■ Core fee income up strongly
■ Discretionary funds growing
■ Resilient investment performance
Wealth management group Brewin Dolphin (BRW) has been busy adjusting its business model following regulatory changes introduced earlier this year. Despite the inevitable disruptions arising from that, however, a trading update at the end of July revealed a 14 per cent rise in total income at the third-quarter stage to £73.3m.
Core fee and commission income grew 27 per cent to £63.8m, although other income fell as a result of the regulatory changes and the group is now working on the move to standard national pricing - whereby clients are charged consistent and transparent rates for all services. As anticipated, there was a net £400m outflow of funds managed on an advisory basis, but this isn't expected to have a material impact on total income as average fees generated from these accounts were relatively low.
Crucially, discretionary funds - which command larger fees - attracted net inflows of £200m in the third quarter, and £700m since the start of the year - an annualised growth rate of 5 per cent. However, overall funds under management fell 2.1 per cent in the third quarter to £27.5bn, mainly as a result of equity market declines.
RBC Capital Markets says…
Outperform. While funds under management fell, those managed on a discretionary basis rose to 74 per cent of total funds at end-June - up from from 70 per cent at end-September 2012. Furthermore, third-quarter's investment performance has held up - a 1.4 per cent decline as a result of weak markets, compared with a 3.1 per cent decline in the FTSE 100 index. Moreover, the group is making solid progress with reducing its cost base, which should boost operating margins - currently at 17.4 per cent - to 21.9 per cent next year. For 2013, expect adjusted operating profits of £49.3m and EPS of 14p, rising to £59.7m and 16.5p in 2014 (from 2012: £42.1m/12.5p) - our price target is 285p.
Numis Securities says...
Add. On the grounds that the new management has now put in place unambiguous operating margin targets, with clear delivery dates (over 20 per cent by 2015 and over 25 per cent by 2016), we have a modestly favourable stance on the stock. While this project continues to carry considerable execution risk, the new targets look achievable given that such peers as Rathbones and Investec Wealth achieve, or target, a margin of over 30 per cent. We've also upgraded our forecasts on the back of the trading update and now expect full-year EPS of 14.6p for 2103 (from 13.8p) with a 7.25p dividend. Our price target stands at 303p.
