Expectations are low for Quilter (QLT), the wealth manager spun out of Old Mutual last year. When it floated, the 145p IPO price was below the range some brokers had predicted. Its sprawling business lines, which are undergoing a lengthy rebranding, have led to it being dubbed a “jack of all trades, master of none” by analysts at Numis. A migration to a new IT platform for its clients, expected to begin later this year, is wearing on investors' nerves. Meanwhile, cash flow is in decline as a high-margin life assurance business runs-off, complicating a push to improve profitability. The challenge ahead was summed up by chief executive Paul Feeney in March when he stated: “as I have said on many occasions, we know that Quilter is not the finished article.”
Room for higher dividend
Low rating in a growing sector
Rising margins
Growing adviser pool
IFAs not tied in
Platform relaunch risks
In the case of Quilter, we think the action being taken to improve performance looks sensible and, as such, low expectations could prove a positive. Its attempt to build a vertically-integrated investment and savings business may be ambitious. But with many of the pieces already in place, as well as £115bn-worth of assets under management (AUM), the group is strongly positioned to capitalise on a fast-growing market in the coming years. None of this is reflected in a market capitalisation equivalent to 2.2 per cent of AUM, compared with 4.8 per cent for standout peer St James’s Place (STJ).
How Quilter might close the valuation gap to an established incumbent requires some explaining, which we’ll come to. It also requires a brief overview of wealth advice in the UK. Since pension freedom reforms were introduced in 2015, wealth managers have been taking assets from pension trustees and insurers and working with (or taking on) financial advisers to drive funds under management, especially discretionary mandates. This has led to consistent rises in fee income and double-digit revenue growth. As a consequence, shares in listed wealth managers trade at a 12 per cent price/earnings ratio premium to the FTSE 250.
It’s questionable whether the rating reflects the sector's truly benign market conditions. Unlike many other financial services groups, wealth managers are less burdened by regulation, balance sheet requirements and low interest rates, and they generally convert cash more effectively while benefiting from strong earnings visibility.
Quilter ticks these boxes, despite being the lowest rated of the so-called 'asset gatherers'. Asset inflows – largely from independent financial advisers (IFAs) – have remained positive, and thus more consistent, than the rest of the UK fund industry. In 2018, Quilter’s overall fee margin edged up to 57 basis points and overheads fell. From this year costs associated with a shift to a new platform should unwind, providing a boost to operating margins.
Improved profitability relies on a smooth modernisation of the investment platform at the second time of asking, which as Barclays, Aviva and Brewin Dolphin have shown is no easy task. But the upgrade is both necessary and potentially game-changing, as it should allow Quilter to target a wider and wealthier UK customer base.
That offering is already extensive. Although it comprises six divisions, Quilter can be boiled down to two distinct operating lines: advice (which includes a discretionary management arm, a face-to-face financial planning offering and a retail-focused asset management division), and a wealth platform for financial advisers. And herein lies the opportunity: because Quilter offers advice, platform and investment productions, it is better placed to secure distribution and capture funds flow. Unlike St James’s Place, Quilter offers its platform and investment products beyond its client base.
QUILTER (QLT) | ||||
ORD PRICE: | 132p | MARKET VALUE: | £2.52bn | |
TOUCH: | 132-132.5p | 12-MONTH HIGH: | 157p | LOW: 109p |
FORWARD DIVIDEND YIELD: | 4.4% | FORWARD PE RATIO: | 11 | |
NET ASSET VALUE: | 106p | NET CASH: | £2.2bn |
Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
2017 | 728 | 209 | 9.6 | nil |
2018 | 788 | 233 | 12.3 | 15.3^ |
2019* | 806 | 230 | 12.3 | 5.6 |
2020* | 898 | 263 | 12.3 | 5.8 |
% change | +11 | +14 | - | +5 |
Normal market size: | 15,000 | |||
Beta: | na | |||
*Numis forecasts, adjusted PTP and EPS figures. ^Includes last year's 12p special dividend |