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Cashed up Shore Capital completes Stockdale acquisition

The investment bank and asset manager is now the fourth-largest adviser on the London stock market
April 2, 2019

Investment bank and asset manager Shore Capital (SGR:230p) is putting some its burgeoning cash pile to good use, having just completed the acquisition of Stockdale Securities to create the fourth-largest adviser to UK-quoted companies, and one servicing 118 corporate clients. Employing 41 staff, Stockdale currently has 53 corporate clients and dealing relationships with 200 institutional clients.

Importantly, the deal is sensibly priced. The maximum consideration of £8.8m (including an 18-month performance related earn-out of £4m) equates to 1.56 times book value and six times Stockdale’s pre-tax profit of £1.5m that it earned on revenue of £11.3m in the 2018 financial year. It's a profitable addition to Shore Capital's own capital markets division, where 2018 pre-tax profits slipped a fifth to £4.06m on revenues down 6.5 per cent to £25.5m. However, this was not a bad result in light of the market turmoil in the fourth quarter that subdued earnings from both corporate finance and market-making activities. Moreover, the company’s diversified business model is proving its worth and more than half the profit shortfall was made up from other activities.

Indeed, Shore Capital’s asset management arm continues to make good progress, reporting divisional pre-tax profits of £3.16m on revenues up 22 per cent to £15.8m. Key highlights here include a £200m funding line secured for deployment in Shore Capital’s Puma Property Finance business. This operation specialises in making both development and pre-development first charge loans (typical size of £3m to £30m) in the residential and commercial sectors, thus capitalising on a highly profitable lending activity and one where larger banks have reined in their activity mainly due to regulatory constraints.

It’s noteworthy that retail appetite for Shore Capital’s Puma branded tax-efficient strategies remains strong even in tougher equity markets. For example, the Puma 13 VCT recently closed early due to high demand, Puma Alpha EIS service now has over £75m of assets under management (AUM), and Puma AIM Inheritance Tax Service continues to grow, ending 2018 with AUM of £24m. Including institutional mandates, total AUM rose by 6 per cent to £920m.

Shore Capital’s balance sheet remains as rock solid as ever. The bank holds almost £5m in quoted and unquoted equities, £6.8m invested in funds it advises, and £33.8m of cash and gilts. It also owns a 59.94 per cent interest in Spectrum Investments, the parent of DBD, a company that holds 32 regional radio spectrum licences in Germany of perpetual duration. Following discussions with the German Telecoms Regulator, the licences are being reallocated from the 3.5 GHz frequency band to the 3.700-3.730 GHz frequency band at no cost, thus enabling their use for 4G and 5G services. The investment is carried in Shore Capital’s accounts at £2.26m, and the directors are “are confident of the future prospects for DBD’s business and the value that can accrete from it”.

The bottom line is that Shore Capital’s shares are not only lowly rated on a 15 per cent discount to book value of 269p, but the balance sheet strength means that its market capitalisation of £49m is fully covered by the aforementioned investments, thus leaving its highly profitable capital markets and asset management operations in the price for free.

For good measure, the board is maintaining the total dividend at 10p a share, so there is a 4.3 per cent dividend yield, too. So, having included the shares in my 2018 Bargain Shares Portfolio at 213p, I remain a buyer.

 

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