Interest rates shore up Rathbones

The propulsive power of interest rates was plain for all to see in Rathbones’ (RAT) full-year results as the asset manager and banking group saw its interest income increase by nearly five times to £18.3mn. The unexpected windfall was welcome for Rathbones as it incurred heavy investment to update the business with new IT infrastructure, plus the costs of integrating its recent acquisitions put considerable pressure on the bottom line.

The company booked deferred acquisition costs of more than £13.5mn as the integration of Saunderson House, a high-end pensions and financial adviser, plus fund manager Speirs and Jeffrey accelerated during the year. There was a similar charge for IT investment of £13.5mn. Overall, comparable like-for-like costs won’t be available until the end of this year once the full contribution from acquisitions has been integrated.

On the operational side, Rathbones showed its traditional split between the investment management and unit trusts side of the business. Unit trusts, which are marketed to retail investors, are a reliable source of fees and, despite lower assets under management of £11bn, underlying profits before tax edged higher to £26.4mn. The contrast with investment management was stark; here falling assets under management and higher costs meant underlying pre-tax profits in investment management were 28 per cent lower at £70mn, although management is guiding towards a return to higher margins once investment is complete.  

Analysts at Panmure Gordon said that "despite the benefit of higher rates, immediate profit progression is limited given ongoing investment spend. The key question is whether there will be genuine operational gearing from the end of 2024”. The broker values the shares at 15 times 2023’s earnings. We think that is fair and note that the shares have enjoyed a decent run. Hold.

Last IC View: Buy, 1,840p, 29 July 2022