In the first half of this year, corporate brokers and nominated advisors benefited from £3.7bn of fundraisings on Aim, but in the past four months only £1.1bn has been raised. WH Ireland has 93 corporate clients, up from 85 a year ago, so with a number of proposed corporate and M&A transactions delayed until next year, inevitably this has impacted W.H. Ireland’s fee income and profits from this activity.
In addition, revenue from the company’s private client wealth management business suffered from lower than expected dealing commission in the latter part of the financial year to end November 2014, albeit this was in part mitigated by a double digit increase in management fee income. Political uncertainties - the Scottish Independence vote and the Eurozone growth scare in October - undoubtedly made investors more cautious and this has been reflected in lower dealing activity in the latter part of the financial year.
That said, it is clear that the private wealth management business is in decent shape entering into the new financial year following a one-off £300,000 investment in new teams (Birmingham and London) and new offices (Milton Keynes and Isle of Man) and a reorganisation of the branch network of smaller offices in order to remove uneconomic activities resulting from the acquisition of Pritchards’ clients.
Moreover, the 10 per cent like-for-like rise in assets under administration in the 12 month period is mainly from higher growth discretionary clients, the full benefits from which will be seen in the current financial year. Indeed, what is not obvious from today’s announcement is the fact that the exit from trading option activities and the closure of nine regional offices has removed £300m of loss-making assets under administration that produced a miniscule gross margin of 0.1 per cent. These have been replaced by between £200m to £250m of higher growth discretionary client mandates producing a highly profitable gross margin of between 0.7 per cent to 0.8 per cent.
In turn, this means that with the one-off investment in these new activities complete, a factor which will clip £700,000 off reported profits for the year just ended, and all of the private wealth management teams recruited from Canaccord, Barclays and Charles Stanley now freed from contract restrictions with former employers preventing them from poaching clients at those firms, then expect a significant margin improvement in W.H. Ireland’s private wealth management side in the coming financial year.
In addition, and something that will become apparent in the coming weeks, I understand from sources that W.H. Ireland has been successful in attracting new corporate clients from other brokers and is likely to start 2015 with at least 100 clients. Not only will this bring in more fee income, but I also understand that the fundraisings from existing clients, who deferred capital raises during the October stock market turmoil, are planned to be executed this month and next.
Impact on forecasts
True, W.H. Ireland will miss Equity Development’s profit estimates. When I last updated my view in July, analysts John Borgars and Gilbert Ellacombe predicted adjusted pre-tax profits of at least £1.5m in the 12 months to November 2014. Guidance from the company is for adjusted operating profits (excluding the £700,000 of gains which flattered the 2012/13 figures, and the £700,000 of one-offs which will hold back the 2013/14 numbers), up from £919,000 in 2012/13 to between £1m and £1.1m for the year just ended. In other words, W.H. Ireland has still posted profit growth, something that is not clear in today’s release, but will become apparent at the publication of the results in early March.
It’s also worth noting that “the board has greater confidence for 2015, reflecting not only the positive impact of delayed business from 2014 being executed next year, but also anticipate a significant margin improvement across the business as a whole and in particular within the private wealth management division.”
As a result, Equity Development expects pre-tax profits of £2.5m and EPS of 7.86p for the financial year to November 2015 and a dividend of 2.5p. I understand that profit figure is the budget target that W.H. Ireland’s board signed off last week. It’s therefore significant that W.H. Ireland’s board has also announced a hike in the final dividend from 1.5p to 2p a share for the 2013/14 financial year ahead of the release of full-year results due out on Monday, 2 March 2015. In my view, this is a clear indication of “the board’s confidence in the outlook for 2015” and those bumper profit estimates.
But, as one would expect following a warning, the shares have sold off this morning, down from 95p to 85p. This values the company’s equity at only £20.3m, despite the fact that WH Ireland has a cash rich balance sheet with net funds of £6.9m at the end of May, or the equivalent of 29p a share, and a futher £3m equity in its freehold head office. On a cash adjusted basis, the shares are now being priced on 7 times earnings estimates for the financial year to end November 2015 and offer a prospective yield of almost 3 per cent based on another rise in the payout to 2.5p a share.
Importantly, with the company set to make up the lost ground in 2015, and with the benefits of a leaner and more profitable structure in place, it’s only reasonable to expect profits to make significant headway towards Equity Development’s and the board’s £2.5m profit target. So although W.H. Ireland’s shares have fallen from 109p when I last updated the investment case post the half year results (‘Broking for bumper profits’, 21 July 2014), albeit they are still up on my original buy recommendation of 68p ('Broking for success', 1 Aug 2011), I see today’s share price weakness as an opportunistic buying opportunity ahead of the next trading update at the time of the full-year results in early March.
With the benefit of the deferred client capital raisings set to come through, news of forthcoming corporate clients wins, new mandates on the private client side (yet to be reported), and a far more profitable business mix following the reorganisation, the platform is in place for some bumper profit growth in 2015. Buy.
Please note that I will be writing features for the rest of this week so unless there is an urgent update from a company on my watchlist, my next scheduled column will appear at 12pm on Monday, 8 December.
■ Subject to availability and for a limited period only, Simon Thompson's book Stock Picking for Profit is available to purchase at a special discounted price of £10.99, plus £2.75 postage and packaging, for all internet orders placed at www.ypdbooks.com. The book is priced at £14.99, plus £2.75 postage and packaging, for all telephone orders placed with YPDBooks (01904 431 213). Simon has published an article outlining the content: 'Secrets to successful stockpicking'
