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Profit from growing affinity towards Lighthouse

The small financial services group has a unique distribution channel to service members of trade unions and large organisations, and a highly profitable one too
September 4, 2018

Interim results from financial services group Lighthouse (LGT:30p) have fully vindicated my decision to initiate coverage in the summer when the share price was 29p ('Alpha Company Research: Simon Thompson looks to profit from the right advice', 6 June 2018). My target price of 40p was reached five weeks later before profit-taking ensued. This looks like a great repeat buying opportunity to me, and one close to my advised entry point.

Operating from three principal locations – London, Stockport, and Woodingdean near Brighton – Lighthouse has built unique distribution channels through affinity partners and accountancy groups, while reducing reliance on its traditional network business. The strategy is paying off as Lighthouse is now a leading adviser in the affinity arena, providing financial advice to more than 6m employees of 21 large organisations and trade unions, including Unison, Unite and the Royal College of Nursing. Growth from this fast growing segment delivered the majority of the 12 per cent rise in Lighthouse’s interim pre-tax profits to £1.26m. Affinity revenues increased by a fifth to £5.1m, buoyed by new business of £2.6m (up from £0.8m in the first half of 2017), and is high margin with the cash profit margin around 20 per cent.

Lighthouse is also making strong progress with its Luceo asset management business. It now offers five funds for five risk classes with Octopus Investments acting as Investment Adviser. The Luceo funds are available on a number of leading platforms and are proving popular. Assets under management (AUM) increased from £37m to £53m in the first half and weekly investment flows are averaging £714,000 since then. Three of the funds are expected to achieve the £20m level of AUM to hit break-even around the year-end, adding a further tailwind to support expectations of Lighthouse posting double-digit profit growth in both 2019 and 2020.

To give you some idea of the momentum in the business, Lighthouse posted a 4 per cent pre-tax profit beat for 2017 after analysts at house broker finnCap had upgraded estimates by 16 per cent since the autumn. Furthermore, finnCap upgraded its 2018 and 2019 pre-tax profits by 7.5 per cent and 16 per cent, respectively, following the 2017 financial results. The earnings upgrade cycle is far from over as finnCap’s full-year pre-tax profit estimate of £2.7m, up from £2.5m in 2017, looks very conservative to me.

Lighthouse also has valuable tax losses, which will wipe out this year’s corporation tax charge. This means that analysts’ fully diluted adjusted EPS estimates of 1.6p for 2018, up from 1.49p in 2017, both of which incorporate a standard 19 per cent corporation tax charge, significantly understate the actual EPS likely to be reported. The balance sheet is cash-rich too; net funds increased from £8.7m to £9.6m in the latest six-month trading period, a sum equating to 8p a share. The cash can be recycled into growing Lighthouse’s affinity and asset management businesses, and offers scope for bolt-on acquisitions. The directors informed me that they are looking in the market place for a corporate transaction to add to the affinity business, a sensible use of funds.

Shareholders are rightly being rewarded, with the interim dividend per share hiked by two-thirds to 0.2p, implying a third increase in the full-year payout to 0.6p, or 30 per cent higher than finnCap had previously predicted. They also raised their 2019 dividend estimate from 0.5p to 0.66p a share.

So with the lossmaking Luceo business fast reaching an inflexion point, the affinity business booming, and the balance sheet cashed up for acquisitions, then Lighthouse is sending out all the right signals. Priced on 12 times cash-adjusted full-year reported post-tax profits estimates, and offering a prospective dividend yield of 2 per cent, the shares rate a strong buy.

 

■ Simon Thompson's new book Successful Stock Picking Strategies can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source and is priced at £16.95 plus £2.95 postage and packaging. 

Simon's second book Stock Picking for Profit has been reprinted and is available to purchase online at www.ypdbooks.com for £16.95, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order. Details of the content of both books can be viewed on www.ypdbooks.com.