Financial Grime 15 October 2018

Oct 15, 2018 / Financial Grime

Investment Platforms

  • Today is the deadline for opening an AJ Bell account to participate in the IPO.  Participation in the IPO is open to clients of Numis and AJ Bell only.  I suspect when we see the rate of account opening pre IPO we should not take that as a guide to the future.  Although its hard to see Hargreaves Lansdown mainlining its historic growth rate going forwards when you have a quoted competitor whose fees compare like this:
  • Ah but Hargreaves Lansdown’s service is better can be said. Although it would appear that the two most important factors are price and brand according to the FCA
  • Valuation Hargreaves Lansdown trades on 31.8X June 19 PE.  Interactive Investor’s accounts for the year to December 2017 became available at companies house last week where we learn they bought TD Wealth with its net tangible assets of £91.5m for £65m. It is notable that of the £91.5m net tangibles £61m was cash. 
  • Conclusion It seems binary. Whgen these platforms work they are hugely valuable. When they don’t the valuation is a modest premium to cash.

 

Acquired Growth 

  • The virtuous circle It always happens in bull markets and is a sign that markets are too buoyant. Ratings get high and companies start to invent stories to justify the high ratings. So they can make some more acquisitions using the expensive paper. And they start to believe their organic growth is really high and the rating keeps going higher.  Until markets fall and then they can’t make acquisitions and gosh – amazingly the organic growth fails to be as exciting as previously thought.
  • The mechanics works where the company makes an acquisition and puts the acquisred product through their distribution pipe which immediately double the turnover of that product.  And the company reports it as organic growth.
  • Example – lets take SimplyBiz as an example. They acquired Landmark Surveyors in January 2018 for £4.8m. The turnover is not disclosed in the prospectus and companies house tells us the December 2017 accounts are overdue but in the year to December 2016 the company achieved £4.9m of revenue (down from £5m in the prior year).  So if we assume an incremental say £5m of revenue per annum for this acquisition we might expect £2.5m of extra in H1 just from this acquisition made in the first month.  It isn’t split out but the company reports £13.7m revenue growth in H1.  That equates to revenue growth of £2.9m.  It would seem reasonable to assume that £2.5m of this was from the acquisition.
  • The other problem of course is that going forwards Simply Biz will report the growth from Landmark surveyors as organic growth when in fact it is from offering a new surveying service to the 3,628 advisory firms who are their members which is therefore by definition not sustainable growth where as growth from a market may frequently be sustainable for a longer period.
  • The backdrop is that the number of IFA’s has changed little over the last 10 years and SimplyBiz is not operating in a growth market.  It is inventing the growth through acquiring products to put down is pipeline.  Which is a good model, but not one which should be confused with a growth market.  Given it trades on 18X December 2018 earnings I am concerned that the market is appraising this as a growth stock.
  • The same concerns apply to JTC which trades on a PER of 21X December 2018 earnings. The same could be said for STM except that company trades on a PER of 10X so there is no question of it being confused for a growth company.
  • I suggest fund managers ask all companies to split organic growth between growth from companies acquired in the last 12 months, underlying growth, and acquired growth.  
  • And can someone remind SimplyBiz to file the accounts for Landmark Surveyors.