Stockwatch: An AIM share with 80% upside potential

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Stockwatch: An AIM share with 80% upside potential

AIM-listed shares in specialist fund manager Miton Group (MGR), currently in the doldrums at around 39p in between final and interim results, look worth accumulating.

When I first drew attention at 25p in January 2015 it was along a rationale that a major improvement in performance had reversed a trend to fund redemptions and would bring renewed inflows. The economics of a well-run fund management operation also enjoys operational gearing - revenue growth drops through easily to profits, so long as high remuneration doesn't cream this off - and the business has low capital expenditure needs beyond IT systems and the like.

The table shows good progress, despite a 2014 jolt when Miton lost a third of its assets due to a business sale and the retirement of a key fund manager provoked the loss of an institutional mandate. In early 2015, the independent directors were exploiting this to accumulate stock and the business continues to look well-placed.

Miton's 2016 results achieved adjusted pre-tax profit 70% higher at £5.1 million (Company REFS regarding this as a 90% advance to £4.9 million) and the dividend up 49% to 1p, reflecting confidence in future prospects and momentum in assets under management. These have grown from £2.1 billion at end-2014 to £3.1 billion as of last February, comprising eight open-ended investment companies (OEICs), four investment trusts and two unit trusts, with eight of these in the first quartile of their respective sectors.

A range of differentiated single-strategy funds and multi-asset funds aims to give the business greater resilience, with solutions for a wider range of (mainly individual) investors. While all this unfurled the stock advanced to 42p, but without further news lately it has eased to 39p which capitalises the business at £67 million - usefully small to optimise gearing benefits.

Miton Group - financial summary              
year ended 31 Dec      Consensus estimates
  2012 2013 2014 2015 2016 2017 2018
Turnover (£ million) 22.3 28.0 27.0 22.0 24.1    
IFRS3 pre-tax profit (£m) 0.9 0.7 -5.5 2.1 4.3    
Normalised pre-tax profit (£m) 0.9 1.8 6.8 2.5 4.9 5.4 6.4
Operating margin (%) 4.0 6.1 24.9 11.0 20.1    
IFRS3 earnings/share (p) 0.8 0.5 -3.0 0.8 1.9    
Normalised earnings/share (p) 0.6 1.1 4.6 0.9 2.3 2.4 2.9
Earnings per share growth (%) -24.7 82.0 314.0 -80.0 147 7.5 20.1
Price/earnings multiple (x)         17.2 16.0 13.3
Historic annual average P/E (x)   54.8 37.2 5.5 29.4 16.2  
Cash flow/share (p) 2.2 3.1 2.0 0.7 5.6    
Capex/share (p) 0.0 0.2 0.1 0.0 0.0    
Dividend per share (p) 0.40 0.45 0.54 0.60 0.67 1.10 1.35
Dividend yield (%)         1.7 2.8 3.5
Covered by earnings (x) 1.5 2.6 9.5 1.9 3.8 2.2 2.2
Net tangible assets per share (p) 5.9 1.8 8.3 9.4 11.1    
Source: Company REFS       

Risk appetite among investors is a crux issue

Not to take anything away from the strong managerial performance, but Miton's has obviously coincided with markets helped by loose monetary policy and investors embracing risk.

Central banks are now trying to at least move towards normalising policy, though sluggish economic growth implies interest rates will edge up cautiously. A major question for the baby-boomer demographic is whether to leave a pension scheme and manage their nest egg independently.

So, without a major economic shock, the next few years ought to remain lucrative for promoting active fund management: this being the macro case and why I follow stocks such as Miton and Liontrust Asset Management (LIO).

From UK small-caps to international investment

Miton has tended to be associated with small-cap investment due to Gervais Williams, managing director, being a pillar of this establishment - having worked at Framlington and Gartmore and being involved with DTI committees on small caps, also the AIM Advisory Council.

Yet the investment centre on Miton's website shows the group being well-diversified with equity concepts such as UK value, US/European opportunities, cautious/defensive multi-asset funds and various income funds. Lately, it's launched a global equity infrastructure fund with a targeted 4% dividend yield and companies with underlying profits directly linked to inflation.

It's an interesting portfolio of funds addressing investors' objectives for capital protection, growth, income and diversity, in a low interest rate environment.

Income statement reflects operational gearing

From the 2016 results, a 27% advance in revenues (net of fee/commission expenses) to £18 million compares with pre-tax profit up 100% to £4.25 million, despite a 15.9% rise in administrative expenses to £13.1 million due mainly to a new fund manager remuneration scheme.

There were also "exceptional" costs such as £475,000 for acceleration of share-based payment. Thus remuneration issues are the main differential between statutory and normalised profit, an increasingly common dilemma with investing in "people" businesses like fund management and recruitment: publicly listed companies claim they have to offer such schemes or talented individuals will leave for private partnerships.

Miton's approach is to remunerate each manager according to net revenue generated by their funds (not to exceed 25% of it), which aligns their interests with shareholders but also raises costs.

Even so, the cash balance rose 51% to £21 million, helped by favourable working capital movements besides the profit advance: the cash flow statement shows net cash generated from operations rose from £1.1 million to £8.5 million. This enabled a 49% rise in the dividend to 1p, which should absorb about £1.5 million going forward.

Balance sheet is cash/goodwill dominated

Apart from £41.1 million goodwill and £21.3 million cash, there isn't much else to the balance sheet within £61.5 million net assets, representing 36p per share.

A strongly cash generative/low capex business profile means it needs no debt. The board ideally needs to keep beefing up the dividend, so the yield is more material than 3% and for outside investors not to suspect a "private partnership arrangement within a plc", where enhanced remuneration schemes shave cash that could be distributed to all shareholders.

Some 6.6 million shares have been repurchased by the company to mitigate dilution from the fund manager remuneration scheme. While such dilution is promised to reduce going forward, it currently feels like a wealth-transfer to managers, of capital that genuinely belongs to shareholders, with some window-dressing of earnings per share (EPS) to make it less visible.

Small size enhances scope for capital growth

A well-established smaller operation is ideally placed to benefit from operational gearing: I would target profit advances towards £10 million, implying EPS near 5p per share and a longer-term price target of 70p.

If the board continues to distribute significantly more capital by way of dividends, this would help underpin such a target. Effectively, a fund management stock is a geared play on markets, so global recession is the chief macro risk, while at the company level it's individual manager departures. The board would likely say this is why a fully-competitive remuneration scheme is vital.

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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