For starters, the small cap company has solid asset backing. Net of £2m of borrowings and finance leases, cash at the end of May was £6.7m, or the equivalent of 28p a share. That’s almost half the share price. In addition, John Borgars at equity research house Equity Development estimates that the company’s head office is worth £3m net of a mortgage secured on the building. In other words WH Ireland’s net cash and property assets (of £5.5m) are worth a combined £12.2m, or 51p a share. That’s a significant sum given the company’s share price is only 61p.
Operational progress
Moreover, it’s not as if WH Ireland isn’t making progress operationally. In fact, in the financial year to end-November 2012, turnover hit a record £25.1m, including an increasing amount of recurring revenue as the company grows its wealth management side. In the latest half year revenues grew a further 4 per cent to £13m.
Assets under management and administration (AUMA) have shot up by £550m since the end of November to £2.27bn. Half of the rise in AUMA is accounted for by WH Ireland’s acquisition of the private wealth management business of investment bank Seymour Pierce, which was placed into administration in February 2013. Those assets under management acquired generated a £200,000 profit in the year to 30 September 2012, but WH Ireland was able to buy this business from the administrators for a paltry £25,000. The wealth management unit generated revenues of £8.4m in the six months to end May, up from £7.1m at the same stage in 2012, to produce profits of £2.14m, a rise of £270,000. This profit contribution excludes central overheads. But the real benefits from the acquisition will be seen in the second half to end November once all of the former Seymour Pierce clients are transferred over to WH Ireland’s own platform, which will remove the double running costs and generate significant cost savings.
True, half-year profits slid from £1m to £520,000 in the company’s corporate broking business, reflecting the lack of fundraisings on the Alternative Investment Market (Aim). WH Ireland is the third largest NOMAD on the junior market with 88 clients, or 8 per cent of the 1087 companies traded on Aim. Ultimately, prospects for this unit are dependent on deal activity/IPOs, both of which are difficult to predict. That said half of the division’s revenues are now recurring, a large increase on six months ago, and the company is closing in on its near-term objective of being able to cover all its direct operating costs from recurring income alone. In any case, even factoring in the lacklustre performance of the corporate broking unit, the shares are still too lowly rated.
Compelling valuation
According to analysts at Equity Development the company should still be able to make pre-tax profits of £750,000 for the full year and, with the benefit of a negligible tax charge, that produces EPS of 3.2p. So, having posted a modest profit in the first six months of the financial year, we can expect a major uplift in the second half as the benefits of the Seymour Pierce acquisition feed through. It also means that full-year results will compare very favourably with last year when WH Ireland posted a reported loss of £177,000.
Moreover, the cash rich balance sheet means the 0.75p a share dividend forecast by Equity Development, covered over four times by prospective earnings, looks a very realistic possibility. Last year the board announced a payout of 0.5p a share. On that basis, the shares offer a prospective yield of around 1.3 per cent and are rated on a modest 10 times full-year earnings estimates net of cash. And if you strip out the integration costs of the aforementioned acquisitions, then that EPS estimate is nearer 4p. The shares are also only priced on 1.2 times book value even though there is hidden value in the balance sheet.
That’s because even if you attribute no value at all to the company’s corporate broking division, then WH Ireland’s wealth management business is being valued on a miserly 0.1 to 0.2 per cent of its AUMA by my calculations. By comparison, Rathbone Brothers is valued on 3.4 per cent of assets under management (AUM) while Brewin Dolphin is rated on around 1.8 per cent. In my view, a far more realistic valuation of WH Ireland’s wealth management business would be around 1 per cent of its AUMA – or £22.7m – even factoring in a discount for the fact the company is Aim-traded, lacks the economies of scale of its larger rivals, and the discretionary AUM of its rivals are far more lucrative, and so warrant a much higher valuation, than execution-only or advisory funds that WH Ireland largely manages.
To put the scale of the undervaluation into some perspective, at the current share price WH Ireland is only being valued at £14.4m. And don’t forget that WH Ireland also has net cash and property worth £12.2m. So with the benefits of the integration of the Seymour Pierce client acquisition likely to be seen in the second half, and with a rock solid balance sheet behind it, I continue to rate shares in WH Ireland a medium-term value buy trading on a bid offer spread of 57p to 61p. Even at 90p, the shares would not be expensive. Buy.
My next column will appear at 12pm on Monday. I have updated the investment case on 17 small-cap shares in eight other online articles this week: Small-cap wonders; Deep value plays; Small-cap trading buys; Undervalued and Unloved; Running profits; Capitalising on capital returns; Indigovision shares slump on warning and Expecting seismic gains.
I will update the investment case on Inland (INL: 32p) and Communisis (CMS: 67p) as soon as I have completed my research.
