- Activist shareholder targets "bloated" workforce and "overly generous" pay
- Operating expenses per adviser are up 65 per cent in five years
- Stock has trailed peers and the FTSE 100 over the period
St James’s Place (STJ) is “fundamentally a strong business that has been delivering great value for clients, partners, employees and even the regulator for years…however, it has failed to deliver meaningful value for shareholders over the last five years.”
That’s the view of PrimeStone Capital, a long-term value fund founded by three former partners of private equity giant Carlyle, which this week penned an open letter to the board and chairman Iain Cornish to urge an overhaul of the wealth advice group. After starting to acquire SJP shares last year, the fund now has a 1.2 per cent stake in the FTSE 100 group.
In its letter, PrimeStone notes that SJP’s share price has declined 7 per cent since the end of 2015, during which time funds under management and income from funds have grown at 18 and 13 per cent per year, respectively. The stock’s annualised total shareholder return of 2 per cent is also below that of the blue-chip index, while its market capitalisation as a percentage of funds under management now stands at “an all-time low of 4.3 per cent”, almost a third below the historical average and half the ratio five years ago.
The activist lays blame for the shares’ underperformance squarely at the “suboptimal management of SJP’s cost base”. Among the criticisms of the business’s overheads are an organisational structure with more than 120 employees with a “head of…” title, what PrimeStone characterised as overly-large technology, marketing and field management teams, and the existence of over 100 investment professionals which work with third-party consultants to select external fund managers.
“SJP’s culture was reported to us by many stakeholders we interviewed as one of ‘don’t do it yourself, hire someone to do it for you’,” wrote PrimeStone in its missive. “If true, this of course leads to profit leakage.”
Pointing to rising operating costs per adviser, and falling margins, the shareholder has recommended management reform a “bloated” workforce and "overly generous" compensation scheme, exit its Asian business and improve financial communication.
In a regulatory filing, SJP said it “proactively engages with shareholders with regards to group strategy and structure and looks forward to commencing a dialogue with PrimeStone”. The company’s shares, which trade at a premium rating of 21 times' Factset-compiled consensus forecast earnings for the current year, were unmoved on the announcements, but dipped the following day after a trading update revealed an underwhelming 32 per cent dip in third quarter net inflows.
But while the longer-term weakness in the share price relative to peers can in part be explained by SJP’s gradual pivot towards lower-margin (but longer-term) pensions mandates, strong client relationships and excellent structural tail winds have failed to generate earnings growth. PrimeStone’s broader argument looks valid. The FTSE 100 group may have more room to push back on its Asian strategy, even as expansion there hoovers up cash. As analysts at Numis note, “building scaled and profitable wealth management businesses from scratch takes time”, while closure costs are difficult to forecast. More broadly, attempts to change SJP’s internal culture and pay scales may prove challenging, though PrimeStone’s tone appears constructive rather than hostile. That’s encouraging, though we’ll await a fuller response before giving our verdict on any re-rating potential. Hold at 936p.
Last IC View: Hold, 970p, 28 Jul 2020
This article was updated on 28/10/2020