STM’s building blocks for growth and acquisitions

Around half of STM’s market capitalisation of £32.4m is backed by net cash on the balance sheet. This means that an operating business that is set to report a 15 per cent rise in underlying pre-tax profit to £3.7m for the 2018 financial year is being valued on 5.5 times post-tax profits. Please note that reported pre-tax profits will be down slightly from £4m to £3.9m as the 2017 result benefited from a £1.3m technical reserve release from STM’s London & Colonial Assurance subsidiary whereas there is a smaller £500,000 technical reserve release in the 2018 annual results.

Around £15.8m of the £20.5m underlying revenue STM delivered in the 2018 financial year is recurring in nature, thus providing the company with a solid and reliable income stream. It’s worth pointing out that STM’s 2018 pre-tax profits are stated after incurring £200,000 of additional costs to improve its corporate governance which resulted in the appointment of a Head of Enterprise Risk, an internal auditor and a full-time Counsel and Company Secretary. These appointments were in response to a Skilled Persons Review (at a cost of £300,000) which found that STM needed to strengthen its senior management.

This explains why the board has just appointed a chief operating officer, Peter Marr, who previously held the same role at Police Mutual, a mutual society that provides insurance, mortgages and savings products to its 200,000 members. Prior to that Mr Marr was operations director at Capital Insurance Services, so has relevant industry experience. True, these new appointments will lead to a £400,000 rise in ongoing operating costs in the 2019 financial year, but clearly they were deemed necessary.

Of far more importance, the integration of last autumn’s acquisition of a UK Sipp business which has over 4,000 members and assets under administration of £898m with STM’s existing UK Sipps business (3,000 members) should generate £500,000 of cost savings. It enables STM to offer niche Sipp products to the UK market with minimal outlay, too. Also, the directors see an opportunity for STM to act as a consolidator in the workplace pensions market by acquiring smaller master trusts in the same way that it has made bolt-on acquisitions in its QROPS business, an offshore pension scheme used by expatriates and internationally mobile employees whose tax domicile can change as a consequence of employment. The £400,000 earnings-enhancing purchase of a majority stake in a top 20 UK auto-enrolment workplace pension provider with 65,000 members is the first step in this process.

It’s worth taking note that chief executive and 11.3 per cent shareholder Alan Kentish says that “with a new enlarged and experienced board, we have all the building blocks in place for our ambitious short term growth and acquisition strategy". While the directors act on this strategy, shareholders can look forward to a forecast 11 per cent hike in the 2018 dividend to 2p a share, according to analysts at brokerage finnCap.

I would flag up too that funds managed by Miton, River & Mercantile and Kestrel Opportunities control 18 per cent, 5.6 per cent, and 3.7 per cent, respectively, of the share capital so there are some smart fund managers backing this special situation. So, ahead of the annual results on Tuesday, 26 March 2019, I rate the shares a buy.

■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.