Indeed, alongside the group's fiscal 2014 results, Miton announced the launch of a new investment trust, Miton UK MicroCap Trust, which will invest in a diversified portfolio of under-researched UK microcap companies, typically those with a market value of below £150m. It could prove popular as Mr Williams believes that a genuinely microcap trust investing in the smallest quoted stocks in the UK market is complementary to many existing smaller company funds or investment trusts where the focus of investment tends to be on larger smaller companies, with relatively low exposure to truly small, microcap companies.
I agree and would also add that microcap companies potentially offer greater growth prospects over the longer term and especially in periods of sustained low economic growth, so it's timely to launch a fund in this niche area in the current economic environment. Miton is attempting to raise £100m at the truts's launch by means of a placing, offer for subscription and intermediaries offer. The extra revenue generated from management fees will come in handy as Miton's assets under management (AUM) fell by a third from £3.1bn to £2.05bn last year. That said, this could mark a turning point.
Turnaround in place
That's because, part of the decline in AUM (£438m) reflected the disposal of the group's Liverpool office, and a further £330m of outflows and loss of segregated mandates was down to the retirement of veteran star fund manager Bill Mott, who previously managed Miton's Income Fund. But with that fund posting a total return of 7.5 per cent in the first two months of this year, beating its benchmark, which should appease clients. Miton has also addressed the underperformance of its multi-asset funds, accounting for 30 per cent of Miton's AUM even after £500m of outflows, by appointing David Jane of Darwin Investment Managers to take control of these. It has proved a successful move: these funds delivered strong absolute performance in the second half of 2014 and should offer potential to gain market share now that they have returned to growth.
It's also worth flagging up that Miton's newer funds attracted gross inflows of £708m in 2014, so there clearly is an appetite for the group's products. In fact, Mr Williams believes that the successful CF Miton UK Value Opportunities Fund managed by George Godber and Georgina Hamilton is likely to be one of the funds that will attract the greatest AUM inflows in the current year. The fund has £240m of AUM, slightly more than the Miton Income fund.
The turnaround in the performance of Miton's funds aside, the group is in a strong position to continue to recruit talented fund managers to diversify its revenue stream further. In the second half of 2014, Miton acquired Darwin Investment Managers for £1.8m, and FP Matterley Undervalued Assets Fund from Charles Stanley Stockbrokers for £1.1m, which together brought in £106m of AUM. But the group's net cash still increased from £11.2m to £15.2m in the fiscal year. That's equivalent to 8.8p per Miton share, so there is substantial funding available to make further acquisitions.
The other point worth noting is that with investment in infrastructure, systems, staff and centralising all operations into one office in the City (from four previously) now complete, then Miton has a very scalable operating structure that will enable AUM to be increased significantly without a commensurate rise in costs. This operational gearing means that incremental increases in revenue derived from rising AUM will have an accentuated impact on profit. To illustrate this effect, analyst Stuart Duncan at broker Peel Hunt predicts that Miton is capable of generating current year pre-tax tax profit of £3.3m on revenue of £15.7m and produce EPS of 1.6p. But based on a rise in revenue to £17.7m in 2016, Mr Duncan believes Miton could turn in pre-tax profit of £4.7m and EPS of 2.2p that year. On that basis, the shares are being rated on nine times current year cash-adjusted earnings estimates, falling to a miserly six times 2016 forecasts.
Target price
Clearly, there is execution risk in launching new funds, and Miton still has to maintain the turnaround in previously underperforming funds to hit those estimates. But if the group can maintain the progress made in the past six months, then the shares are being rated at a bargain-basement level. Mr Williams certainly thinks so as he topped up his holding by acquiring 295,000 shares at an average of 25.5p each in January to lift his stake to 9.08m shares, or 5.3 per cent of the share capital. Since then, the share price has formed a strong base at the 20p level, indicating that the downtrend from highs around 50p a year ago has been arrested. And the board is clearly confident enough of prospects to raise the annual payout by 11 per cent to 0.6p a share, implying a yield of 2.6 per cent.
The bottom line is that there could be substantial upside to the share price if Miton continues to generate inflows into its best-performing funds and maintains the turnaround in previously underperformers. Trading on a 40 per cent discount to net asset value, and with net cash accounting for 40 per cent of its market value, I rate Miton's shares a decent recovery buy at 23p and have a year-end target price of 35p.
MORE FROM SIMON THOMPSON...
Please note that I have written articles on the following companies in March, all of which are available on my IC homepage... and are detailed below with web links for ease of reference.
■ Non-Standard Finance: Buy at 103p ('A non-standard investment', 2 Mar 2015)
■ WH Ireland: Buy at 92p, target 140p ('A non-standard investment', 2 Mar 2015)
■ Software Radio Technology: Buy at 31.25p, target range 40p to 43p ('On the radar', 3 Mar 2015)
■ Vislink: Buy at 48.5p, target 60p ('Tapping into e-commerce profits', 4 Mar 2015)
■ Sanderson: Buy at 68p, target 80p to 85p ('Tapping into e-commerce profits', 4 Mar 2015)
■ Town Centre Securities: Run profits at 292p ('To bank profits or not?', 5 Mar 2015)
■ Sutton Harbour: Buy at 36.5p ('To bank profits or not?', 5 Mar 2015)
■ Housebuilders: Run profits on Persimmon, Bellway, Barratt Developments, Taylor Wimpey, Berkeley Group. Bank profits on Crest Nicholson, Bovis Homes, Galliford Try and Redrow. Buy Inland at 64p) ('Housebuilders: trading gains', 9 Mar 2015)
■ Walker Crips: Buy at 47p; Henry Boot: Buy at 232p; H&T: Buy at 179.5p; Nationwide Accident Repair Services: Buy at 85p; Communisis: Buy at 56p; Global Energy Development: Speculative buy at 44p ('Six-shooter of small-cap buys', 10 Mar 2015)
■ Stadium: Run profits at 123p; Pure Wafer: Hold at 42p ('Electrifying shares', 11 Mar 2015)
■ CareTech: Buy at 230p, target 300p ('Time to take care', 16 Mar 2015)
■ LMS Capital: Buy at 77.5p; Globo: Run profits at 55.5p; Trifast: Buy at 99p, target 140p ('Exploiting currency moves', 17 Mar 2015)
■ KBC Advanced Technologies: Buy at 87p, target 165p; K3 Business Technology : Buy at 227p, target 275p; Fairpoint: Buy at 123p, target 190p ('Blow out results', 18 Mar 2015)
■ Charlemagne Capital: Buy at 10.75p; Bloomsbury Publishing: Hold at 155p ('Below the radar', 19 Mar 2015)
■ Redde: Buy at 108p, target 125p ('In the fast lane', 23 Mar 2015)
■ Pittards: Buy at 137p; Crystal Amber: Buy at 152p; Record: Buy at 35p; Arbuthnot Banking: Buy at 1,420p; Inspired Capital: Buy at 17p; Stanley Gibbons: Buy at 257p ('Bargain shares updates 2015', 23 Mar 2015)
■ Accumuli: Accept NCC offer; Getech: Buy at 49p, target 67p; Faroe Petroleum: Trading buy at 79.5p, target 94p ('Buyouts and bumper profits', 25 Mar 2015)
■ Moss Bros: Buy at 108p, target range 120p to 130p; Vislink: Buy at 47p, target 60p ('Suitable investments for growth', 26 Mar 2015)
■ Safestyle: Buy at 180p, target 230p; GLI Finance: Buy at 57.5p, target 80p; Oakley Capital Investments: Buy at 165p, target 180p; First Property: Buy at 34p, target 380 to 40p ('A quartet of small cap buys', 30 Mar 2015)
■ Cenkos Securities: Buy at 197p, target 250p; Polo Resources: Sell at 6.3p; Greenko: Hold at 104p; Bezant Resources: Hold at 2.5p ('Small cap updates', 31 Mar 2015)
■ Simon Thompson's 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 stockpicking'
