Financial Grime - 11 October 2018

P2P Platforms

Fellow Finance came to market yesterday in Finland trading at a polite 4% premium to its IPO price. The market is very jittery as some of these high growth companies are coming to market. For the sake of clarity it may be useful to compare Fellow Finance’s historic numbers with those of Funding Circle as well as the valuation

Valuation The multiples of 12.7X and 14.5X historic sales is appraising this as a very high return platform. To compare it to the highest return platform on the market Hargreaves Lansdown (68% operating margin) that trades at 20.9X June 18 sales. Integrafin (48% operating margin) at 13X September 18 sales.

Conclusion It would appear that the market valuation is anticipating the two P2P lenders achieving close to a 50% operating margin. That may take a little while so I suspect it’s a case of supply and demand and due to the small amount of stock available in this quted sector a small number of people are prepared to look further forward in valuation terms. As more companies come to market that period of anticip[ating forward earnings will reduce and valuation will accordingly. Unless they can significantly out perform and increase the demand for the stock.

Hargreaves Lansdown – Trading Statement

Share Price 1948p

Mkt Cap £9.2bn

Update – Net inflows 1.4% in 3 months to September contributing to AUA up 3% to £94.1bn. Revenue was £120m, up 16% year on year.

Conclusion It amazing the rating a 68% operating margin gives a stock. Organic growth in AUM of under 6% is lower than most of the fund managers (shame about Jupiter) as it will be AJ Bell, Interactive Investor and others who are taking market share at lower prices. However reliable modest growth can still be valuable.

Jupiter – Trading Update

Share Price 377p

Mkt Cap £1.73bn

Update Net outflows of 1.7% for the quarter mitigated by market tailwinds left AUM down 1.1%.

Conclusion Cheapest I recall seeing this stock. But in a market rout it may be too early to bottom fish.

Liontrust – Trading Update

Share Price 642p

Mkt Cap £325m

Update Net inflows of 3.5% took AUM to £12.05bn over the quarter. Economic advantage is now 49% of AUM while sustainable is 28%.

Estimates 12% PBT growth over the year to March 19 looks conservative given 15% AUM growth over the first 6 months

Conclusion Cheap stock with strong growth coupled with an element of concentration risk

Polar Capital Business unit crystallisation

Share Price 596p

Mkt Cap £558m

Crystallisation – Under the incentivisation policy of Polar fund managers can sell their economic carry in their funds to the holding company at a 25% discount to the rating of the company after they have done 3 years service in exchange for shares that they are locked into for the next 3 years. The healthcare team have elected to exercise this option which results in 3% earnings enhancement

Valuation EV/AUM 3.2%. PER 15.2 yield 5.3% before the 3% earnings enhancement

Conclusion Shares are expensive. The healthcare team accounts for 14% of AUM and this is not positive for the medium term.

Alpha FMC – Trading Update

Share Price 225p

Mkt Cap £228m

Update Both revenue and adjusted EBITDA excpected to be “considerable ahead” of the prior year. Consultant headcount up 28% and utilisation in line with prior year. Board is comfortable with expectations

Estimates Estimates anticipate 12% revenue and pBT growth for the year to March 19 to £15.2m PBT which looks very conservative given 28% headcount growth and maintained utilisation

Conclusion For a stock with a consulting model that is in good markets but is not hugely scalable the rating of 19.8X could be vulnerable in a devaluing equity market on the back of rising long bond yields.

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