Why this AIM star still has 30% upside
5th June 2017 13:55
June started with a bang for wealth manager . Two acquisitions on the first day of the month propelled the share price above a long-term trend, then cracking half-year results Monday added another 7% upside.
AFH shares are now up 21% since the end of May and at an all-time high, 40% so far in 2017, and well over 50% since moving to AIM in 2014.
Of the six acquisitions made during the first-half, Parker Sage Independent Financial Advisers was bought last week for up to £5.6 million, followed by Suffolk-based Eunisure for £4.5 million.
"Whilst AFH has a strategy of continuing to increase the average size of our acquisitions, the company also remains committed to providing an exit for retiring IFAs, where our existing advisers can offer the full AFH service to the acquired client base," CEO Alan Hudson explained.
And today, results for the six months ended 30 April show pre-tax profit up 34% year-on-year to £1.15 million on revenues of £13.9 million, up 19%. Gross margin improved one percentage point to 56%, while earnings per share (EPS) were 27% higher at 6.17p. Funds under management have doubled since 2015 to £2.2 billion.
Net cash stands at a healthy £12 million, with the only debt being a small property mortgage, giving scope for further acquisitions.
The Bromsgrove-headquartered company says it has a "strong pipeline of acquisition opportunities", with April's oversubscribed institutional fundraising at 175p adding £9.5 million to the warchest.
Respected City analyst, Jeremy Grime at finnCap, says the Parker Sage buy alone may add 6% to revenue and 20% to pre-tax profit. He reckons the acquisitions finally give the company all-important scale.
Hudson, who founded the company back in 1990 and currently owns over a fifth of the £69 million business, says its increased size will also give AFH the ability to "drive down platform and third-party administration costs".
A price/earnings (PE) ratio of 12.3 times will come down with upgrades, says Grime. In addition, the dividend yield of 2.1% also "looks low", given the estimate is for a 5p payout from 18p of earnings.
"The company is now reaching scale which is all important in this space," he adds. "The shares are looking attractive and valued too low. I suspect these shares will reach £3."
Justin Bates at house broker Liberum is similarly enthralled by AFH. He likes continued margin expansion and now expects compound annual growth rate in EPS of 32% over the next three years.
Factoring in the acquisitions and placing, he upgrades profit forecasts for 2018 by 21%. Rolling forward his price target date to full-year 2018 and using a PE of 14, Bates hikes his price objective from 205p to 296p.
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.
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