On an underlying basis, pre-tax profits surged from £59,000 to £470,000 in the six months to end May 2014 before factoring in £267,000 of one-off reorganisation costs. The company has sensibly streamlined the branch network inherited from the acquisition of the Pritchard’s asset management business by closing four small offices, transferring assets from three offices in East Anglia to WH Ireland’s London office, and moving a team of asset managers from Malvern to the Birmingham office. As a result the company has a well balanced branch network of 10 offices with a decent geographic spread. A new office will open shortly in Milton Keynes.
In addition, the company has decided to cease administering funds for third parties, a wise move because this will free up the back-office capacity to enable the private client business to handle the new clients brought in by the recently-recruited teams. For instance, the new Milton Keynes office will focus on discretionary and advisory fund management led by a team of four former Charles Stanley personnel. These individuals had £230m of assets under management (AUM) between them at their former employer of which 60 per cent were discretionary or advisory.
In addition, WH Ireland has made a number of recent appointments in its London office including a team of four poached from Canaccord Genuity Wealth Management. The team had £250m of AUM between them at their former employer of which 40 per cent were discretionary or advisory. Realistically, WH Ireland’s chief executive Richard Killingbeck expects that around two thirds of these clients could follow the managers to WH Ireland and transfer their business to the company. In this scenario then it is only sensible to believe that assets under management and administration (AUMA) will rise above £3bn by the year-end, having risen by almost 10 per cent from £2.5bn to £2.7bn since the November financial year-end.
The Milton Keynes office will be loss making in the current year due to start up costs, but is expected to be “usefully profitable in fiscal 2015”, according to equity analysts at research house Equity Development. Also, the new Isle of Man office opened in March post regulatory approval and is anticipated to “break-even” by the year-end. The aim here is to target clients with portfolios in excess of £250,000 and I understand from chief executive Richard Killingbeck that two significant manadates are in the pipeline and the business could have between £50m to £60m of AUM by the year-end making the target to attract between £80m to £100m of AUMA within 12 to 18 months look very achievable. If successful, then this unit will be a significant income generator too.
Moreover, adjust for the drag on profits from the reorganisation and start-up costs, and WH Ireland grew profits significantly more than £410,000 in the six month period. For instance, the Isle of Man office only opened for business in March and start up costs of £200,000 in the period were taken through the profit and loss account. The unit is expected to break-even in the second half.
So factoring in the above developments, it’s only reasonable to expect a ramp in full-year profits. Analysts John Borgars and Gilbert Ellacombe predict a rise in underlying full-year profits from £1.27m in the year to November 2013 to between £1.5m to £1.9m this year. Taking the mid-point of this range would produce EPS of 5.55p, up 50 per cent on fiscal 2013, and would easily underpin a 33 per cent rise in the dividend to 2p a share as analysts expect. On that basis, the shares are trading on 19 times forward earnings and offer a prospective dividend yield of 1.8 per cent.
WH Ireland also has a cash rich balance sheet and net funds of £6.9m at the end of May, up from £4.2m at the end of November, equate to 29p a share. Strip this sum out from the current share price, and the cash adjusted forward PE ratio is only 14. That’s hardly a punchy valuation for a company predicted to grow EPS by 50 per cent in the current financial year.
Wealth management business undervalued
Furthermore, if you strip out administered assets under management, and apply a conservative valuation of 2 per cent of AUM to WH Ireland’s wealth management business, then this would value the unit at £32m, or more than the whole company’s own market capitalisation of £26m. That is a sensible valuation since earlier this year wealth management group Rathbone acquired the private client division of Jupiter and also part of rival Tilney’s, paying a consideration of 2 per cent on AUM in each case.
WH Ireland’s wealth management business has 8,000 private clients with 17,000 accounts including ISAs and SIPPs, offering a high quality service tailored to the needs of clients, rather than offering a commoditised service. The bespoke service offering is clearly paying off as with the benefits of some shrewd acquisitions, AUMA are up from £1.7bn in the past 18 months.
Moreover, the growth can only continue given the changes in pension legislation announced in the 2014 Budget by Chancellor Osborne. Industry experts now expect far fewer pension plan holders to purchase annuities on retirement, opting instead to keep their pots themselves and seek advice from wealth management groups to manage these funds independently. That can only be good news for WH Ireland. Interestingly, the company has potential to use its bumper cash pile to make some more value adding acquisitions to boost its discretionary fund management business. I would not be surprised at all to see this happen in the next six months as the business scales up. It would make sense too as the operation has scope to increase AUM to between “£3.5bn to £4bn” without adding to staff costs, so this would improve efficiency levels and reduce the cost to income ratio even further.
This growth potential has yet to be reflected in WH Ireland’s share price and the undervaluation becomes even more pronounced when you consider that the company has over £1m of cash surplus to regulatory requirements and also £3m equity in its Manchester head office. On this basis, the wealth management business alone could be worth £36m, or 40 per cent more than WH Ireland’s own market value.
But even that understates the hidden value because the company also has a profitable corporate broking arm, representing 92 clients (up from 85 in November) who are predominantly small Aim-traded companies. Retainers cover the majority of the unit’s fixed costs. Ultimately, equity fund raisings for clients is a key component of the income received which explains why raising £34.8m in nine transactions in the six month period, up from £26.5m in 13 deals at the same stage in fiscal 2012/13, helped more than double operating profit (pre-central overheads) from corporate broking. Clearly, a business that is capable of making £2m of profit contribution (pre-central overheads), as was the case last financial year, has to have some value. However, we are getting a free ride here as it is not being attributed any value at all in WH Ireland’s current share price. We are also getting a free ride on some of that £6.9m cash pile too.
That’s because if you strip net funds of almost £7m out of the current market value of £26m, deduct the £3m equity in the freehold head office, in effect the market is attributing a value of only £16m to both the wealth management and corporate broking businesses. That’s a ridiculously low valuation for a company expected to produce pre-tax profits of up to £1.9m in the fiscal year to end November.
Target price
In the circumstances, my upgraded fair value target of 180p still looks as reasonable now as it did when I last updated the investment case when the share price was 109p (‘Smashing target prices’, 27 February 2014). This neatly coincides with a major high during the 2003-2007 bull market in April 2006. Beyond that the all-time high of 195p dating back to October 2007 is the next target. Equity Development has a sum-of-the-parts valuation of 227p including a valuation of 146p a share for the wealth management business and a further valuation of 80p a share for the corporate broking business based on valuing the division’s recurring revenues of £2.9m on a multiple of five times, or around £14.5m; placing a value of £1.4m on the market-making activities, or one times annual revenue.
On any basis, WH Ireland’s shares look undervalued to me and I continue to rate them a buy. Please note that I have taken into consideration a liquidity discount in my fair value valuation, and have also factored in the ongoing unstable geopolitical backdrop in the Ukraine, Russia and Middle East when making this recommendation. I have also factored in the current state of the IPO market and the implications for secondary market fundraises.
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
