Interactive Investor

Stockwatch: A multi-year AIM tuck-away

9th September 2016 11:49

Edmond Jackson from interactive investor

It's worth taking another look at AIM-listed pensions consultancy and wealth manager Mattioli Woods.

Latest prelims to 31 May affirm its strategy to consolidate the fragmented industry of Independent Financial Advisers (IFAs) after the government has liberated pension schemes, and management cites a "strong pipeline of further acquisition opportunities", hence the business model offers further mileage.

Benefiting from five acquisitions since a June 2015 placing at 490p a share raised £18.6 million, total revenue is up 24.3% to £43.0 million with a 22.2% increase in assets under management/advice to £6.6 billion.

Pre-tax profit is up 18.9% to £6.3 million and basic earnings per share (EPS) by 7.7% to 21.1p, with normalised EPS up 14.0% to 31.0p. Amortisation costs of buying "people businesses" help explain the disparities and, admittedly, organic revenue growth is down to 11.3% from 19.2%.

But the group has made over 1,100 new client wins and positioned itself well across business areas that represent good quality. Recurring revenues have edged up to 82.6% and overall revenues derive 39.6% from asset management, 38.6% pensions, 12.3% employee benefits and 9.5% property management. The dividend rises 19.0% to 12.5p with earnings cover of 2.5 times.

Momentum justifies upgrades

The 2017 consensus appears to need upgrading, given the group's intrinsic strength and £29.8 million cash providing ample scope for further deals.

For developmental context, at 685p a share the group is capitalised at £172.6 million. This would likely reduce the forward price/earnings (PE) multiple from about 21 times currently, which otherwise appears a full rating against a prospective yield of barely 2%. But with the group expanding and the Bank of England having declared more monetary stimulus, I wouldn't expect the rating to come down much.

Company REFS cites an annual average historic PE of 20.9 in 2014, 27 in 2015 and 27.2 this year. When I drew attention at 455p in July 2014, the forward PE was about 17 times and I suggested possibly waiting for a break in the market; the stock did later drop below 400p, then rose from 460p to 646p through 2015.

Should markets turn volatile, recurring income from advice and administration should insulate the firmNow it is recognised for "growth" status and the macro context has become more supportive, the rating is likely to remain in the order of 20 times.

My original rationale was Mattioli Woods being well-placed to benefit from the government's pension schemes liberation. It could also exploit its listed public company status to consolidate a fragmented industry of IFA firms.

This continues and, if anything, is bolstered by the Bank of England's latest cut in interest rates and renewed quantitative easing (QE), which forces individuals to explore better options for savings and investment - thereby creating potential clients for IFAs.

Demographics - largely relatively wealthy "baby-boomers" from the 1960s and 70s - also support this flow of capital into financial assets, relative to the younger generation that's challenged simply to own a home.

Should markets turn volatile, management contends its high level of recurring income from advice and administration - rather than performance fees - insulates the business, unlike a stockbroker or some other asset managers. So the stock looks to have further upside as a multi-year tuck-away.

Founders own 23% of the equity

Classic risks with acquisitive financial groups are aggressive accounting and over-stretch from acquisitions and debt. But with chief executive Ian Mattioli owning 12.8% and chairman Bob Woods holding 10.2%, there's incentive to ensure prudent long-term development, overseen also by four institutions with 6% to 9% stakes.

Chief risks may be when development matures and the growth rating is exposed to slipWoods is now ceding the chair to the deputy chairman Joanne Lake as a planned hand-over for this 25 year-old business, hence good longevity with established checks and balances. A common criticism of AIM stocks is being high-risk and speculative, but this one offers soundly-based growth hence is worth considering - also for AIM benefits such as mitigating inheritance tax.

Its chief risks appear to be when development matures and the growth rating becomes exposed to slip; also if eventual size and pursuit of efficiencies compromise personal service leading to client loss. But all that looks a few years away.

The end-May balance sheet showed £5.3 million contingent considerations arising during the year from acquisitions and another £3.4 million financial liabilities in the short-term, albeit no bank debt relative to £29.8 million cash. This may already have been trimmed by such payouts becoming due, also the latest £2.2 million acquisition of MC Trustees - £1.2 million was paid up-front.

MC looks complementary to group development, as a wealth manager and employee benefits business with over £400 million under management, making £0.4 million pre-tax profit on £1.6 million revenues in 2015.

While acquisitions inherently raise the risk profile, their rationale and execution appear capableIn his outlook statement the chairman notes: "Accelerating consolidation within the SIPP market is putting smaller operators under increasing pressure to join forces with larger firms...a trend to continue with increased regulatory capital requirements from this September."

All five businesses acquired in the last financial year are said "integrating well and have all contributed positively..."

So while acquisitions inherently raise the risk profile, their rationale and execution appear capable.

To be picky, the operating margin in the REFS table is showing steady decline, although on an earnings before interest, tax, depreciation and amortisation basis, and before £0.3 million acquisition costs, it edged up to 21.6%.

So, as with basic versus normalised profit, mind a dilemma interpreting acquisitive groups. Management does actually concede margin pressure from needing to reduce product costs, it plans to offset with operational efficiencies.

Near-term slowdown

The outlook statement cites a slowdown in investment as clients "held their breath" after the EU referendum, although I'd emphasise that Bank of England policy is more important going forward.

Being picky again, the statement confuses the EU referendum with the expectation of "increasing demand for advice post-Brexit" - which is strictly at least two years away, but one assumes they mean henceforth.

Anyhow there will always be blips up and down according to latest financial developments. Focus instead on Mattioli Woods' vertical integration as adviser, administrator, product provider and asset manager, which offers further upside in years ahead.

For more information see the website.

Mattioli Woods - financial summaryEstimates
year ended 31 May201220132014201520162017
Turnover (£ million)20.523.429.334.643.0 
IFRS3 pre-tax profit (£m)4.24.65.15.36.3 
Normalised pre-tax profit (£m)4.54.85.25.2 9.8
Operating margin (%)21.620.517.515.715.4 
IFRS3 earnings/share (p)16.718.821.719.621.1 
Normalised earnings/share (p)18.219.920.827.231.032
Earnings per share growth (%)-1.59.04.930.814.03.2
Price/earnings multiple (x)    22.1 
Cash flow/share (p)23.627.719.330.5  
Capex/share (p)2.73.64.64.5  
Dividends per share (p)5.26.07.810.512.513.0
Yield (%)      
Covered by earnings (x)4.23.63.32.62.5 
Net tangible assets per share (p)12.926.832.752.1  
Source: Company REFS

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