It also highlights the important point that there can be multiple buying opportunities in the shares I write about, and which a disciplined approach to investing can take advantage of. For instance, I advised buying shares in the company no fewer than four times between mid-February and early August at prices ranging from 61p to 65p. Everyone following the advice should be heavily in profit.
As I have pointed out in the past, the best gains are made by those who have the discipline and the patience to ride out the troughs and are invested when a wider investment audience recognises the potential in a company’s shares which first attracted you to them. In the case of WH Ireland, I now have to decide whether that potential is now priced in or whether there is more share price upside to come.
Clearly, fund managers at Oceanwood Global Opportunities thinks there is further upside as they accumulated a 9.54 per cent stake in WH Ireland last month. Until today’s upbeat trading update, there had been little in the way of newsflow since I last updated my position apart from the fact that WH Ireland reached a settlement with former boss Paul Compton who left the company suddenly in acrimonious circumstances a year ago.
His replacement, Richard Killingbeck is certainly incentivised to do well as he entered into a joint share ownership agreement in relation to one million shares which replaces a previous option scheme over 473,787 shares which he entered into a year ago. Interestingly, the exercise of the new scheme is subject to a formula based on a total return to WH Ireland shareholders over a three-year period and is based on the mid-market price of an ordinary shares on 28 October 2016 together with the aggregate dividends paid over the preceding three-year period.
The main terms of the formula are that, in the event that the three year value is less than or equal to 115p a share, the exercise price will be 74.5p. However, if it is 200p a share or more, the exercise price will be nil; and if the three year value is between 115p and 200p the exercise price will decrease on a sliding scale from 74.5p to nil. In other words, only if WH Ireland shareholders are well rewarded will Mr Killingbeck reap the full benefits of his share ownership agreement. That seems fair to me and I don’t think many shareholders will begrudge him an option over one million shares at nil cost if the share price over the three-year period is north of 200p.
Strong operational progress
Importantly, Mr Killingbeck has made a very good start as WH Ireland have just announced this morning that following a strong second half from both its corporate broking and private wealth management businesses, the company’s revenue and profits will exceed market expectations for the financial year to November 2013.
The operational progress is following a trend too: in the financial year to end-November 2012, turnover hit a record £25.1m, including an increasing amount of recurring revenue as the company continues to grow its wealth management side. In the half year to end May, revenues increased a further 4 per cent to £13m. Therefore, turnover will have hit another record in the year just ended.
We will have to wait for the final results to be released in March for a clearer picture of the growth rates being generated, but prior to today’s announcement analyst John Borgars at equity research house Equity Development was pencilling in pre-tax profits of £750,000 for the full year to November 2013 and, with the benefit of a negligible tax charge, that generates EPS of 3.2p. Those estimates will be upgraded. It also means that full-year results will compare very favourably with last year when WH Ireland posted a reported loss of £177,000.
Strong fundamentals
Moreover, the company’s cash rich balance sheet means the 0.75p a share dividend forecast by Equity Development, covered more than 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 0.83 per cent and are rated on 20 times full-year earnings estimates net of cash (worth 24.5p), but that’s before likely large upgrades.
It’s worth pointing out too that WH Ireland has beaten market forecasts after incurring one-off integration costs on acquisitions which analysts previously estimated at around 0.8p a share. Add these costs back and underlying EPS of 4p were previously predicted for the year just ended. So pre-upgrades the PE ratio is 16 times, net of cash, which is not unreasonable to me. The shares are also only priced on two 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 at 0.1 per cent of its assets under management and administration (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 opinion, 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 being valued at £24.6m, or only £2m less than a realistic value of the wealth management business. In addition, the company has net cash of £6.7m and property worth £5.4m. In total those assets are worth a further 44p a share, or half the current share price.
And there is good reason to expect that the earnings momentum we have been seeing will continue in the future and for investors to recognise more fully the value in the businesses.
Wealth management driving growth
For starters, WH Ireland is only starting to reap the benefits from the Seymour Pierce client acquisition. AUMA shot up by £550m to £2.27bn, or by almost a third, between the end of November 2012 and last May. 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 in a distressed sale situation WH Ireland was able to buy this business from the administrators for a paltry £25,000.
As a result, 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 are coming through now that virtually all of the former Seymour Pierce clients have been transferred over to WH Ireland’s own platform. This has removed the double running costs and is generating significant cost savings. In other words, we can expect a decent profit uplift from this division in the coming financial year once these costs drop off.
And clearly the company’s corporate broking business has bounced back from a tough first half. WH Ireland is the third largest NOMAD on the Alternative Investment Market (Aim) with 88 clients, or around 8 per cent of all the companies traded on the junior market. 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 which should roughly cover all its direct operating costs.
In any case, even if you are ultra cautious and attribute no value at all to the corporate broking unit in a sum-of-the-parts valuation, which seems harsh given it still made a profit contribution of £520,000 pre-central overheads in the first half, then I still arrive at an asset based valuation of around 130p a share.
Upgraded price target
Applying a modest liquidity discount to this valuation, given WH Ireland’s smaller scale, and backed by a rock solid balance sheet, I have upgraded my fair value target to 120p which neatly coincides with the major lows in 2007 for a technical perspective. Needless to say that I continue to rate shares in WH Ireland a medium-term value buy on a bid offer spread of 86p to 90p. Ahead of the full-year results in March, and with earnings upgrades to come for both this year and next, I rate the shares a buy.
Finally, due to unprecedented demand, my new book, Stock Picking for Profit, has sold out and is being reprinted for delivery the week beginning Monday, 6 January 2014. As a special promotion to IC readers, the first 100 pre-orders for the book placed online with YPD Books and quoting offer code ICOFFER will receive complimentary postage and packaging. The book can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213. The book is only being sold through YPDBooks and no other source. It is priced at £14.99, plus £2.75 postage and packaging. Telephone orders will continue to incur the £2.75 charge.
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