Fund manager Miton (MGR:62p) has delivered the hefty rise in assets under management (AUM) that I predicted when I last updated the investment case (‘Running gains’, 21 May 2018).
Buoyed by inflows of around £300m for both the first and second quarters, and a positive market movement of £100m, the company increased its AUM by more than £700m to £4.5bn in the first six months of the year, and that’s after posting 14 per cent growth in the second half of 2017. In fact, Miton has now reported positive net inflows for seven consecutive quarters, prompting analyst Stuart Duncan at house broker Peel Hunt to upgrade his earnings forecasts yet again, raising his full-year pre-tax profit and EPS forecasts by 11 per cent to £8.5m and 4.2p, respectively, implying 24 per cent year-on-year growth, on revenue of £26.7m.
Rising AUM has an accentuated impact on profits for fund managers as an increasing amount of incremental fee income drops straight to the bottom line given their relatively fixed cost base. I wouldn’t discount the possibility of further upgrades, either, as Peel Hunt’s new forecast is based on a year-end AUM of £5bn, up from £4.6bn previously. I have good reason to think this way as all bar three of Miton’s 16 funds are first or second quartile performers under their current manager’s tenure, so they are pulling in new investors on the back of ongoing outperformance. Miton has launched two new complementary funds in 2018, too, including a US Smaller Companies Fund that already has £83m AUM, further supporting growth.
Based on the new forecasts, and after taking into account an expected year-end cash pile of £25m, worth 14.5p a share, Miton’s shares are still only priced on a cash-adjusted forward PE ratio of 11.3, or 30 per cent below the rating of other small-cap asset managers. For good measure, the board has declared total dividends of 3.67p a share since I initiated coverage at 23p ('Poised for a profitable recovery', 4 Apr 2015), highlighting the cash-generative nature of the business. Furthermore, Mr Duncan at Peel Hunt is predicting another sharp hike in the annual dividend from 1.4p to 1.9p a share, rising to 2.4p a share in 2019. The 2019 payout is based on a further step change in pre-tax profit to £10.5m on revenue of £31.9m to produce EPS of 5.2p. On this basis, Miton’s shares offer a prospective dividend yield of 3.1 per cent, rising to 3.9 per cent in 2019.
Mr Duncan is not the only one adjusting his numbers. I have done so too and now feel that having seen my 60p target price achieved this morning, and after taking into account the hefty EPS upgrades, a 2018 forward PE ratio of 14 net of cash on the balance sheet seems a more reasonable rating to me, implying a new target price of 75p. Buy.
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