Edmond Jackson's Stockwatch: Asset price party boosts Mattioli Woods

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Following my piece on Science in Sport, a pricey small cap that has yet to make a profit, what of Mattioli Woods which has a well-established financial record? Is monetary stimulus a main driver for shares in such radically different firms? Both are AIM-listed, but Mattioli Woods' pensions consultancy and wealth management business is lower-risk, and now is not the time to quit.

Its five-year chart has a median price of about 250p and a mid-2012 low of 168p - from which the stock has soared to 455p. While the five-year financial profile is the kind likely to serve shareholders well - with cash flow per share consistently ahead of earnings per share, and low capital expenditure needs - pre-tax profit has not shown significant growth until recent expectations for an advance over £6 million. What's more, the forward price/earnings multiple is currently over 17 times and prospective yield just 1.7% despite 25% dividend growth anticipated for the latest financial year to end-May.

Recent financial news affirms momentum, but insiders have locked in gains, too. On 1 April the wife of the managing director of the Atkinson Bolton Consulting subsidiary sold 7,000 shares at 445p; on 3 April the executive chairman sold 220,000 shares at 445p retaining 3,073,703 shares or 15.42% of the company; on 7 April the managing director of the Atkinson Bolton Consulting subsidiary sold 14,000 shares at 445p, retaining 412,718 shares, and his wife sold a further 7,000 shares also at 445p.

More starkly the group operations director effected two sales: on 15 April, 5,434 shares at 446p and the next day 12,978 shares at 438p, retaining just 447 shares. There has also been some small-scale buying e.g. on 9 June, 806 shares by the finance director albeit via the company's Share Incentive Plan.

Positive share sentiment

The price continued to rise to 455p after a 2 July trading update cited 25% revenue growth for the last financial year to 31 May with total client assets up 27% on the year. From the financial year to end-May 2013 it was already possible to see how assets under management, administration and advice were rising strongly, by 20.5% to £3.64 billion, if hard to discern what element resulted from winning new business versus financial assets rising in value amid a bull market.

New business has also likely been encouraged by positive sentiment towards shares since markets turned strongly upwards from late December 2011; but at some point the sentiment and trend will change; possibly why the board maintains dividend cover over three times relative to earnings. Acquisitions have also enhanced performance: for example last July's purchase of wealth manager Atkinson Bolton brought in £420 million funds under management.

While the macro context warrants some caution it also provides long-term opportunity, with Mattioli Woods a strong brand in this field. The government has liberated pension funds enabling full access from retirement and the company cites "new planning opportunities already being welcomed by our clients." It is also building on capabilities in property to help investors diversify, e.g. a real estate investment trust heralded as "an exciting opportunity to drive dynamic growth in our property business. We will continue to support private clients seeking to invest in new syndicated property investment where appropriate."

This area of financial advice is highly competitive with many smaller Independent Financial Adviser (IFA) firms, but since regulatory changes have introduced more capital requirement it's possible the industry consolidates, with larger firms like Mattioli Woods continuing to acquire. January's interim results showed net cash up from £4 million to £8 million so the group is well-resourced.

No margin of safety

Mattioli Woods' strategy is to operate at the higher end of its chosen markets, providing comprehensive wealth management services based mainly on retirement planning. The interim results showed pension consultancy and administration revenues up 23.9% to £6.11 million, and "with increased client activity as the economic outlook improves...we continue to have a strong enquiry pipeline and our focus remains on the quality of new business, with an average new scheme value of over £0.32 million," the company said. Wealth management revenues increased 39.7% to £4.09 million with £0.56 million of this contributed by Atkinson Bolton.

These are buoyant times for pensions and asset management, and long-term potential looks good, just beware it is hard to predict when sentiment will change and how long a bear phase will apply. The group also derived £2.45 million interim revenue from employee benefits advisory, up only 6% amid industry pricing reviews - a shift from commissions to fees meaning reduced revenues in the short term then increased recurring revenues. Due to the timing of property syndications, such revenue slipped from £1.1 million to £0.8 million.

So, Mattioli Woods is an attractive long-term play on more choice and vigour in investment planning for retirement. I balk at saying attractive "investment" at this share price because it offers no margin of safety. The directors look shrewd, preserving gains in their own equity exposure and not reducing dividend cover, although it means little yield support if stockmarkets turn down. If you are a holder then it is probably best to ride out volatility, this being a quality business, but with fresh money the shares look richly valued - so await a break in the market.

Prelims will be announced on 2 September. For more information see mattioli-woods.com