True, the company incurred a first-half operating loss of £1.1m on revenue down almost a third at £12m, a subdued performance reflecting the impact of a host of factors including investors' fears over Chinese growth, commodity price deflation, a 72-day period during which time the company was unable to undertake regulated activities following a FCA fine, and ultimately uncertainty in the run up to the EU referendum. All these factors reduced transactional income across the business. However, the fact that the share price was unmoved post results tells a story, and one that I can shed some light on having got the inside track from the boss of the company.
Potential deals in the corporate broking pipeline
Firstly, and something that was not reported in the results release, WH Ireland's corporate broking arm is working on two to three large corporate transactions for clients for completion in September and October, each of which could generate £1m of revenue for the company. That's a significant sum in relation to first-half corporate broking revenue of £3.1m, down from £4.9m in the six months to the end of May 2015.
The shortfall this time around was due the lack of income earned from representing clients on corporate deals, the consequence of which was the unit posting a first-half loss of £1m. I also understand that current retainer income from WH Ireland's 95 corporate clients is around £3.2m to £3.3m, so with a fair tailwind it's not inconceivable the division could make up a chunk of the first-half shortfall if these large deals come off and make headway towards last year's revenue of £9.9m when the unit turned in operating profit of £414,000.
It wasn't reported either that WH Ireland has parted company with six individuals on the corporate broking side since the May half-year end, the result of which is to cut the annual cost base by around £350,000 to £400,000. This means that a higher proportion of incremental revenue will boost the bottom line, something worth bearing in mind if WH Ireland manages to pull off these major corporate transactions.
Secondly, discretionary assets under management have risen by 15 per cent to £949m and now account for a third of total assets under management of £2.67bn. This helped recurring management fee income across the private wealth management division rise by 15 per cent to £4m in the six-month period and account for nearly half of the division's revenue of £8.5m. It's set to rise further because at the end of the trading period, WH Ireland's Isle of Man office was appointed to manage two investment mandates for the Isle of Man government for a period of five years.
The appointment as discretionary investment manager comes only two years after WH Ireland established its Isle of Man office, a period during which the company has enjoyed strong growth in its international client base. Mr Killingbeck says the office is likely to move into profit in the current financial year on the back of this contract win. It's only reasonable to expect more Isle of Man clients to consider WH Ireland given this strong endorsement from the island's government.
Cash pile set to get a boost
I can also reveal that having signed a seven-year agreement with SEI Investments (Europe) to outsource its private wealth management back-office operations, currently performed out of its Manchester head office, the company has now signed heads of agreement to sell the property for £4.75m. It will then lease part of the property at an annualised rental of £100,000 for the next nine months, before moving to new premises in the second quarter of 2017.
WH Ireland will not only save the interest charge on the £1.1m loan secured on the Manchester office, but the outsourcing deal will reduce the company's costs and result in an improved service to customers, too. In fact, the annual custody charge on around £2bn of assets under management (AUM) being outsourced to SEI has been priced in "single basis points" under the terms of the agreement, and headcount in Manchester will be reduced from 90 to between 40 to 50 individuals by the second quarter next year at a one-off cost of only "a couple of hundred thousands of pounds".
The net effect will be to leave the company with net funds of around £10m, or almost 40p a share, giving the board "a little bit of firepower on the discretionary side if opportunities become available". Also, Mr Killingbeck believes that there could also be some interesting deals to be done to enhance the corporate broking business as a result of the market turmoil seen this year.
Undervalued
Of course, the volatile nature of the market makes it nigh impossible to forecast what the company could deliver in the second half, but what's clear to me is that the shares are undervalued at the current level.
That's because even if one ascribes nil value at all to WH Ireland's corporate broking activities, and ignores the value in its advisory and execution-only mandates which have total AUM of around £1.7bn, then net of cash on the balance sheet and the equity in the Manchester head office, its discretionary AUM are in effect being valued at only £14.4m, or 1.5 per cent of AUM. To put that in perspective, the price recently paid by Tilney BestInvest for Towry was around 5 per cent of AUM.
Analysts John Borgars and Gilbert Ellacombe at equity research firm Equity Development believe WH Ireland's asset management business is worth around £57m, or 221p a share based on a valuation of 4 per cent of discretionary funds under management, 2 per cent for advisory and 0.5 per cent for execution-only. They have a sum-of-the-parts valuation of £62m, or 240p a share.
On a bid-offer spread of 90p to 94p, valuing the company's equity at £24.4m, I continue to see value in the shares and rate them an undervalued recovery play. Buy.
Please note that I have published three columns today, and assessed the merits of eight small cap companies this week, all of which are available on my home page
