STM cashed up for acquisitions

At the time the directors revealed that their company would deliver a £500,000 increase in underlying pre-tax profits to £3.7m on flat revenues of £21.4m. The dividend per share has been raised by 11 per cent to 2p at a cost of £1.2m, and is covered more than three times by EPS of 6.2p. The payout is easily funded from a balance sheet holding net cash of £15.6m (26.3p a share).

The key take for me in today’s results is that STM has just completed the acquisition of Carey, a UK Sipp business that has over 4,000 members and assets under administration of £898m. This not only scales up its existing UK and international Sipps business (1,915 and 1,271 members, respectively, having grown by 20 per cent in aggregate last year), but it should generate £500,000 of cost savings this year and be earnings accretive in 2020. The acquisition also enables STM to offer niche Sipp products to the UK market with minimal outlay, such as property Sipps.

Interestingly, chief executive Alan Kentish pointed out during our results call that Carey’s UK distribution network and product offering “is significantly better than that of  London & Colonial (acquired by STM in September 2016)”, suggesting potential for the combined operation to gain traction in a UK Sipps market that posted double-digit market growth in 2018 now that it has critical mass. Indeed, he pointed out that the combined Sipps operation is targeting a move from break-even this year to making an operating margin closer to the 15 to 20 per cent level on annual revenues of £3.5m to £4m. That’s well worth noting.

Strategically, the directors also 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-enrollment workplace pension provider with 65,000 members is the first step, and STM is looking at buying up further sub-scale operators who have decided not to apply for Master Trust authorisation from The Pension Regulator. It wouldn’t take many bolt-on acquisitions to create a profitable workplace pension business, so this is where corporate activity is being focused.

House broker finnCap predicts an adjusted pre-tax profit of £4.1m on revenues of £20.9m this year, but has not yet factored in the Carey acquisition so this is before potential upgrades. On this basis, the shares are rated on a cash-adjusted PE ratio of four and offer a prospective dividend yield of 4.6 per cent based on a 10 per cent hike in the 2019 payout to 2.2p a share.

So, having first advised buying the shares at 35p (‘Tapping into a pensions payday’, 27 Apr 2015) and banked dividends of 4.9p a share excluding the forthcoming final dividend of 1.3p that goes ex-dividend on 30 May, I am maintaining my target price range of 90p to 100p ahead of news on further acquisitions and potential earnings upgrades. Buy.

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