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Recovering Charles Stanley undervalued

The wealth manager has been streamlining its business, growing assets under management and progressing its dividend payments
October 12, 2017

The shift by wealth managers to discretionary management of clients’ funds has been well documented. Charles Stanley (CAY) may have come slightly later to the party than some of its peers, but it is now gathering discretionary funds at an increased pace. This, coupled with the restructuring of its operations, meant the group swung substantially back into the black last year. Earnings are now forecast to accelerate further during the next three years, but we don't feel this is yet baked into the share price.

IC TIP: Buy at 390p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points

Trading at a discount to peers

Growing discretionary assets

Reduced costs

Improving margins

Bear points

Manager productivity below average

Online platform loss-making

Charles Stanley began to restructure two years ago, following the appointment of chief executive Paul Abberley. Since then it has sold its capital markets and employee benefits businesses to focus on its core wealth management operations. It also reduced headcount and consolidated five offices into one. It has simplified pricing for clients and has been working on growing its customer-referral network. Meanwhile, the pay policy for its investment managers has been revised to better reflect performance.  

The fruits of a busy two years has been a reduction in operating costs and a steady increase in discretionary funds under management. In the year to March 2017, discretionary assets under management were up by more than a fifth to £11.4bn. In the same period revenue was up slightly, despite the disposal of non-core businesses. Pre-tax profit was £8.8m, compared with a loss of £0.3m the previous year and a £6.1m loss the year before that. The 2017 performance benefited from a one off net gain of £3.2m from the consolidation of office space. Yet on an operating basis profit was still up to £5m, from a £0.3m loss.

Tight cost control, including the implementation of the new pay policy, helped improve the operating margin of its core business to 7.1 per cent, from 3.1 per cent in 2016. Management has set a target of achieving a 15 per cent operating margin by 2020. Investment manager productivity is also getting better, with the level of average managed per regulated manager increasing to £51.6m – an increase of more than a quarter on 2016. However, this is still below industry standards. Management has set a target of £70m per manager by 2020.

The wealth manager has also been investing in online broking platform Charles Stanley Direct. It increased its assets under management by more than a third last year to £1.9bn. However, the loss of a white label deal with Fidelity resulted in a dip in revenue and an increased operating loss of £1.9m in 2017. But during the first quarter of this financial year, year-on-year revenue for the platform was up more than a quarter to £1.3bn.

CHARLES STANLEY (CAY)  
ORD PRICE:390pMARKET VALUE:£198m
TOUCH:385-398.5p12-MONTH HIGH:434pLOW: 242p
FORWARD DIVIDEND YIELD:3.3%FORWARD PE RATIO:14
NET ASSET VALUE:176p*NET CASH: £52m
Year to 31 MarTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20151442.64.95
20161364.06.25
20171429.914.66
2018*15112.519.010
2019*16118.528.213
% change+7+48+48+30
Normal market size:1,000   
Matched bargain trading    
Beta:0.45   
*Includes intangible assets of £21m, or 42p a share
**Peel Hunt forecasts, adjusted PTP and EPS figures