Rathbones still resilient

Rathbones (RAT) reported figures were generally well received in the eyes of the market: of all the asset and wealth mangers, its shares have fallen the least over the past 12 months. Part of that defensiveness was down to assumptions that a specialist wealth manager like Rathbones would become a takeover for a larger bank. In the event, a takeover did not materialise, but the company’s operational performance has been enough to support the share price through the worst of the market rout for the sector.

The acquisition of high-end advisor Saunderson House has added £4.2bn of assets under management, which also clearly helped to maintain the level of management fees, which were £29.9mn for the half, up from £26.1mn last year. Surprisingly, given the general picture, fund flows in the half were positive for Rathbones and although down year on year, came in at £600mn for the period. Overall assets under management were slightly lower at £58.9bn. Meanwhile, acquisition costs for the full year are expected to come in at £14mn, related to Saunderson House and deferred options related to the buy-out of boutique firm Speirs & Jeffrey.

However, Rathbones has discovered that a paradox occurs when planned spending, which is still forecast to be £20mn this year, collides with lower-than-expected revenue growth. On top of its acquisition expenses, the company had planned £8mn of spending on updating its digital infrastructure. When combined, the impact on the operating margins for the year was noticeable – this was 21.5 per cent in the half, compared with 29.4 per cent last year. Management now forecasts an operating margin in the low 20s for this year, before returning to the 27-30 per cent range for 2024.    

As well as worries over cost management, Panmure Gordon analysts pointed out the weak performance of Rathbone’s unit trusts business, which is most reliant on retail investors for fund inflows.

It had been the area of biggest growth over the past couple of years, though still relatively small in the context of Rathbones’ overall business, and Panmure thinks that unit trusts won’t help to hold up the profit line. The broker forecasts earnings per share of 124p for the year, rising to 131p for 2023. Overall, that gives a price/earnings ratio of 14.8, falling to 14 for 2023. That looks fully priced in the context of this year’s performance and, with cost pressures taking a while to subside, we retire our buy tip. Move to hold.

Last IC View: Buy, 1,674p, 24 Feb 2022