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Financial Services Disruption
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Dignity Q3 update reiterates that trading is in line with expectations for the full year but it evidences the effect of price competition at the lower end as profits fall from £19.9m to £12.2m in Q3.
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Pervasive I can’t help but think this price competition which the market didn’t expect when it came to light at the end of 2017 will increasing become a theme in the era of disruption of financial services. The large incumbent with high market share in segments where the consumer is reluctant to shop around are the most vulnerable.
- Often such dominant incumbent will tend to also have high leverage or be owned by private equity as margins will be high justifying high debt levels. We have seen it in annuities, funerals, retirement mortgages, and the robo’s continue to try in wealth management.
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Conclusion My bet is insurance is next where the FCA is currently conducting an investigation into pricing. That will include insurance premium funding where the largest player is private equity owned and Close Brothers is the number two player and effectively a duopoly operates.
AFH – Year End Trading Update
Share Price 385p
Mkt Cap £162m
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Update Revenues for the year expected to exceed £50m accompanied by expanding EBITDA margin which is in line with management expectations. The company re iterates its objective of achieving £75m revenue, EBITDA margin of 20% and £5bn AUM (10% ahead of the current level).
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Estimates Given consensus expectation for the year to October is £49.5m this looks like a modest beat. October 19 consensus anticipates management achieving the targeted £75m revenue and a 21% EBITDA margin and £5bn AUM as the management guide in the statement.
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Valuation EV/AUI is 2.8%. October 19 PER 14 X and yield 2.2%. Harwood capital trades at EV/AUI of 1.8% which is lower as a % of AUI but higher on a PER basis at 17.1X October 18 with a 2.5% dividend yield.
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Conclusion I have tried to fault AFH but completely failed. Given the positive market backdrop all they have to do is not mess up. They haven’t and seem unlikely to. One to own.
Gresham House – Acquisition
Share Price 478p
Mkt cap £117 m pro forma
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Acquisition Last week one feature that went largely unreported was the acquisition of Livingbridge by Gresham House. I don’t remember seeing an acquisition price as high as 8% of AUM since Invesco bought Martyn Arbib’s Perpetual in October 2000 for c 10% of AUM.
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Valuation The high price relative to AUM is a very reasonable price relative to EBITDA where the acquisition price represents a multiple of 8X. Given it made a 55% operating margin last year the multiple is a 4.4X multiple of sales. The average revenue yield on AUM last year was by deduction 1.8%. Post acquisition I estimate the Pro forma Per to be c 14X.
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Conclusion The reasonable acquisition price relative to profits makes this an excellent acquisition for Gresham House. What is more amazing is that a fund manager with 16 members of staff can make a 55% operating margin. I suspect that will change going forwards as scale becomes more important.
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