IFG Group
Written by
IFG Group |
Meeting near-term headwinds |
Update to end October |
Financial services |
6 December 2016 |
Share price performance
Business description
Next events
Analysts
IFG Group is a research client of Edison Investment Research Limited |
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In its trading update IFG reported that performance has been in line with management expectations. The cooling effect of market uncertainty on growth in James Hay and financial advice client numbers, together with the impact of low interest rates, remain a near-term head wind for revenues. Even so, with Saunderson House continuing to increase profits, IFG expects to match 2015 earnings. The long-term growth opportunity presented by an ageing population and pension freedoms remains in place and to address this IFG is continuing investment to enhance its service and increase operational gearing.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/15 |
71.3 |
11.5 |
8.3 |
4.4 |
17.4 |
3.0 |
12/16e |
77.5 |
10.6 |
8.3 |
4.9 |
17.4 |
3.4 |
12/17e |
80.2 |
12.3 |
9.2 |
5.4 |
15.7 |
3.7 |
12/18e |
89.3 |
15.6 |
12.1 |
5.9 |
12.0 |
4.1 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Trading in line
IFG reports that total assets under administration (AUA) at the end of October stood at £26.4bn, up 8% from the end of June and 12% from end December. At James Hay Partnership the number of clients, which remains the principal revenue driver, was stable although the average value per account has risen, which should be positive over time for the take up of more elements of the modular MiPlan offering. At Saunderson House, AUA increased from £4.1bn at end June to £4.5bn with the number of clients increasing by 2.6% to 1,945 over the same period. Clients are still seeking advice at higher levels than in previous years, reflecting uncertain market conditions; this increases fee income but has some impact on new client acquisition.
Outlook
We have raised our estimates for the current year to reflect the management statement’s guidance that the company is, as a whole, trading in line with 2015. Our subsequent year estimates are, at this stage, little changed although it is possible that more stable market conditions could allow growth rates for both business areas to be stronger than we have assumed.
Valuation
We have updated our DCF valuation and, reflecting the stability of our longer-term estimates, our central valuation is unchanged at 181p/share. Factoring this into a sum-of-the-parts valuation, based on an increased 2016 earnings estimate, means that lower multiples are required to match the 181p value but at 22x this would still reflect the assumption of good longer-term growth. Delivery of the expected performance for this year and resumption of faster growth in client numbers are potential catalysts for a re-rating towards our central value.
Trading in line with management expectation
In its interim management statement for the period to end October, IFG indicated that trading has been in line with management expectations as reported with the half-year results in September. Key points from the statement were as follows.
■
Management sees the business as being on course to deliver a solid set of results, in line with 2015.
■
James Hay (retirement wealth platform, leading SIPP administrator) AUA was £21.9bn at end October, up 12% from £19.5bn at the end of 2015. Net inflows of £1.4bn over this period were equivalent to 7% of the opening balance, while market and other movements accounted for the remaining 5% increase.
■
The number of accounts at James Hay was broadly stable at c 55,000 compared with both the end of 2015 and the end of June. Additions, running at 8.0% on an annualised basis, were below historical levels in the mid-teens, reflecting the unfavourable market background and were largely offset by attrition of 6.8%. At the half year IFG noted that fee changes had prompted a faster than expected drop-off from the tail of smaller accounts and this remains a factor within the rate of attrition.
■
The average account value at James Hay rose from c £0.35m (end December) to c £0.40m. As mentioned earlier, this is unlikely to influence near-term revenues significantly but should be a positive factor over time as larger accounts are more likely to use a wider range of segments within the modular MiPlan product. MiPlan now accounts for AUA of £8.6bn (39% of the total) with 23,000 clients (average value £0.37m).
■
At Saunderson House (financial adviser, discretionary manager) AUA stood at £4.5bn at the end of October, an increase of 12.5% since the end of 2015 and 9.8% from the end of June. The number of clients stood at 1,945 compared with 1,895 at the end of June (+2.6%) and 1,809 at the end of 2015 (+7.5%). As highlighted at the half-year stage, the uncertain background created by the EU referendum contributed to a higher than usual requirement for financial advice for clients. This generated higher revenue, reflecting chargeable hours, but has tended to limit the time available for client acquisition. This pattern has persisted into the second half but is still expected to normalise in due course.
■
The strategic focus of the group on developing and investing in its retirement wealth platform and financial advice business is unchanged following the assumption of the CEO role by former CFO John Cotter in September. For James Hay the main focus will be on distribution through financial advisers, although IFG reports that it is seeing growth in its direct to consumer offering given the availability of online account opening. The emphasis at Saunderson House is mainly on organic growth in advisory and discretionary services, but acquisitions would be considered, subject to cultural and operational alignment.
Financials
We have updated our estimates in line with the management’s statement that the performance will be similar to that of 2015. Previously, after the reduction of growth estimates following first half figures we had allowed for a substantial reduction in profitability (over 20% at the EBITDA level for 2016). This now appears too cautious and we have increased our FY16 EBITDA estimate by 11%. At this stage we have kept our forecasts for 2017 and 2018 close to their previous values (within 3%).
Exhibit 1: Estimate revisions
Revenue (£m) |
EBITDA* (£m) |
PBT** (£m) |
EPS** (p) |
DPS (p) |
|||||||||||
New |
Old |
% chg. |
New |
Old |
% chg. |
New |
Old |
% chg. |
New |
Old |
% chg. |
New |
Old |
% chg. |
|
2016e |
77.5 |
77.3 |
0.3% |
14.8 |
13.3 |
11.2% |
10.6 |
9.2 |
16.3% |
8.26 |
7.16 |
15.3% |
4.90 |
4.90 |
0.0% |
2017e |
80.2 |
81.3 |
-1.4% |
16.3 |
16.0 |
1.6% |
12.3 |
12.0 |
2.2% |
9.23 |
9.03 |
2.1% |
5.39 |
5.39 |
0.0% |
2018e |
89.3 |
89.7 |
-0.5% |
19.7 |
20.0 |
-1.5% |
15.6 |
15.9 |
-1.9% |
12.13 |
12.42 |
-2.4% |
5.93 |
5.93 |
0.0% |
Source: IFG Group data, Edison Investment Research. Note: *Excludes exceptional items, share-based payments and discontinued businesses. **Additionally excludes amortisation of acquired intangibles, unwind of contingent consideration.
Valuation
Leaving the assumptions for our DCF valuation unchanged (including a 10% discount rate, 10x terminal multiple and 4% longer-term growth following faster, 10% growth for 2019-20), we generate the same central value as previously (181p), reflecting stable longer-term estimates for the business. Exhibit 2 shows the sensitivity of the valuation to assumptions for the discount and long-term growth rate.
Exhibit 2: Discounted cash flow valuation (p) sensitivity
Discount rate (right) and long-term growth |
8% |
9% |
10% |
11% |
12% |
2% |
191 |
180 |
169 |
160 |
152 |
3% |
198 |
186 |
175 |
165 |
156 |
4% |
205 |
192 |
181 |
170 |
161 |
5% |
212 |
199 |
187 |
176 |
166 |
Source: Edison Investment Research
As in our previous note, published in September, we have updated our sum-of-the-parts calculation setting the total in line with our central DCF valuation. Because our estimate for 2016 has increased, the multiples applied are lower than previously (total 22x versus 25x), although this can still be seen as reflecting the expectation of a resumption of more rapid growth (which in turn is built into the assumptions that feed into our DCF valuation).
Exhibit 3: Sum-of-the-parts valuation
|
2016e post-tax profit, £m |
Multiple, x |
Value, £m |
James Hay Partnership |
6.8 |
20.5 |
139.2 |
Saunderson House |
5.4 |
16.0 |
85.7 |
Operating units |
12.1 |
18.5 |
224.9 |
Central cost |
(3.4) |
10.0 |
(34.0) |
Total |
8.7 |
21.8 |
191.0 |
IFG group value per share (p) |
181 |
||
IFG group value per share (€) |
2.14 |
Source: Edison Investment Research
Exhibit 4: Financial summary
Year end 31 December |
£000s |
2014 |
2015 |
2016e |
2017e |
2018e |
|
PROFIT & LOSS |
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Revenue |
|
|
65,096 |
71,316 |
77,536 |
80,210 |
89,270 |
Cost of sales |
(54,459) |
(55,864) |
(61,327) |
(62,564) |
(68,381) |
||
Gross profit |
10,637 |
15,452 |
16,209 |
17,646 |
20,889 |
||
Gross margin % |
16.3% |
21.7% |
20.9% |
22.0% |
23.4% |
||
Other underlying expenses |
(328) |
(1,414) |
(1,389) |
(1,396) |
(1,209) |
||
EBITDA |
|
|
10,309 |
14,038 |
14,820 |
16,250 |
19,680 |
Depreciation |
(1,190) |
(1,091) |
(1,108) |
(1,235) |
(1,221) |
||
Amortisation (exc acquired intangibles) |
(950) |
(1,094) |
(1,941) |
(2,134) |
(2,350) |
||
Share based payment charges |
(287) |
(204) |
(197) |
(230) |
(230) |
||
Total underlying operating expenses as reported by divisions |
(2,755) |
(3,803) |
(4,635) |
(4,994) |
(5,010) |
||
Underlying operating profit as reported by divisions |
|
7,882 |
11,649 |
11,574 |
12,652 |
15,879 |
|
Amortisation of acquired intangibles |
(1,701) |
(1,809) |
(1,781) |
(1,576) |
(1,395) |
||
Operating profit before exceptional items |
|
|
6,181 |
9,840 |
9,793 |
11,076 |
14,484 |
Exceptional items |
(1,353) |
(1,350) |
(799) |
0 |
0 |
||
Operating profit |
|
|
4,828 |
8,490 |
8,994 |
11,076 |
14,484 |
Finance Income |
284 |
569 |
396 |
92 |
104 |
||
Finance expense |
(504) |
(482) |
(492) |
(483) |
(483) |
||
Profit Before Tax (FRS 3) |
|
|
4,608 |
8,577 |
8,898 |
10,685 |
14,105 |
Profit Before Tax (norm) |
|
|
7,825 |
11,539 |
10,643 |
12,261 |
15,591 |
Tax |
(3,310) |
(1,900) |
(2,339) |
(2,351) |
(2,693) |
||
Discontinued businesses |
(497) |
246 |
0 |
0 |
0 |
||
Non-controlling interests |
(134) |
(598) |
0 |
0 |
0 |
||
Profit After Tax (FRS 3) |
|
|
667 |
6,325 |
6,559 |
8,334 |
11,412 |
Profit After Tax (co norm) |
|
|
5,652 |
8,568 |
8,593 |
9,591 |
12,597 |
Profit After Tax (Edison norm) |
|
|
5,889 |
8,731 |
8,750 |
9,774 |
12,780 |
Average number of shares outstanding (m) |
104.6 |
105.2 |
105.4 |
105.4 |
105.4 |
||
EPS - Company adjusted (p) |
|
|
5.40 |
8.14 |
8.15 |
9.10 |
11.95 |
EPS - normalised (p) |
5.61 |
8.26 |
8.26 |
9.23 |
12.13 |
||
EPS - FRS3 (p) |
0.64 |
6.01 |
6.22 |
7.91 |
10.83 |
||
Dividend per share (p) |
4.04 |
4.44 |
4.90 |
5.39 |
5.93 |
||
Underlying EBITDA margin (%) |
15.8% |
19.7% |
19.1% |
20.3% |
22.0% |
||
Reported operating margin (%) |
12.1% |
16.3% |
14.9% |
15.8% |
17.8% |
||
BALANCE SHEET |
|||||||
Non-current assets |
|
|
59,972 |
57,946 |
57,066 |
56,321 |
55,580 |
Property plant and equipment |
2,491 |
2,597 |
2,754 |
2,719 |
2,723 |
||
Intangible assets |
54,398 |
55,314 |
54,303 |
53,593 |
52,848 |
||
Other non-current assets |
3,083 |
35 |
9 |
9 |
9 |
||
Current assets |
|
|
48,405 |
56,359 |
56,803 |
62,045 |
70,341 |
Trade receivables |
19,079 |
22,255 |
20,376 |
21,826 |
24,335 |
||
Cash & equivalents |
29,326 |
34,089 |
36,427 |
40,219 |
46,007 |
||
Other current assets |
0 |
15 |
0 |
0 |
0 |
||
Held for sale assets |
|
|
3,544 |
0 |
0 |
0 |
0 |
Total Assets |
|
|
111,921 |
114,305 |
113,869 |
118,366 |
125,922 |
Current liabilities |
|
|
21,909 |
30,347 |
27,558 |
28,828 |
31,018 |
Borrowings |
2 |
6,831 |
6,831 |
6,831 |
6,831 |
||
Trade payables |
20,741 |
22,813 |
17,788 |
19,054 |
21,244 |
||
Provisions |
1,015 |
703 |
1,796 |
1,798 |
1,798 |
||
Other current liabilities |
151 |
0 |
1,143 |
1,145 |
1,145 |
||
Non-current liabilities |
|
|
11,390 |
4,760 |
4,823 |
4,823 |
4,823 |
Borrowings |
6,639 |
0 |
0 |
0 |
0 |
||
Provisions |
1,726 |
1,857 |
2,038 |
2,038 |
2,038 |
||
Deferred tax |
3,025 |
2,903 |
2,785 |
2,785 |
2,785 |
||
Held for sale liabilities |
1,908 |
0 |
0 |
0 |
0 |
||
Total liabilities |
|
|
35,207 |
35,107 |
32,381 |
33,651 |
35,841 |
Minority interests |
(4) |
0 |
0 |
0 |
0 |
||
Shareholders' equity |
|
|
76,718 |
79,198 |
81,488 |
84,715 |
90,080 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
8,091 |
13,803 |
9,279 |
16,066 |
19,362 |
Net Interest |
(188) |
(162) |
(216) |
(391) |
(379) |
||
Tax |
(2,331) |
(2,226) |
(1,264) |
(2,351) |
(3,103) |
||
Capex |
(5,087) |
(5,221) |
(3,965) |
(4,200) |
(4,225) |
||
Acquisitions/disposals |
8,602 |
1,800 |
2,934 |
0 |
0 |
||
Issue of equity |
529 |
403 |
162 |
0 |
0 |
||
Dividends |
(4,068) |
(4,188) |
(4,711) |
(5,333) |
(5,866) |
||
Other |
378 |
529 |
(4) |
0 |
0 |
||
Change in net cash |
5,926 |
4,738 |
2,215 |
3,791 |
5,788 |
||
FX changes |
(222) |
(167) |
123 |
0 |
0 |
||
Opening net (debt)/cash |
|
|
16,983 |
22,687 |
27,258 |
29,596 |
33,388 |
Closing net (debt)/cash |
|
|
22,687 |
27,258 |
29,596 |
33,388 |
39,176 |
Source: IFG Group data, Edison Investment Research
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