Financial Grime - 8 November 2018

Nov 08, 2018 / Financial Grime

Its that time of year when our thoughts turn to the fallen.   As another 35 have gone missing in action on the battlefields of Berenburgs trading floor we must remind ourselves of the human cost of Mifid 2.  This follows hard on the heals of a recent dawn raid taking out 24 from Bank of America.

News

  • Zopa raises £60m yesterday in its largest funding round to date according to P2P Finance news.  Crowdcube has also raised £8.5m in a funding round led by Draper Esprit, alongside Channel 4 and Balderton Capital, which backed peer to peer lender Zopa in the early days. 
  • New non-executive director for Amigo Holdings, Clare Salmon
  • One Savings Bank announces a positive trading update guiding to 20% loan book growth with a NIM of 3% and 30% cost income ratio.

Financial Sector Risk

  • Financials as a sector are generally deemed to be a risky sector but the EY profit warning monitor clearly evidences that over the last 10 or so years the incidence of profit warnings from the financial sector is consistently below average.  To the extent that investment is about avoiding profit warnings investors should be overweight the financial sector.  It has the added benefit of perceived risk which implies mispricing too.

AJ Bell - Results and IPO 

  • News The intention to float announcement is out from AJ Bell this morning alongside its results for the year to Sept 18.  Customer numbers were up 20% to 197,912 and AUA was up 16% to £46.1bn. That’s an average customer size of £233k. Net inflows were 14.6% over the year (2017 – 16%).  Revenue was up 19% to £89.7m which represents an average revenue yield of c 20bps. PBt was up 31% to £28.4m while dividends for the year amounted to £14.6m, representing a 65% payout ratio  alongside a further special dividend of £8m. Net assets are £64m, of which £50m is cash.
  • Valuation  Hargreaves Lansdown, hampered by its comparatively high 45bps platform charge produced 9.6% net inflows in the year to June 18 which also results in a smaller average client size of £84k. HL trades at 34 X June 19 estimated earnings.  It appears that AJ Bell with its superior growth prospects and lower charging structure should merit a premium to HL.  While I struggle to justify HL’s rating I can think of a good pair trades here.
  • Conclusion There is a pre IPo teach in for independent analysts which is good to see and all companies should adopt this approach to ensure better education for analysts. This company has enormous potential.  This is part of the shift of trading volumes away from institutions towards retail towards a time rather like 80 years ago. Back when the majority of the market was owned by retail investors the retail broker also owned the corporate relationships.  That will happen again. Last time round these brokers also had proper names like Pidgen Stebbings Gow and Parsons. Perhaps by then this company will be called Hargreave, Bell and Flowers.

Arrow Global – 9 month Results 

Share Price 199p

Mkt Cap £351m

  • Results Underlying PAT was up 10% to £42.9m delivering a 33.4% ROE from AUM up 22.6% to £51.5m and collecvtions up 18.2% to £288.5m. Over 50% of the balance sheet investments are now outside of the UK. 84 month ERC is up 12.4% to £1.64bn and 120 month ERC is up 16.5% to £1.96bn. Leverage also decreased to 3.8X secured net dect to EBITDA.
  • Estimates Consensus anticipates pre tax profit of £68m for the year
  • Valuation A PER of 5.5X with a yield of 6.1% is representative of the risks the market attached to a highly geared debt collector expanding overseas
  • Conclusion  Overseas expansion appears to be going well. If this continues investors will be well rewarded.