When financial markets are healthy, shares in asset managers are a great example of the power of so-called "operational gearing" and its occasional pitfalls. The combination of fixed cost bases coupled with positive client inflows and rising asset prices is normally a reliable formula for earnings growth. Conversely, when falling markets cause the value of assets under management to drop and leads clients to pull their cash, an inflexible cost base can be a liability. In the case of wealth management firm Mattioli Woods (MTW) – which generates more than half of its revenues from fixed, initial or time-based fees (rather than ad-valorem surcharges) – the risk is dialled down. This business model, buttressed by a strong track record of small acquisitions, helps to explain why the Aim-traded stock is closely followed by top UK small-cap funds, appearing in our most recent list of small-cap manager best ideas (see Ideas Farm, IC, 15 May 2020).
Acquisition track record
Fee-based model
Wealth advice demand
Small-cap "best idea"
Sensitive to markets
Not ‘cheap’ compared with peers
Mattioli’s fee structure is partly a reflection of the products it offers advice for. Around two-thirds of assets under management, administration and advice are concentrated in self-invested and small self-administered pension schemes, with the remaining client money classed as employee benefits and personal wealth assets. These are also sticky mandates, with 91.5 per cent of revenue in the six months to November classed as recurring.
One demonstration of the group’s resilience arrived at the end of March, when chief executive and founder Ian Mattioli said the profit outlook for the year ending 31 May remained “in line with management expectations”. Although the market rout has and will continue to cause “an inevitable disruption” to asset-linked income streams, lower market sensitivity is likely to be complemented by an uptick in demand for advice. Judging by the recent comments of larger wealth peers, including Brewin Dolphin, clients have also tended to boost their allocations to their fund holdings, rather than cash out amid the unprecedented volatility.
This doesn’t mean Mr Mattioli and his team have been sitting on their hands. Alongside a reduction in directors’ fees – and a 100 per cent cut to the chief executive’s basic salary – the group has cut discretionary spending, some operating costs and put a staff bonus programme on ice.
At the same time, the company has shown it is prepared to invest in hard times, having given the green light to the £25.6m acquisition of UK-wide wealth management and employee benefits group Hurley Partners. Like many of the two dozen deals agreed since its 2006 initial public offering, the deal is split between cash and shares, and structured with a large contingent payment to provide Mattioli with extra protection. This isn’t to suggest protection is needed, mind; the fragmented nature of the UK wealth market means management can afford to only select the deals that offer solid earnings benefits. That’s a sensible strategy for holding back industry-wide margin pressure.
| Mattioli Woods (MTW) | |||||
| ORD PRICE: | 688p | MARKET VALUE: | £185m | ||
| TOUCH: | 683-693p | 12-MONTH HIGH: | 865p | LOW: | 530p |
| FORWARD DIVIDEND YIELD: | 3.5% | FORWARD PE RATIO: | 13 | ||
| NET ASSET VALUE: | 324p* | NET CASH: | £17.0m** | ||
| Year to 31 May | Turnover (£m) | Pre-tax profit (£m)*** | Earnings per share (p)*** | Dividend per share (p) |
| 2017 | 50.5 | 10.2 | 31.4 | 14.1 |
| 2018 | 58.7 | 12.4 | 39.3 | 17.0 |
| 2019 | 58.5 | 14.5 | 43.6 | 20.0 |
| 2020** | 62.8 | 16.0 | 48.6 | 22.3 |
| 2021** | 67.9 | 17.0 | 52.3 | 24.0 |
| % change | +8 | +6 | +8 | +8 |
| NMS: | 750 | |||
| BETA: | 1.03 | |||
| *Includes intangible assets of £48m, or 177p a share | ||||
| **Includes lease liabilities of £3.1m | ||||
| ***Canaccord Genuity forecasts, adjusted PTP and EPS figures | ||||
