The share price of Aim-traded STM (STM:55p), a company that primarily administers offshore pensions and is expanding both its UK and international self-invested personal pensions (Sipps) operations, has drifted back since I covered the half-year results (‘STM delivers strong growth’, 11 Sep 2018), albeit the holding is still showing a total return of 71 per cent since I initiated coverage (‘Tapping into a pensions payday’, 27 Apr 2015). This has created a repeat buying opportunity well worth exploiting, especially as a pre-close trading update confirmed that STM is trading well, and is likely to continue to do so.
Indeed, analysts Nik Lysiuk and Jeremy Grime at house broker finnCap maintained their forecasts, which point to a 5 per cent increase in STM’s pre-tax profit to £4.2m on revenue of £20.8m in 2018. Strip out net funds of £16.3m from the company’s £32.6m market capitalisation, and STM’s operating businesses are effectively being valued on less than five times full-year post tax profit. A price-to-book value of one is hardly exacting, too.
It’s not as if the company is about to go ex-growth, either. finnCap is maintaining its 2019 forecasts that suggest the company can lift both operating profit and pre-tax profit by £600,000 to £5m and £4.8m on revenue of £21.9m. On this basis, expect a 25 per cent hike in the 2019 dividend per share to 2.5p, up from 2p forecast for the 2018 financial year, and 1.8p declared in 2017. This implies a prospective dividend yield of 3.6 per cent for 2018, rising to 4.5 per cent in 2019.
Moreover, it’s not as if STM isn’t putting its cash pile to good use. In October, the company announced the £400,000 earnings-enhancing purchase of a majority stake in a top 20 auto-enrolment workplace pension provider which has 65,000 existing members and is expected to break-even this year based on its organic growth alone, and a UK Sipp business which has over 4,000 members and assets under administration of £898m. The integration of the acquisition with STM’s existing UK SIPPs business, which has 3,000 members should generate £500,000 of cost savings. It also enables STM to offer niche Sipp products to the UK market with minimal outlay. There is an overseas growth angle, too, as STM’s international Sipps business has over 1,000 members after attracting 434 new clients in the first half of the year. STM is looking to expand its network of financial intermediaries to enhance growth rates further.
The move into the auto-enrolment market looks very interesting given there are a limited number of providers operating in what is an expanding market and one where cost of entry is prohibitive to new entrants. Organic growth aside, this offers an opportunity for consolidation among sub-scale operators.
The same is true for further bolt-on acquisitions for STM’s Qualifying Recognised Overseas Pension Schemes (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. STM is looking to acquire smaller rivals hit by the UK tax changes in the 2017 UK Budget, which has led to the imposition of a 25 per cent tax on transfers into Qrops for residents located outside the European Economic Area (EEA). STM has now successfully integrated the £950,000 acquisition of a Malta-based provider that earns over £800,000 of annual revenue from its 1,600 Qrops plans, and should contribute £400,000 to STM’s annual operating profit in 2019. STM’s now administers almost 12,500 Qrops plans, which generate recurring revenue north of £10m, and at a decent profit margin, too, thus de-risking the investment case.
So, with the company cashed up to make further earnings-enhancing acquisitions, I feel that the valuation anomaly is worth exploiting. To put the potential share price upside into perspective, if my sensible looking target price of between 90p and 100p is achieved, then STM’s shares will still only be priced on a cash-adjusted price/earnings ratio of between 9.5 and 11 for 2019. That’s not an unreasonable rating for a company that’s on course to make a pre-tax return on equity of close to 13 per cent this year. Buy.
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