The success of fund launches in the past year, and top quartile investment performance from a host of Miton's funds, have been driving the recovery in the company's assets under management (AUM). In the third quarter to the end of September, AUM increased from £2.5bn to £2.8bn, around £80m ahead of the run rate predicted by house broker Stuart Duncan at Peel Hunt. Other funds gaining traction include Miton's European Opportunities Fund which has produced a total return of 26.9 per cent in the past six months, or 12.5 per cent ahead of its benchmark. The fund now has AUM of £74m, having only launched in mid-December 2015.
Several of Miton's other funds continue to generate strong net inflows. CF Miton UK Multi-Cap Income Fund has increased AUM from £586m to £733m this year and has returned 129 per cent since launch in October 2011, a thumping 58 percentage points higher than its benchmark. CF Miton US Opportunities Fund continues to pull in new investors, too: AUM here have risen from £129m to £203m this year and the fund's one-year total return of 39 per cent is 8 percentage points higher than its benchmark.
Admittedly, the growth has been needed to offset fund outflows from Miton's flagship CF UK Value Opportunities Strategy Fund after its star fund managers George Godber and Georgina Hamilton were poached by a rival earlier this year ('Star asset managers poached from Miton', 7 April 2016). The fund has continued to suffer redemptions and its AUM now stands at £319m, down from £388m at the end of June, and £788m at the time of their resignations six months ago. That said, having acted swiftly to appoint a new fund manager, Andrew Jackson, who previously managed the top-quartile performing EdenTree UK Equity Growth Fund until his departure in the summer of 2015, the CF UK Value Opportunities Strategy Fund posted a first-quartile performance in Mr Jackson's first quarter in charge.
The bottom line is that Miton now looks well on the way to recovery, and nailed on to deliver Peel Hunt's full-year pre-tax profit and EPS estimates of £4.5m and 2p, respectively, up from £3m and 1.3p in 2015. Moreover, there is an operational gearing effect on profits to be earned from incremental net revenues. This explains why Mr Duncan at Peel Hunt believes that Miton can lift both pre-tax profits and EPS by 20 per cent to £5.4m and 2.4p, respectively, in 2017. And with net funds of £18m equating to 10.5p a share on its balance sheet, the board can easily afford to lift the payout per share from 0.7p to 0.8p this year, rising to 0.9p in 2017, as Mr Duncan predicts.
On this basis, Miton's shares are rated on 8.3 times cash-adjusted earnings estimates for 2017, offer a near-3 per cent prospective dividend yield and are still rated below book value of 35p. So having first recommended buying the shares just below 23p ('Poised for a profitable recovery', 4 April 2015), and last reiterated that advice at 29p ('Anomalously priced fund managers', 27 September 2016), I continue to rate them a buy at 31.5p and have upgraded my target price to 38p. Buy.
Private & Commercial's earnings beat
Aim-traded finance house Private & Commercial Finance (PCF:32p), whose shares I recommended buying at 24.5p ('A small-cap gem', 18 April 2016) and reiterated that advice at 26.5p ('Business as usual', 13 July 2016), has guided the market to expect results ahead of analysts' expectations.
The key take for me was that new business written was 20 per cent higher at £37.2m in the six months to end-September 2016, compared to the first half, even though the fourth quarter encompassed a period of business and consumer uncertainty post the EU referendum. Operating through two divisions, consumer finance (providing finance to consumers mainly for used vehicles) and business finance (providing finance to SMEs for vehicles, plant and equipment), Private & Commercial has more than 11,000 loan agreements in place and increased receivables by 9 per cent to £122m in the second half. It's good quality lending as 90 per cent of borrowers are prime credit risk, no single customer accounts for more than 0.5 per cent of the loan book and new business orientations of £6m to £6.5m per month are evenly split between consumer and corporate customers, which helps to diversify risk. Around £65m of headroom on existing credit facilities will comfortably fund lending for the coming year.
The company's banking licence application is proceeding as planned and the board's aim is to be in a position to take deposits by mid-2017, a move that will enable the company to utilise cheaper funding and move down the risk curve by offering credit to higher-quality borrowers that were previously deemed uneconomical. As a result, analyst Donald Tait at brokerage Panmure Gordon believes "there is a very good chance the company can grow the loan book at an even faster rate and without lowering credit standards, quite the opposite, in fact". Mr Tait is forecasting full-year pre-tax profits of £3.8m on revenues of £55m to drive up EPS from 1.3p to 1.8p in the 12 months to end-September 2016, implying that the shares are rated on 17 times earnings and on a price-to-book value of two times, neither of which is a high valuation for a company generating a fully diluted post-tax return on equity of 14 per cent.
Of course, Private & Commercial needs to maintain robust levels of loan growth to hit predictions of a 25 per cent hike in pre-tax profits in the new financial year, but with chief executive Scott Maybury noting that "the result of the EU referendum has not affected trading and our organic growth remains strong", I am willing to bet on that possibility and maintain my target price range of 35p-40p. Buy.
STM completes transformational acquisition
Aim-traded STM (STM:50p), a financial services company specialising in the administration of assets for international clients in relation to retirement, estate and succession planning and wealth structuring, has completed the acquisition of Haywards Heath-based London & Colonial (L&C), an independent financial services group.
The initial cash consideration of £4.13m was funded through a £3.3m bank loan, with the balance of £1.25m to be released over the next 12 months subject to indemnities. The purchase price represents a small premium to L&C's net asset value of £4.8m, even though L&C needs to hold £4m of regulatory capital for its life business, so most of its net assets are cash. That's worth noting because by merging STM's own life business with that of L&C, STM can release one set of regulatory capital of £4m, which accounts for more than two-fifths of its own cash pile of £9.3m, a sum worth almost 16p a share. There are economies of scale from merging the life operations, too.
Almost all of STM's earnings are derived from its Qualifying Recognised Overseas Pension Schemes (Qrops) business, an offshore pension scheme approved by HMRC and used by expatriates and internationally mobile employees whose tax domicile can change as a consequence of employment. Bearing this in mind, L&C has 300 Qrops clients who are being transferred over to STM's own platform, and has a UK self-invested personal pensions (Sipp) business with 2,000 clients, so the acquisition scales up STM's Qrops operation and diversifies the product range by offering a Sipp to its network of financial intermediaries.
Add to that £750,000 of planned cost savings by merging L&C's operations with STM, and I anticipated conservative profit upgrades in the order of £500,000 to next year's forecasts when I first analysed the deal ('The inside track', 14 September 2016). Analyst Duncan Hall at brokerage FinnCap clearly shares this view, having just raised his 2017 pre-tax profit estimate from £3.6m to £4.1m to produce EPS of 5.9p, implying over 50 per cent earnings growth next year, based on STM's revenues rising from £16.3m to £20.4m. He also expects the dividend per share to be hiked from 0.9p to 1.3p in 2016, rising to 2p in 2017. On this basis, STM's shares are rated on nine times forward earnings, or six times net of cash, and offer a decent prospective dividend yield of 4 per cent.
So, having first advised buying STM's shares at 35p ('Tapping into a pensions payday', 27 April 2015), and reiterated that advice at 45p in last month's article, I continue to see significant upside. So does Mr Hall who has upgraded his target price from 60p to 65p, slightly shy of my target of 70p. Buy.
Record funds inflows
The second-quarter trading update from Aim-traded currency manager Record (REC:27.5p) made for an interesting read in light of the volatile market conditions in currency markets since the EU referendum. The company's assets under management equivalent rose from $53bn to $55.8bn in the three months to end-September 2016, buoyed by $1.3bn of additional passive hedging mandates and $1.4bn of positive market movements. Passive mandates are lower margin but a relatively stable revenue source that covers 85 per cent of Record's fixed costs before profit-sharing.
Chief executive James Wood-Collins notes that his business "continues to see heightened investor awareness of the risks and opportunities posed by currency fluctuations arising from volatile market conditions. These concerns are seemingly set to endure due to the ongoing geopolitical tensions across the globe, the forthcoming presidential elections in the US and the UK's exit from the EU. Such awareness is provoking interest from investors across a broad spectrum of Record products and we believe further progress will be made in the current financial year".
The performance of Record's Multi-Strategy product, which returned 3.16 per cent for the first half, was noteworthy as this included a 1.35 per cent positive return in the three months to end-September 2016, a period of heightened market volatility. An extension of the licensing agreement with WisdomTree Investments to provide signals to dynamically hedge currency exposures within WisdomTree's rules-based index family is worth noting, too, as this will allow active hedging strategies to be accessible to a wider range of investors than before.
I would also flag up that the board is looking to pay out excess earnings above the ordinary dividend as special distributions, having assessed the company's strong financial position and its regulatory capital requirements. Net cash and marketable securities are worth around £34.7m, or 15.7p a share, so more than half the share price is backed by cash. Furthermore, based on a maintained payout of 1.65p, Record's shares offer an attractive 5.9 per cent dividend yield with scope for a higher return if the board declares special dividends.
True, although Record’s shares have risen 10 per cent since I rated them a buy at 25p (‘Record payout boost’, 21 Jun 2016), I included them at 34.3p in my 2015 Bargain Shares Portfolio, so even after banking 2.55p a share of dividends in the interim the holding is down 12.5 per cent. However, with analysts at Edison upgrading their full-year EPS estimates by 17 per cent to 2.63p post the trading update, and increasing their 2018 estimate by 26 per cent to 2.93p, I feel a rating of 4.5 times cash-adjusted earnings is harsh and continue to rate the shares a buy ahead of results on 18 November.
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