Aim-traded STM (STM:73p), a company that primarily administers offshore pensions for 15,445 clients, has delivered an 11 per cent rise in first-half underlying pre-tax profits to £2.1m after adjusting for a £0.5m technical expense reserve release which inflated last year’s results.
The outcome was even more impressive given that STM incurred a £0.3m one-off charge to amicably resolve a spat with the Gibraltar Financial Services Commission (GFSC) in relation to its Qrops business, an offshore pension scheme approved by HMRC and used by expatriates and internationally mobile employees whose tax domicile can change as a consequence of employment.
Recurring revenue accounted for 79 per cent of STM’s first-half revenue of £10.8m, up by five percentage points, in part reflecting this year’s £950,000 acquisition of a Malta-based provider that generates over £800,000 of annual revenue from its 1,600 Qrops plans. With net cash of £16.3m backing up over a third of STM’s market cap of £43m then the company has ample funding to acquire more small Qrops players.
There was steady growth in its international self-invested personal pensions (Sipps) business, which has almost 1,000 plans after attracting 434 new clients in the six-month period. STM is looking to expand its network of financial intermediaries to enhance growth rates further, and plans to diversify its product offering into further niches such as UK property Sipps. A pre-tax profit margin target of 25 per cent over the next 12 to 18 months, up from 20 per cent in the first half of 2018, reflects the operational leverage of the business, another positive in my view.
House broker FinnCap expects STM to deliver full-year pre-tax profits of £4.2m, rising to £4.8m in 2019, estimates that should offer upside in the event of further earnings-enhancing bolt-on acquisitions, or new products accelerating organic growth rates. So, having first advised buying STM’s shares at 35p (‘Tapping into a pensions payday’, 27 April 2015), and last rated them a buy at 62p (‘On course for a rerating’, 31 July 2018), on a cash-adjusted PE ratio of 7 for 2019, and supported by a 3.4 per cent prospective dividend yield, my target price range of 90p to 100p could yet prove conservative. Buy.
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