Share plc — Delivering IT programme and revenue growth

Share reported full year revenue 28% ahead of 2016 and a normalised pre-tax profit versus a small loss in the prior year reflecting the continuing programme of IT investment to provide the basis for future growth and enhance the client experience. The proposed dividend of 0.4p/share was above our expectation and represents an increase of 60%. Exhibit 1 sets out key profit and loss figures for the full year and second half of 2017 and the main points are discussed below (all comparisons FY17 versus FY16 unless stated).

Share has made progress with its technology programme designed to deliver a digital transformation and to further one of its three strategic aims: putting customers first. During the year achievements included development of the Share Centre mobile App with the launch in October of a version which allows clients to fund their account and trade. It is still early days, but Share report 4% of trades are via the App. Work has also been undertaken to redevelop and enhance the Share Centre website with new features set to rolled out on a phased basis. Work on the infrastructure that supports client services has also taken place including a new client asset reconciliation system completed and projects related to regulatory changes also completed. The investment is expected to be substantially completed in the current year.

In addition to strengthening the IT platform that supports it, the second strategic aim of focusing on the core business was furthered through the sale of Sharefunds (which acts as an Authorised Corporate Director), a non-core activity.

The third strategic leg is pursuing strategic partnerships and acquisitions. Here, 2017 saw additional services for Computershare come on line including certificated and corporate nominee dealing. Approximately 8,000 Invesco Perpetual investment trust accounts were moved across to the Share platform and a bond subscription service was launched for Wellesley and Co. There is a pipeline of further potential partnerships although, as usual, timing of completion of agreements is unpredictable.

As highlighted above, 2017 saw strong growth in AUA and Exhibit 2 puts this in a longer-term context making clear the increased growth in recent periods reflecting a combination of organic growth supported by the attractions of Share’s flat account fee structure, market strength and acquisitions of books of business.

Exhibit 3 gives an analysis of revenue over the same period. Revenue was broadly maintained in the period between 2011 and 2016 despite the elimination of trail commission, the adoption of the flat account fee structure and the contraction in interest income as rates fell to historically low levels. 2017 therefore represented a substantial step forward driven primarily by commissions as a result of favourable market conditions and the new partnership agreements.

Exhibits 4 and 5 show revenue market share figures for Share compared with a peer group collected by Compeer1. The first chart shows growth in the different categories of income with Share demonstrating particular relative strength in dealing commissions and fee income. The next chart shows Share’s progress in market share (revenue excluding interest income) relative to the same peer group. Against a broader quarterly-collected peer group that includes Hargreaves Lansdown, Share’s market share for 2017 increased to 3.87% compared with 3.21% in 2016.

The recent pattern in UK equity market performance and volatility are illustrated in the next two charts highlighting the period of strength from early 2016 to end 2017 despite bouts of volatility accompanying events such as the Brexit vote and UK election. This year there has been a further spike in volatility and marked weakness in February. It remains to be seen whether the subsequent reduction in volatility will be sustained, allowing a return to more favourable conditions for investor confidence and hence for Share.

In Exhibit 8 we chart the level of retail equity fund sales as reported by the Investment Association as one indicator of investor confidence. This shows that 2017 saw a return to significant net purchases after a negative year in 2016. The Exhibit 9 shows a shorter-term series of the net fund sales data together with the Lloyds Bank investment sentiment index for UK equities. While we do not yet have fund sales data for 2018 it is interesting to see that Lloyds Bank survey data has remained in positive territory despite the period of higher volatility. This could be a positive indicator for Share and, in tune with this, the company notes that during the market decline in February this year two thirds of its trades were buys.

Clearly, Share will be sensitive to any significant market setback but on a longer view the work it has done to improve its customer offering and the success it has had in building revenue market share, AUA and partnership agreements should stand it in good stead through market fluctuations. One source of swings in sentiment is likely to be changing expectations on the pace unwinding of exceptionally low interest rates and here, Share stands to benefit from higher rates earned on client money balances to the extent that banking counterparties reflect rising rates in the deposit rates they pay. We expect higher interest income to make a significant contribution to the increase in normalised profits we estimate for 2018 (see estimate revisions set out in the next section).

Changes in our estimates are shown in Exhibit 10 with a forecast for 2019 included for the first time. There is a 6% increase in our revenue estimate for this year which translates into a 20% rise in estimated earnings. The main change we have made, as noted above, has been to increase the assumed interest income reflecting the rise in customer deposits, greater flexibility granted by the FCA and some benefit from a rise in base rates. Subject to policy rate movements and how much these feed into deposit rates, we suspect there could positive surprises compared with our expectation.

Share’s capital and cash position remains strong. The regulatory capital requirement is £5m for 2018 and was £5.6m for 2017. At end 2017 the group held capital equivalent to three times the requirement, comfortably above the company’s own policy of holding twice the regulatory requirement. Share has no debt and at the year-end had cash of £10.5m compared with £11.4m at the end of the prior year. Operating cash flow was a positive £1.1m while the main uses of cash were intangible and fixed investment (£1.5m), much of which related to the IT programme together with dividends and share purchases for the employee benefit reserve (£0.9m in total). In addition to the cash position Share holds available for sale investments, primarily holdings in the London Stock Exchange and Euroclear. These were valued at £6.4m at the year end.

We have updated the comparative table we have used in previous notes. This incorporates selected measures for Share, Alliance Trust Savings and Hargreaves Lansdown. The scale of Hargreaves Lansdown is apparent with its latest reported AUA standing at £86bn compared with £15.8bn and £4.7bn for Alliance Trust Savings and Share respectively. With a history of growth and track record of profitability it is unsurprising that Hargreaves Lansdown also trades on substantially higher multiples of revenue or as a percentage of AUA. Following an increase in the capital requirement for Hargreaves Lansdown last year, surplus capital (assuming a target of capital at twice the required level, in line with Share) has been largely absorbed. For Share there is a £5m surplus on this basis which we deduct from the market capital to calculate an adjusted value. For Alliance Trust Savings we take the valuation reported in the Alliance Trust accounts (down from £61.5m to £38m following problems and costs associated with the launch of a new IT platform). Perhaps unsurprisingly after a year of significant losses at Alliance Trust Savings, the valuation in terms of revenue and AUA now stands below Share.

Share’s valuation is lower than that we reported following the H117 results (then the adjusted value was 2.0x revenue and 0.8% of AUA) which we would ascribe to the strong revenue and AUA growth that has yet to be fully evidenced in profitability. Prospectively, organic and/or acquisitive growth may produce positive surprises as operational gearing comes into play following the period of IT investment.

We have also updated our DCF valuation using assumptions that include intermediate growth (2020-22) of 50% to capture operational gearing starting from relatively low profitability, a discount rate of 10% and a terminal multiple of 10x. Allowing for changes to our FY19 assumptions, our central value (see sensitivity in Exhibit 12) is unchanged at 30.5p.