The company owns a 51.8 per cent stake in fast growing unsecured lender Secure Trust Bank (STB: 2,850p) and the performance of that company was a major contributing factor in Arbuthnot reporting record pre-tax profits of £32.4m, a rise of over 50 per cent year-on-year. Secure Trust reported a 42 per cent hike in its own profits in the same period, reflecting robust growth in its motor, retail and business finance lending. In fact, total lending by Secure Trust shot up by over 70 per cent to £1,075m, funded almost entirely by retail fixed term deposits and bonds of £1,033bn. These deposits have fixed terms and Secure Trust has been able to offer best buy rates to income seekers, so has had no problem matching its loan growth with deposit funding in a low interest rate environment where investors struggle to make worthwhile returns without putting their capital at risk.
Importantly, the surge in lending has not been at the expense of credit quality as Secure Trust’s impairments of £16.8m, albeit up from £8.6m in 2014, were not out of line with the sharp rise in loan balances and a customer base of 570,000. Secure Trust remains well capitalised, boasting a core tier one ratio of 13.6 per cent. Moreover, having agreed to sell its Everyday Loans business to sub-prime lender Non-Standard Finance (NSF: 75p) for £232m, its core tier one ratio is set to increase to 24 per cent. A price-to-book value ratio of 2.3 times doesn’t seem harsh for a company that grew underlying EPS by 9 per cent to 170p last year and is expected to increase EPS by almost a third to 223p in the current financial year, according to analyst James Ash at Canaccord Genuity. On this basis, the shares are rated on a forward PE ratio of 12.8 and offer a 2.5 per cent dividend yield.
Secure Trust’s raised payout per share of 72p includes a final dividend of 55p, but excludes a special dividend of 165p to be paid on the completion of the Everyday Loans transaction. The forward PE ratio will drop a point to only 11.8 after this capital return. I remain positive on the investment case.
I also remain positive on Arbuthnot’s shares. That’s not only because its £200m market capitalisation is well below the £268m open market value of its holding in Secure Trust, despite the fact that Arbuthnot has been able to sell shares easily in Secure Trust, but also because the company is generating decent growth on its own. For instance, private bank Arbuthnot Latham increased profits by two thirds to £6m in 2015, a performance that reflects a substantial increase in new clients opening accounts, an improved outcome from its Dubai office, a contribution from the Dunfermline Building Society residential mortgage book, acquired from its administrators in December 2014, and the benefits of hiring more private bankers. Arbuthnot Latham is well funded and a loans-to-deposit ratio of 69 per cent suggests there is ample funding available to continue to grow lending here. The bottom line is that the private bank is in the price for free.
There are income attractions too. In fact, with Arbuthnot set to receive a £22m dividend from Secure Trust on its 9.48m shareholding in that company, its board have declared total dividends of 54p a share including a special of 25p a share. Also, its pro-forma net tangible assets will rise to £220m as soon as the Everyday Loans sale completes which means that the company’s equity is trading on a 10 per cent discount to tangible book value. The shares are also trading on only 10 times earnings estimates of 130p according to analyst James Hamilton at broking house Numis Securities.
Needless to say, I continue to rate Arbuthnot’s shares a buy at 1,340p.
Please note that I have published four columns today, 10 so far this week, and 19 since Monday last week, all of which are listed below. I am still working my way through a number of results announcements and will endeavour to update my views as soon as possible.
MORE FROM SIMON THOMPSON...
I have written articles on the following companies recently:
■ Plethora Solutions: Take profits at HK$0.079 ('On the takeover trail', 14 March 2016)
■ Somero Enterprises: Buy at 150p; target 185p ('A solid buy', 15 March 2016)
■ 32Red: Run profits at 150p ('32Red in the money, 15 March 2016)
■ Communisis: Sell at 44p ('Patience running short at Communisis', 15 March 2016)
■ Global Energy Development: Sell at 27p ('Global Energy plays waiting game', 15 March 2016)
■ Raven Russia: Sell at 30p ('Raven Russia battens down the hatches', 15 March 2016)
■ Stadium: Buy at 122p, new target price 150p ('Switch on for bumper gains', 16 March 2016)
■ French Connection: Buy at 42.75p ('Return to profitability looms for chic operator', 16 March 2016)
■ Fairpoint: Run profits at 159p ('Fairpoints to make', 17 March 2016)
■ Netplay TV: Buy at 10p ('Netplay's shares spin higher', 21 March 2016)
■ Satellite Solutions Worldwide: Buy at 5.5p, target 9p to 10p ('Blue sky tech play', 21 March 2016)
■ Miton: Buy at 30.5p, new target 38p (‘Riding earnings upgrades’, 22 March 2016)
■ Inland: Run profits at 86p, new target 95p (‘Valuation surge boosts Inland’, 22 March 2016)
■ Pittards: Crystallise loss at 71p (‘Subdued demand hits Pittards’, 22 March 2016)
■ French Connection: Buy at 43p ('Stakebuilding gathers pace at French Connection', 22 March 2016)
■ Safestyle: Run profits at 276p (‘Exploiting a window of opportunity’, 23 March 2016)
■ PV Crystalox: Speculative buy at 10p (‘Lights start to glow at PV Crystalox’, 23 March 2016)
■ Arbuthnot Banking Group: Buy at 1340p (‘Banking on a banking duo’,23 March 2016)
■ Cenkos Securities: Sell at 130p ('Cenkos profits slide', 23 March 2016)
■ 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking
