Gaining share in challenging markets

Share 5 November 2015 Update

Share

Gaining share in challenging markets

Q3 market share
trading update

Financial services

5 November 2015

Price

30p

Market cap

£43m

Net own cash (£m) at June 2015

10.1

Shares in issue
(excluding Employer Benefit Trust)

139.5m

Free float

31%

Code

SHRE

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(6.3)

(2.4)

(22.1)

Rel (local)

(10.0)

1.5

(23.2)

52-week high/low

40.00p

27.25p

Business description

Share plc owns The Share Centre and Sharefunds. The Share Centre is a self-select retail stockbroker that also offers share services for corporates and employees. Relative to peers a high proportion of income is from stable fee income.

Next events

FY15 results

March 2016

Analysts

Mark Thomas

+44 (0)20 3077 5700

Martyn King

+44 (0)20 3077 5745

Share is a research client of Edison Investment Research Limited

Share has once again taken market share (8.41% of peer group revenue in Q315 vs 8.16% in Q215 and 7.62% in Q314), continuing its multi-year trend. However, trading conditions remain challenging with market dealing commissions falling, regulatory pressure on fees and maturing high rate accounts being reinvested at lower yields. Overall revenue was down 1% on Q314 and, taking account of a continuation of this subdued trading for the rest of the year, we have reduced our estimates.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/13

15.0

2.3

1.29

0.52

23.3

1.7

12/14

15.0

1.6

0.99

0.62

30.3

2.1

12/15e

14.3

1.1

0.69

0.75

43.5

2.5

12/16e

15.4

1.5

0.89

0.90

33.7

3.0

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.

Q315 details

Dealing commission (46% of revenues) increased by 12% (peers down 17%) on Q314, supported by the Barclays certificated trading business, which commenced in April 2015, as well as strong EIS administration revenues. Fee income (46% of revenues) decreased by 2% on Q314 (peers down 25%), significantly affected by the impact of the Retail Distribution Review on trail income, where Share took the pain earlier than many peers. Interest income (8% of revenues) reduced by 38% on Q314 (peers up 22%). While cash balances have been rising, Share has seen high-interest term deposits – which were secured by building society mortgage portfolios – mature and the options for reinvestments post July 2014 changes in regulatory client asset rules have all been at lower interest rates. The timing of deposit maturity affects trends in any particular quarter.

Outlook

Share reports that dealing activity in October has continued to be weak, and that a continuation of current trading is likely to mean that 2015 results will be below current market expectations. The group says it is in advanced discussions on a number of partnership opportunities, which could be significant to 2016 trading. It also signed an agreement to acquire up to 3,000 investment trust ISA accounts from Henderson Global Investors (transfer date 11 December 2015). We have assumed a £1.3m profit of the partial disposal of Share’s stake in LSE.

Valuation: Around fair value, upside from new deals

The cutting of earnings estimates sees our cash flow valuation fall to 24p from 27p and our Gordon’s growth model to 33p from 35p. The average of our approaches is thus 28.5p, ie around to the current price. We believe that further partnerships provide upside to our estimates and they will be included as announced. Our forecast 2016 net cash and investments forecasts account for around half the current market capitalisation of the group.

Q315 market share

We believe the continuation of market share gains is important. While any quarter is likely to be variable, Exhibit 1 below highlights the improving market share over a sustained period.

Exhibit 1: Market share by quarter (%)

Source: Share plc, compeer peers. Note: Peers comprise Alliance Trust Savings, Barclays Stockbrokers, Equiniti, Halifax Share Dealing, HSBC Stockbrokers, Saga Personal Finance, Selftrade, and TD Direct Investing.

Outlook

Trading remains challenging and the regulatory pressures are unlikely to moderate in the near future. We have cut our revenue estimates accordingly. The key strategic uncertainty is the development of partnerships as a source of new income streams. The Barclays deal has clearly helped Share outperform its peers in trading revenue in Q315. It has also announced a deal with Hendersons (see below). With this statement Share reiterated its interim comments that it is in advanced discussions on a number of partnership opportunities, which could be significant to the group's future trading performance and on which it hoped to announce further details in due course. Management appears confident that it will deliver further deals, which we will include in our forecasts as and when they are announced.

Acquisition of Henderson’s investment trust ISA assets

On 9 September Share announced it had signed an agreement with Henderson Global Investors to acquire the company’s remaining investment trust ISA accounts. Under the agreement, The Share Centre will acquire up to 3,000 ISA accounts containing assets of approximately £78m, invested predominantly in Henderson's managed investment trusts. Henderson has written to all the account holders concerned and the effective date of transfer will be 11 December 2015. No financials of the deal have been revealed, but we do not believe they will be material in the group context. Of more importance is that it again reinforces Share’s credibility as a potential partner for a major institution wishing to divest a non-core activity.

Sale of LSE shares

On 8 October 2015 Share announced it had sold 77k of the 222.7k shares it held in the London Stock Exchange Group. The sale realised cash proceeds of £1.93m. We have assumed that the tax treatment will be FIFO and so the in-cost of the shares sold will be £0.6m (for the most recent rights issue and negligible previous cost). A one-off accounting profit of £1.3m has been recognised in our statutory estimates (with a resultant charge tax of c £0.3m). We have assumed the gain will be in the group profit share. These factors are stripped out of our normalised numbers. There is an offsetting reduction in the revaluation reserves as the previously unrecognised gain is now realised. Share holds the remaining shares as a strategic investment. The holding arose because of historic membership of the exchange (and subsequent rights issues). Share was already cash rich and we believe the sale was a tactical realisation of investment rather than for any other purpose.

Valuation

The average of our valuation approaches is 28.5p (previously 31p), which implies an earnings multiple of c 32x 2016e EPS (c 18x adjusting for surplus cash and investments at par). The change is primarily due to lower estimates. The personal shareholder perks (a 30% discount on all online deals for shareholders with 500+ shares) are attractive to retail investors.

Peer ratings

Hargreaves Lansdown is still trading on a forward P/E of c 37x (to June 2016). Other wealth managers are trading as follows: Brewin Dolphin 15x year to September 2016, Brooks Macdonald 18x June 2016, Charles Stanley 16x March 2017, and Rathbone Brothers 18x December 2016. All valuations are at 5 November 2015.

DCF

Our DCF value of 23.9p (previously 27p) is based on detailed forecasts to 2016, 5% CAGR in EBITDA over the next 10 years, a discount rate of 9% and a terminal multiple of 10x. We have valued investments as if they are cash. 2016 forecast cash/investments account for 56% of the value, while the terminal value accounts for just 17%. This valuation has fallen since our last report due to lower earnings estimates.

Gordon’s growth model

The current profitability is below the level we believe to be sustainable for this type of business. With a capital base 5.4x the required regulatory amount, there is significant opportunity for re-gearing through either organic or acquisitive growth. A more normal interest rate environment would also add to returns on the cash balances. We assume a 17% sustained ROE, a 9% COE and growth at 5%. On this basis, Share should trade at 3x book value. We then discount the valuation for current performance below long-term expectations (Share is capital rich), bringing the fair value to 33p. Since our last valuation (35p), short-term estimate changes have seen a lower equity forecast.

Financials

Changes to estimates

Exhibit 2: Revisions to estimates

Revenue (£m)

PBT (£m)

EPS (p)

Dividend (p)

Old

New

% chg

Old

New

% chg

Old

New

% chg

Old

New

% chg

2015e

15.2

14.3

(6)

1.3

1.1

(14)

0.8

0.69

(15)

0.75

0.75

0

2016e

16.5

15.4

(7)

2.1

1.5

(28)

1.3

0.89

(29)

0.90

0.90

0

Source: Share plc, Edison Investment Research

We have assumed that the group will manage its discretionary costs in the light of the continued difficult revenue outlook. However, there is operational leverage and the fall in earnings and profits is much higher than the fall in revenue. We also assume that part of the 2015 management of costs is a deferral into 2016 and so the gearing is greater that year. We have not built in any new partnership income, which may be expected to have a positive leveraging effect. Given the balance sheet strength, our dividend forecast is unchanged at present.

Exhibit 3: Financial summary

Year end 31 December

£'000s

2007

2008

2009

2010

2011

2012

2013

2014

2015e

2016e

PROFIT & LOSS

Revenue

 

11,721

11,973

14,128

15,591

14,255

13,914

14,996

15,020

14,300

15,400

Cost of Sales (exc amortisation and depreciation)

(10,467)

(10,578)

(11,880)

(12,430)

(12,782)

(12,867)

(13,472)

(14,481)

(14,326)

(14,870)

EBITDA

 

1,254

1,395

2,248

3,161

1,473

1,047

1,524

539

(26)

530

Depreciation

 

(75)

(73)

(76)

(96)

(88)

(99)

(108)

(104)

(109)

(115)

Amortisation

(16)

(16)

(16)

(22)

(28)

(16)

(11)

(11)

(15)

(15)

Operating profit (pre-exceptional)

 

1,163

1,306

2,156

3,043

1,357

932

1,405

424

(-150)

400

Exceptionals

0

(655)

0

0

0

(562)

0

0

0

0

Other

1,203

(55)

(114)

(6)

0

0

0

60

1,312

0

Investment revenues

947

859

303

217

210

298

311

308

308

308

Profit Before Tax (FRS 3)

 

3,313

1,455

2,345

3,254

1,567

668

1,716

792

1,470

708

Profit Before Tax (norm)

 

2,340

2,358

2,710

3,656

2,075

1,654

2,319

1,631

1,134

1,514

Tax

(867)

(588)

(639)

(978)

(453)

(147)

(385)

(124)

(294)

(142)

Profit After Tax (FRS 3)

 

2,446

867

1,706

2,276

1,114

521

1,331

668

1,176

566

Profit After Tax (norm)

 

1,765

1,700

2,061

2,649

1,550

1,319

1,843

1,417

956

1,251

Average Number of Shares Outstanding – exc treasury (m)

159.1

158.3

160.5

154.5

144.3

142.9

142.9

143.5

139.5

140.0

EPS - normalised (p)

 

1.11

1.07

1.28

1.71

1.07

0.92

1.29

0.99

0.69

0.89

EPS - FRS3 (p)

 

1.54

0.55

1.06

1.47

0.77

0.36

0.93

0.47

0.84

0.40

Dividend per share (p)

0.20

0.22

0.25

0.30

0.36

0.43

0.52

0.62

0.75

0.90

EBITDA Margin (%)

10.7%

11.7%

15.9%

20.3%

10.3%

7.5%

10.2%

3.6%

(0.2%)

3.4%

Operating Margin (before GW and except.) (%)

9.9%

10.9%

15.3%

19.5%

9.5%

6.7%

9.4%

2.8%

(1.0%)

2.6%

BALANCE SHEET

Fixed Assets (mainly Investments)

 

5,775

3,031

3,338

4,017

3,850

4,137

6,721

9,405

7,491

7,501

Current Assets

 

17,494

21,694

26,124

28,831

20,913

22,665

28,267

21,279

21,454

22,285

Total Assets

 

23,269

24,725

29,462

32,848

24,763

26,802

34,988

30,684

28,945

29,787

Current Liabilities

 

(5,919)

(5,954)

(9,387)

(16,604)

(8,152)

(9,569)

(14,394)

(8,352)

(9,187)

(10,106)

Long term Liabilities

(1,454)

(1,479)

(1,355)

(807)

(672)

(754)

(1,187)

(1,594)

(1,650)

(1,650)

Net Assets

 

15,896

17,292

18,720

15,437

15,939

16,479

19,407

20,738

18,108

18,031

CASH FLOW

Operating Cash Flow

 

1,163

1,306

2,156

3,043

1,357

932

1,405

424

(150)

400

Net cash from investing activities

1,969

840

76

(424)

(89)

(178)

168

(434)

1,929

104

Net cash from (used in) financing

(2,616)

764

(348)

(4,207)

(422)

(507)

(606)

(736)

(878)

(1,054)

Net Cash Flow

 

(410)

730

2,170

(2,543)

(955)

1,142

1,440

(971)

(354)

7

Opening net (debt)/cash

 

12,053

11,642

12,372

14,542

11,999

11,044

12,186

13,626

12,655

12,301

Closing net (debt)/cash

 

11,642

12,372

14,542

11,999

11,044

12,186

13,626

12,655

12,301

12,308

Source: Share plc, Edison Investment Research

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Copyright 2015 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Share and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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