Join our community of smart investors

Brewin Dolphin's growth undervalued

The wealth manager is the most cheaply rated in the sector, and we don't think its income or growth potential justifies this
June 22, 2017

Brewin Dolphin (BRW) has spent the past three years putting its recovery plan into action. This included consolidating its offices, focusing on higher-margin discretionary wealth management and exiting non-core businesses. It has also transformed its back-office in response to regulatory changes, while still growing its funds under management. As a result earnings growth is set to ramp up from this year and there is a dividend yield above 5 per cent on offer. However, this progress is not reflected in the price of the shares, which are trading at a lower level than any of its peers.

IC TIP: Buy at 331p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Trading at a discount to sector
  • Growing discretionary assets
  • Fat dividend yield
  • Improving margins
Bear points
  • Exposed to changing investor sentiment
  • Advisory income falling

Brewin has been steadily growing its discretionary fund management business. During the six months to the end of March discretionary funds were up 9 per cent to £31.5bn. This is compared to a 5 per cent increase in the MSCI WMA Private Investor index during the same period. This consisted of £1.1bn in net inflows and £1.6bn in investment gains. Discretionary funds - where a client hands over the day-to-day running of their portfolio - accounted for 95 per cent of core income at the end of March. This was thanks to a larger proportion of funds being managed on a discretionary basis - 83 per cent at the end of March, up from 63 per cent at the same time three years earlier. Brewin has also been helped by growth in the average size of client portfolios. At the end of September it was £590,000, compared with £498,000 in the previous year.

Distribution channels for the group's discretionary management services have been broadened via the launch of the Managed Portfolio Service, a white-label platform used by intermediaries to invest their clients' money. That division saw the strongest growth in funds during the first six months of the year, with net inflows of £0.5bn and a further £0.1bn thanks to positive market movements. It now manages £1.8bn on behalf of intermediaries across 11 platforms. It has also been broadening its intermediary network in order to gain more referrals. As well as traditional IFAs, the wealth manager has been strengthening its ties with legal groups, developing specialist services for solicitors and their clients, legal and accounting firm partners and corporate advisers. However, these services attract lower fee margins, which meant the income yield on its core discretionary service fell slightly to 88 basis points during the previous year.

The good news is that the shift towards discretionary management and back-office operational improvements are still driving better profit margins. During the first half of the year, the adjusted pre-tax profit margin was 22 per cent, up from 20.7 per cent in the previous year. Management has set a target of growing this to 25 per cent. What's more, more than 70 per cent of its discretionary funds under management are those gained by clients approaching the group directly. Of these direct private clients, around 16 per cent receive financial planning services, as well as investment management. The plan is to increase this to 30 per cent within the next two to three years, in order to maintain organic growth within its direct discretionary business.

However, Brewin is still managing the decline of its advisory business, with fees and commission falling 15 per cent to almost £7m during the six months to March. Execution-only funds - which are more sensitive to transaction volume and therefore investor sentiment - were also down 6 per cent to £3.4bn. In both cases this was due to net outflows during the period.

BREWIN DOLPHIN (BRW)

ORD PRICE:331pMARKET VALUE:£938m
TOUCH:331-331.2p12-MONTH HIGH:354pLOW: 207p
FORWARD DIVIDEND YIELD:5.1%FORWARD PE RATIO:14
NET ASSET VALUE:87p*NET CASH:£152m

Year to 31 DecTurnover (£m)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
201428158.916.29.9
201528462.217.112
201628261.016.813
2017**30367.718.814.5
2018**33782.123.117
% change+11+21+23+17

Normal market size: 1,500

Beta: 0.66

*Includes intangible assets of £76m, or 27p a share

**Shore Capital forecasts, adjusted PTP and EPS figures