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Leaner Brewin Dolphin is too cheap

The broker-turned-wealth manager is in a period of transition and is trading at a discount to its peers
August 4, 2016

The benefits of Brewin Dolphin ’s (BRW) transformation from stockbroker to fully-fledged wealth manager are starting to come to fruition. Discretionary funds under management were up to £33.5bn at the end of June, compared to £32bn at the September year-end. This change in the mix is providing better quality revenue, which is expected to feed through to beefier cash profit margins. The move towards more stable fee-based income is also helping cushion the impact of nervous investor sentiment. However, with the shares trading at a discount to peers and its historic average, we don’t reckon the benefits of holding the stock longer-term – including expected pre-tax profit growth of almost a quarter by 2018 – haven't been fully priced in.

IC TIP: Buy at 252p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Shifting to more stable income
  • Trading at a discount to peers
  • Growing funds under management
  • High prospective dividend yield
Bear points
  • Commission revenue declining
  • Advisory business outflows

Despite investor jitteriness around investing in the equity markets, Brewin Dolphin grew its funds under management by 4.7 per cent during the past nine months and 2.1 per cent during the past three months to the end of June. This increase in funds is one of the benefits of management’s strategic decision to pursue discretionary wealth management, where clients outsource their investment management, rather than the traditional advice and commission model. Over the same periods, discretionary funds were up by 8.1 per cent and 3.5 per cent, respectively. As a result fee income from the core investment management business for the first nine months of the year was up 2.2 per cent at £132m, while advisory fees and commissions fell.

 

 

Brewin has been steadily selling off its non-core assets linked with its broking past, including its execution-only Stocktrade business in April. Conversely, management has been building out the group’s wealth management services including a service for family lawyers and their clients, and one for corporate advisers and their clients. Its managed portfolio service is now available on 10 platforms, with 94 new adviser companies signing up to the service in the six months to the end of March. As a result funds under management for this channel have increased by half to £0.9bn during the first half. Management plans to launch a passive version of the service later this year, along with a direct access platform, to boost sales via intermediaries even further.

There have been some growing pains. Execution-only funds were flat at £3.6bn in the three months to June, as business is more dependent on transaction volume and therefore investor sentiment. The shift towards higher-quality discretionary business has also come at the expense of some of its advisory funds. Funds under management for advisory investment management were down more than a quarter year-on-year at the end of June to £3.1bn. These factors could well weigh on profits for the current financial year, but from 2017 pre-tax profits and EPS are expected to swing back into growth as the increasingly dominant discretionary business outweighs declines elsewhere.

BREWIN DOLPHIN (BRW)

ORD PRICE:252pMARKET VALUE:£ 713m
TOUCH:251-252p12-MONTH HIGH:319pLOW: 207p
FORWARD DIVIDEND YIELD:5.6%FORWARD PE RATIO:14
NET ASSET VALUE:79p*NET CASH:£117m

Year to 31 SepTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201328452.214.88.6
201429160.216.69.9
201528462.217.112.0
2016**28058.916.012.2
2017**30168.118.414.2
% change+7+16+15+16

Normal market size: 2,000

Matched bargain trading

Beta: 0.76

*Includes intangible assets of £84m, or 30p a share

**Numis Securities forecasts, adjusted PTP and EPS figures