Growth Cycles and CTR: Financial Grime – 3 April 2018

News, views and unwavering opinion – even in the face of adversity – on the Speciality Financials sector.

Growth Cycles 

Sometimes my teenage daughter can be painful. There are days when she can decide she is disappointed with her parenting and she has now reached an age where she speaks her mind.  At such times she needs to be avoided.  Tending a vegetable patch can be strangely attractive in order to avoid her.

Growth stocks can have similar tendencies.  There is a time to avoid growth stocks.  I find monitoring the ROE of stocks can signal when it is time to depart the room, and similarly when it is time to return.  So I ran the ROE trend against the PBT and the share price for all the stocks in my universe yesterday. In the lenders the market is very efficient. After all these stocks are valued by reference to ROE.  But it is less efficient with the other stocks.

H&T is a good examples of where the market is efficient. The graphs also illustrate the reason for my conviction that the company will do well:

Brooks Macdonald is a good example of when the market mistakes a stock for a growth stock and then it has a speed wobble. It is starting to look like an interesting recovery play at the moment as the AUM flows are picking up.

Charles Taylor Plc – CTR – Acquisition, Contract win and Placing  

• Share Price: 261p
• Mkt Cap: £181m

Acquisition and Contract: The company is acquiring Inworx for up to $50.5m, a consultancy and software provider to insurance brokers across Latin America. The price is between 6 and 13.7X September 17 profits, or 1.5-3.4X last year’s revenue. The company has also won a contract to up to 3,500 coverholders, 250 brokers and 60 managing agents. The company is raising £17.6m of new shares (c9.75% of the company) to finance the acquisition.

Estimates: The acquisition adds c.5% to Charles Taylor’s revenue and 14% to the profits in exchange for c. 10% of new shares. The statement says however that the acquisition is expected to be earnings neutral in 2018 and enhancing in 2019.  The new contract with Lloyds however, while it may take time, has the potential to be very significant.

Valuation: The shares trade on a PER of 11.3X and yield 4.5%.  Net debt is a little above 2X EBITDA at £53m so the company is fully leveraged.

Conclusion:  This is a company where the ROE has been declining over recent years. This acquisition gives scale to the Insuretech business while the contract has the potential to start to improve the ROE.  However it is now a broadly spread company and the shares may start to look interesting if they could divest some of the non-core run off business which would simplify the balance sheet. 

Perhaps a little early just yet.

Contact: Jeremy Grime | 0207 220 0550 | jgrime@finncap.com