Financial Grime 29 August 2018

Aug 29, 2018 / Financial Grime

News

  • P2P Irish P2P lender Flender has raised 10m Euro as the first step in its plan to raise 50m Euro from institutional investors to expand from SME lending to property development. To date it has lent 2.5m Euro to SME’s so I can imagine the valuation is forward looking.  The firm typically lends at 12-15% with a minimum loan size of 200k Euro. The investor was Eiffel Investment Group which also has stakes in Ratesetter and Funding Circle

 

  • Aston Martin IPO It will take the might of Deutsche Bank, Goldman and JP Morgan to persuade the hedge funds they now have the perfect hedge for their Tesla short position which now seems to be not going private

 

Back to School  

 

  • Yield gaps over the long term August is nearly over and we have now exceeded the longest bull market since WW2. But prior to WW2 we had a reverse yield gap where equities yielded more than bonds because they were riskier.  Between WW2 and around 2016 equities generally provided a lower yield because dividends grew and bond coupons didn’t. It seems now we are in the risk averse low growth yield pre war world where bull markets are longer.

 

  • This time round To get some post holiday perspective I took a look at the top 50 companies on AIM in March 2009 when this bull market started and compared it to today’s top 50 AIM stock to assess how much has changed.  I march 2009 a staggering 22% of the market cap of the top 50 in AIM was in Mining. Today that is zero.  Other features are:

 

  1. Oil & Gas producers have gone from 13% to 5%.
  2. General retail has grown from 6% to 15% on the back of the online sector such as ASOS and Boohoo.
  3. Pharma sector has increased from 5% to 14% as technology has become more accessible for research purposes.
  4. Within Financial services that sector is smaller than it was in 2009 representing 10% today against 14% in 2009. Breaking this down into sub sectors it appears that the 4% that was accounted for by insurance businesses has now disappeared entirely as the insurers consolidated post 2009.  This trend is now set to reverse as the emphasis moves from financial scale to distribution scale requiring operational efficiencies in distribution.  The insurance fintech stage will enable a number of insurance based companies to prosper. I would highlight STM and Randall & Quilter.
  5. The market cap of the top 50 AIM companies has increased 405% to £52.4bn from £12.9bn in 2009. However of the top 50 companies on AIM today only 2 were in the top 50 in 2009. That is a family brewer and the original maker of lino flooring.

 

  • Conclusion AIM companies are transitioning companies evidenced by only 2 of the top 50 maintaining a top 50 position over the course of the current bear market.  The winners are the new models such as online retail and the losers are generally those that have ridden a macro wave that is ending.  For my money I fancy the online bespoke insurance space as the next winner in financials.  Consolidation has ensured that most of the quoted insurers are now large leaving a huge gap that can be filled using technology. It is a sector with high barriers to entry and high returns alongside a tendency for customers to repeat.  Lets start with R&Q which has some very useful pan European permissions.

 

 Orchard Funding Group – FY Trading Update – In line

Share Price 98p

Mkt Cap £20.8m

 

  • Statement Orchard reassures that PBT is expected to be in line with expectations on the back of strong lending and revenue growth combined with cost control.  The volume of lending grew at 8.5% year on year and the loan book 8.9% which combined with tight cost control we expect to deliver 19% PBT growth. The company comments that competition is aggressive from the two leading market players. Notwithstanding this the company is delivering growth in line with our expectations

 

  • Estimates Ahead of full year results due on 1 November we make no change to our estimates. We note that the company is targeting the bank license by the end of the calendar year. This is likely to provide the company with the ability to compete in insurance premium finance as well as other markets effectively and we will review our growth forecasts together with funding cost assumptions and overhead assumptions on results

 

  • Valuation The company has an impressive record of loan book growth in tough markets since IPO. With improving prospects on the back of cheaper and more flexible funding we look forward to growth and returns accelerating in due course.  For now we maintain our 130p target price, some 30% ahead of the current level

 

  • Conclusion We expect the granting of a banking license to enable the company to effectively fund and grow into adjacent markets alongside the core insurance premium funding and professions funding markets. This is an exciting time which we believe will represent an opportunity for investors at the current price