- Annual cash profit down 90 per cent to £0.1mn
- Operating loss of £0.9mn reflects loss of earnings from Titan Wealth sale
- Post-period Precise Protect acquisition restores profitability
Shareholders in Aim-traded Tavistock Investments (TAVI:5.25p) should not be alarmed by the 90 per cent fall in group cash profit from £1.4mn to £0.1mn on flat revenue of £34mn in the 12 months to 31 March 2023. The financial services group sold its highly profitable multi-asset manager to discretionary fund manager Titan Wealth in the prior financial year, so is in the process of rebuilding profitability through selective acquisitions and organic growth initiatives.
The group’s advisory business delivered another strong result, increasing revenue by almost 5 per cent to £32.7mn, or 96 per cent of the group total, and lifting its operating profit contribution by 19 per cent to £3.1mn. The unit’s recurring revenue exceeds 80 per cent, so is a reliable performer. However, its contribution is not enough to cover group central overheads of £4mn, hence the reported operating loss of £0.9mn.
Tavistock has so far received £26.7mn of cash from the Titan disposal and had net cash of £9.7mn at the financial year-end. Of this sum, deferred cash consideration of £4mn was paid in April 2023 to complete the £10mn acquisition of a 21 per cent stake in regulated IFA group LEBC Holdings, and in the same month, the group announced the earnings-accretive acquisition of Precise Protect, a fast-growing insurance and protection business based in Bangor, Northern Ireland. I covered that acquisition in detail at the time (‘Two valuation anomalies that are worth exploiting’, 13 April 2023).
Factoring in the initial cash consideration of £2.7mn, pro-forma net cash is around £3mn and Tavistock is also due £13.3mn (2.4p) of total cash payments at the end of 2023 and 2024 from Titan Wealth.
A smart strategic acquisition
Strategically, Precise Protect has increased the group’s client base by almost 50 per cent to 110,000 private clients, doubled its network of financial advisers, and offers the potential to boost revenue by upskilling Precise Protect’s mortgage and protection advisers to become IFAs through the group’s academy. The business reported pre-tax profit of £1.45mn on revenue of £6.5mn in its last financial year, so factoring in a £4mn contingent cash earn-out over the next three years, the multiple paid is a sensible five times profit.
It means that the contribution from Precise Protect and the growing advisory business should now cover central overheads. The key is to continue rebuilding profits through organic growth initiatives and recycling cash into earnings-accretive acquisitions.
Organic growth initiatives
Tavistock’s numerous distribution partners, commercial partners, affinity relationships and corporate relationships provide it with new business enquiries, as does its website. So, to increase the sources of leads, management plans to launch shortly its "Tell Me How" financial information and advice portal that will be freely available to employees of all its partner organisations. Precise Protect should drive well-qualified advice leads from its 30,000-plus clients, too.
Ongoing investment in technology to support the scalability of the business is another organic growth initiative to facilitate the flow of management information and efficiency of operations, thus enabling advisers to spend more time servicing clients. For instance, a data warehouse has been created to collate data from the numerous systems to automate production of management information, oversight of advice provision and control of risk management. It has reduced costs, too.
Sum-of-the parts valuations
Tavistock’s share price has had a roller-coaster ride since I included the shares, at 4p, in my 2022 Bargain Shares Portfolio, more than doubling at one stage before succumbing to profit-taking. They are massively oversold at the current level, as highlighted by a 14-day relative strength indicator (RSI) reading of 17.9. There is material value on offer.
To put this into perspective, Tavistock's market capitalisation of £29.4mn is completely backed by the £13mn-worth of investments made to date in LEBC and Precise Protect, deferred consideration of £13.3mn due from Titan Wealth, and pro-forma net cash of £3mn. It leaves the advisory business in the price for free, even though it’s growing its profit contribution and, to a trade buyer, could easily be worth as much or even more than Tavistock’s market capitalisation. Value buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.
