In any case, what interests me right now is that the company has been quietly growing its asset management business and delivering on its strategic plan, announced in the summer of 2012, to transform the company from a predominantly traditional private client stockbroker to a full service investment and wealth management group. In the financial year to end March 2014, Walker Crips returned to profitability and posted operating profit of £470,000 on revenues of £20.7m, reversing an underlying loss of £1m in the prior financial year. True, that’s hardly a rich return on net assets of almost £21m, of which net cash accounts for £7.8m, which largely explains why investors only attribute a market value of £16.5m to its equity or 21 per cent less than book value.
Building a profitable business
However, what’s clear to me is that the company is moving in the right direction and looks to be building a profitable business with sustainable recurring revenue streams. Regional expansion has gathered pace in the past 18 months alongside growth within Walker Crips’ main offices in London and York. There has been a significant increase in recruitment of teams of investment managers and advisers, so it’s worth pointing out that the full impact of the new revenues generated by the latest seven investment managers recruited will be felt “materially in the second half of the financial year to end March 2015.” That’s because most of these new recruits only joined at the end of the first half, having transferred from Walker Crips’ peers such as Barclays Wealth, JM Finn, Charles Stanley and EFG Harris Allday.
In other words, it’s only reasonable to expect a bumper second half performance from Walker Crips when it reports its full year results as the company reaps the benefits of a further increase in its higher margin discretionary and advisory assets under management (AUM) and so continuing a strong growth trend. Indeed, at the end of September 2014, AUM from this segment had risen by 26 per cent to £1.45 billion year-on-year and total assets under management and administration increased at a similar rate to £2.66bn.
In turn, fees and non-broking income accounted for 57 per cent of the company’s first half revenues in the six months to end September 2014, up from 52 per cent at the same stage in 2013, reflecting the strategic emphasis and the longer term revenue benefits of asset gathering alongside transactional brokerage. It also reflects the conversion of the company’s client base to discretionary or portfolio-managed mandates, a trend that is being fuelled by incoming new advisers whose clients already provide predominantly fee driven revenue streams and a further shift by existing clients to fee-based charging.
Bearing this in mind, it’s worth flagging up that the board stated at the end of last year that “we continue to evaluate target companies and businesses for suitably measured and value-added acquisitions. The company has continued trading profitably since the period end and remains in a strong financial position.” Or put it another way, the board are actively looking at deploying some of that £7.8m cash pile to make earnings enhancing acquisitions and to scale up the investment and wealth management operations. It would make sense to do so as the cash inflow from interest earned was a miniscule £46,000 in the last six month period, so there is clearly a better use of these funds.
Decent dividend and scope for PE ratio to fall sharply
Shareholders will undoubtedly reap the benefits of strategic bolt-on acquisitions too as the increase in profits will enable the company to lift the pay-out. It’s not bad in any case as a 12-month rolling dividend of 1.59p a share provides a yield of 3.5 per cent.
Admittedly, analyst earnings forecasts are hard to come by, but I feel that an underlying pre-tax profit of around £400,000 for the second half to end March 2015, up from £270,000 for in the first half, should be easily achievable to generate full-year adjusted EPS of 1.4p. And with net funds equating to 21p a share, representing 47 per cent of the current share price, the cash adjusted PE ratio could be as low as 17. Moreover, that rating should drop sharply in the next financial year if Walker Crips makes earnings enhancing acquisitions and maintains the strong momentum in both the asset and wealth management arms of the business.
For good measure, the shares signalled a chart break-out on Tuesday this week on their point & figure chart (1p per point), and one that appears to have broken the eight month downtrend in the share price since hitting a high of 54p last May. That price level is my inital price objective.
Understanding the risks
Of course, there are risks, the most obvious of which is the potential for equity markets to suffer a sharp decline if the eurozone blows up, even though I feel this is a long shot. In addition, the UK general election is only three months away, so there is scope for investors to become nervous ahead of that major political event.
On a company specific level, there is no guarantee that the profit growth I am factoring in will materialise either. Walker Crips is a small cap company too, so it’s shares are less liquid and more volatile than large cap financial services companies. Some investors may be disheartened by the fact that the shares are no higher now than they were six years ago, at the start of the 2009 bull market.
That said, taking all of those factors into consideration, and giving the management team led by chief executive Rodney Fitzgerald and chairman David Gelber, a former chief operating officer of interdealer broker Icap, credit for the turnaround in the business, then I still believe Walker Crips’ shares are worth buying on a bid-offer spread of 43.5p to 45p for the medium-term. Please note that this is a small cap company with a market value of £16.5m, so it’s sensible to deal in smaller bargain sizes to avoid market makers raising their offer price above the quoted spread to fill a large trade.
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
