Join our community of smart investors

Lighthouse sends out the right signals

The financial services group that targets 7m members of affinity groups has raised its dividend by two thirds, boosted its cash pile and prompted earnings upgrades from analysts.
February 26, 2019

Underpinned by a record average revenue per adviser of £122,000, financial services group Lighthouse (LGT:26.5p) has delivered a resilient performance in the face of weaker financial markets in the final quarter of 2018. Second-half pre-tax profits increased by 9.5 per cent to £1.38m on the first half of 2018 to produce annual pre-tax profit of £2.64m, up from £2.52m in 2017. Adjust for tax credits that buoyed 2017 post-tax profits and underlying earnings per share (EPS) rose by 6 per cent to 1.68p.

Furthermore, with over 80 per cent of record annual cash profit of £3.4m converted into free cash flow, the board hiked the payout far more than analysts had anticipated, raising the dividend per share by two-thirds to 0.7p at a cost of £900,000. The bumper cash flow performance also enabled Lighthouse to make a £1m strategic investment in Aim-traded Tavistock Investments (TAVI:3.6p) to give it a 5.3 per cent stake in the financial advisory and fund management business.

Lighthouse advises clients owning assets that are cumulatively worth in excess of £5bn and the strategic agreement between the two companies enables these clients to access Tavistock's investment solutions, including a range of capital protection fund products that are principally invested in iShares by BlackRock and guaranteed by Morgan Stanley. The new products can now be accessed through Lighthouse’s asset management business, Luceo, and should also drive additional demand for the five Luceo funds that are managed by Octopus Investments.

A key attraction of Lighthouse’s business model is its unique distribution channel, which gives it access to 7m members of 23 affinity groups (trade unions and large organisations). Recurring revenue from the affinity business accounted for half divisional revenue of £9.7m and it’s highly profitable too, boasting a profit margin of 30 per cent. Lighthouse added two new affinity groups to its roster last year, in addition to 10 renewals, strategically the most important of which was a new contract with the National Education Union. With 450,000 members, it’s by far the largest education union in the UK and means that government funded education, healthcare and public services account for 1.6m members across 11 affinity groups.

Following upgrades post results, FinnCap expects pre-tax profits to rise from £2.65m to £3m in 2019 to produce EPS of 1.8p and support a 14 per cent hike in the dividend per share to 0.8p. Expect net funds to increase by £1.2m to £10.7m by the year-end, a sum worth 8.4p a share. On this basis, Lighthouse’s shares are rated on a cash-adjusted forward PE ratio of 10 and offer a 3 per cent prospective dividend yield. That’s an attractive rating as I highlighted when I last suggested buying the shares, at 23.6p, ahead of the results (‘Lighthouse signals a buying opportunity’, 14 January 2019), having first highlighted the investment case in my June 2018 Alpha Report. 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.

Limited offer: Successful Stock Picking Strategies and Stock Picking for Profit can be purchased for the combined promotional price of £25 plus postage and packing of £3.75 [UK] subject to stock availability.