Manx Financial Group — Resilient, profitable and ready for growth

Manx Financial Group (LN: MFX)

Currency in GBP

Last close As at 03/02/2023

GBP0.20

0.00 (0.00%)

Market capitalisation

GBP23m

Research: Financials

Manx Financial Group — Resilient, profitable and ready for growth

Manx Financial Group (MFG) offers a combination of relatively fast growth potential and low valuation. Operating income doubled between 2016 and 2020 with only a 1% decline in the pandemic year. MFG’s key assets are Conister Bank, a specialist SME and retail lender, Edgewater Associates, the largest Manx independent financial advisory business, and Manx FX, a currency broker and provider of international payment processing facilities. The ROE ranged between 12% and 17% in FY14–19 and 9% in the challenging 2020/H121. The bank is well capitalised and funded. MFG restarted paying dividends after 16 years in 2021. The shares do not have a very demanding rating at 0.49x 2020 P/BV and 5.7x depressed 2020 earnings, presenting strong share price upside potential as earnings recover.

Pedro Fonseca

Written by

Pedro Fonseca

Analyst, Financials

Financials

Manx Financial Group

Resilient, profitable and ready for growth

Banking

Spotlight - Initiation

7 March 2022

Price

7.05p

Market cap

£8m

Share price graph

Share details

Code

MFX

Listing

AIM

Shares in issue

114.1m

Last reported total capital ratio

17.8%

Business description

Manx Financial Group is an independent banking group founded in 1935, domiciled in the Isle of Man. Its 100% owned bank, Conister Bank, is regulated by the UK’s Financial Conduct Authority (FCA) as well as the Isle of Man Financial Services Authority. MFX also owns Edgewater Associates, the largest independent financial advisory services company in the Isle of Man.

Bull

Good profit track record.

Balance sheet is well capitalised and funded.

Small size allows bank to be nimble.

Bear

Small market cap.

Limited brand awareness.

No broker forecasts.

Analyst

Pedro Fonseca

+44 (0)20 3077 5700

Manx Financial Group is a research client of Edison Investment Research Limited

Manx Financial Group (MFG) offers a combination of relatively fast growth potential and low valuation. Operating income doubled between 2016 and 2020 with only a 1% decline in the pandemic year. MFG’s key assets are Conister Bank, a specialist SME and retail lender, Edgewater Associates, the largest Manx independent financial advisory business, and Manx FX, a currency broker and provider of international payment processing facilities. The ROE ranged between 12% and 17% in FY14–19 and 9% in the challenging 2020/H121. The bank is well capitalised and funded. MFG restarted paying dividends after 16 years in 2021. The shares do not have a very demanding rating at 0.49x 2020 P/BV and 5.7x depressed 2020 earnings, presenting strong share price upside potential as earnings recover.

Historical data

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/17

11.5

2.7

1.8

0.0

4.0

N/A

12/18

13.2

2.7

1.5

0.0

4.6

N/A

12/19

16.5

3.0

1.6

0.0

4.6

N/A

12/20

16.4

2.0

1.2

0.0

5.7

N/A

Source: Manx Financial Group

Weathered the COVID-19 storm well

Conister Bank, MFG’s largest business, accounting for 78% of revenue in H121 and more than half of its earnings, has been relatively resilient and benefits from 92% of its lending being secured or government backed. Edgewater reported a FY20 pre-tax loss of £94k (FY19: £219k profit) but broke even in H121. Manx FX has remained very profitable and has benefited from a high FX trading volume due to the volatility from the COVID pandemic and Brexit. Loan impairment charges from Conister Bank were an annualised 2.1% of average net loans in the past three half-year periods, but MFG’s resilient operating margins have allowed it to report a good level of profitability: the ROE was 9% in FY20 and H121.

Balance sheet allows for growth

Management aims to grow organically as well as take advantage of value-creating acquisition opportunities. The bank’s balance sheet is well capitalised and with good liquidity. Management has been moving to more prime, recession-proof sectors since the 2016 Brexit vote to both protect and allow for future loan growth. MFG is also seeking a UK banking licence to further expand its business.

Valuation: P/BV of 0.49x, trailing P/E of 5.7x

Although there are no consensus forecasts for MFG, the strong loan book growth bodes well for future revenue. MFG is trading at a P/BV of only 0.49x, which seems quite low given its track record of delivering ROE above its COE (COE; we estimate this at 10–11%). Its trailing FY20 P/E of 5.7x does not seem demanding, especially since FY20 earnings were depressed by credit conditions caused by the pandemic led recession. MFG’s trailing valuation multiples are at significant discount to peers.

Company description: Independent banking group

MFG was founded in 1935 and listed in 2012 on the LSE’s AIM market. Its executive chairman, Jim Mellon, has a 19% stake. Gregory Bailey, a biotech entrepreneur and MFG non-executive director has 16%; the remaining 65% is free float.

Conister Bank is the largest company in MFG, accounting for 78% of its operating income in H121 and more than half of its profits. Conister has a solid capital base (total capital ratio was 17.8% in H121) and proved capable of accessing commercial liquidity rates through its Isle of Man banking licence (Class 1 deposit taking). MFG had a loan to deposit ratio of 91.5% (H121).

Conister operates in several SME and retail lending niches; Exhibit 6 shows the breakdown as of H121. Hire purchase loans (32%), wholesale funding arrangements (15%) and financial leases (14%) are the biggest segments. It has been very active in the COVID-related, government-backed loans programme and this segment has quickly grown to 19% of the loan book. Conister has been repositioning its loan book away from subprime to near prime over the last couple of years.

Conister Bank is regulated by the Isle of Man Financial Services Authority and the UK’s Financial Conduct Authority (FCA). Most of its lending is secured; it has 8% in unsecured consumer loans.

The other two relevant companies owned by MFG are Edgewater Associates (EA) and Manx FX. The former is the largest independent financial advisory business in the Isle of Man, while the latter is a currency broker and provider of international payment processing facilities. MFG’s debt collection company (Manx Collections) obtained an FCA licence in June 2021 with the aim not only of making recoveries but also of winning collection mandates from other financial services businesses during this economic downturn.

There seem little operating expenses allocated to Manx FX, which contributes to it having an outsized contribution to earnings relative to its operating income. In 2020 and 2021, it also benefited from a strong increase in FX trading due to volatility from both COVID and Brexit. Conversely, market volatility has hurt Edgewater as investors have delayed investment decisions and fewer face-to-face meetings have also hurt business. It is   possible that calmer markets may adversely affect Manx FX income. We note that fee income and total operating income in H120 (when COVID started) was £875k and £872k respectively, but only £457k and £224k in the calmer H220 (usually FX markets are busier towards the end of the calendar year).

Exhibit 1: Operating income by segment (H121)

Exhibit 2: Earnings contribution (H121)

Source: Manx Financial Group

Source: Manx Financial Group

Exhibit 1: Operating income by segment (H121)

Source: Manx Financial Group

Exhibit 2: Earnings contribution (H121)

Source: Manx Financial Group

Exhibit 3: Full year operating income progression (£000s)

Exhibit 4: Full year net profit and ROE progression

Source: Manx Financial Group

Source: Manx Financial Group

Exhibit 3: Full year operating income progression (£000s)

Source: Manx Financial Group

Exhibit 4: Full year net profit and ROE progression

Source: Manx Financial Group

MFG has a solid record of profitability with ROE of 12–17% over the years before COVID-19. The business was relatively resilient during the COVID-19 lockdowns and posted an ROE of 9% in FY20 and in H121. Although Conister Bank’s loan impairments rose to 2.1% of loans in FY20 as a result of the crisis, MFG’s strong operating margin was able to absorb this (Exhibit 5). The amount of stage 3 loans increased from 5.9% in FY19 to 10.6% in FY20 and then declined to 8.3% during the first six months of 2021.

MFG’s strategy is to continue to grow both organically and through value-creating acquisitions. Management highlighted in its 2021 interim report that the ‘current economic conditions’ could provide some buying opportunities that it would analyse.

Exhibit 5: Profit versus impairments (as % of loans)

Exhibit 6: Loan book breakdown (H121)

Source: Manx Financial Group

Source: Manx Financial Group

Exhibit 5: Profit versus impairments (as % of loans)

Source: Manx Financial Group

Exhibit 6: Loan book breakdown (H121)

Source: Manx Financial Group

H121: Resilient profitability, good loan momentum

MFG reported £1.03m in earnings for H121, up 3% year-on-year, but down 17% compared to H119 before the pandemic. ROE was 8.9% (9.0% in H120), which is a relatively resilient figure given the COVID-19 challenges. Impairment charges were 2.1% of average loans, but this ratio is stable compared to the two previous periods: 2.1% (H120) and 2.2% (H220). Stage 3 loans declined as a percentage of net loans from 10.6% (FY20) to 8.3%. Impairment coverage of stage 3 was 52.6%. This is significantly lower than the 85.6% at the end of H120, but stable compared to the end of 2020 (51.5%). For comparison, the latest data from the European Banking Authority (EBA) showed average stage 3 coverage in Europe in FY20 at about 47%, while most of the larger UK banks have coverage ratios below 50%.

The loan book grew 16% year-on-year. The net interest margin was 8.5% of loans versus 8.7% in H120 and 11.2% in H119. The tighter margin reflects the repositioning of the loan book away from subprime, while rising interest rates will help margins going forward. Total revenue grew 6% year-on-year, but core operating revenue grew 12%. The H120 total revenue figures had been bolstered by gains on securities and asset revaluation. Operating expenses also grew 6% y-o-y and the group’s cost to income ratio remained stable at 65%. Conister’s total capital ratio fell from 19.3% in FY20 to 17.8% due to a strong increase in the loan book in H121, but its capital remains ample.

Exhibit 7: H121 results versus previous years

Year end 31 December, £m unless stated

H119

H120

H121

H121 vs
H120 (%)

H121 vs
H119 (%)

Net interest income

8,877

7,811

8,555

9.5

-3.6

Net fee income

(1,118)

287

478

66.6

n.m.

Fee and commission expense

(2,934)

(1,870)

(1,878)

0.4

-36.0

Depreciation on leasing assets

0

(203)

(173)

-14.8

n.m.

Core operating income

7,759

7,895

8,860

12.2

14.2

Other operating income

139

111

129

Gains on securities and asset revaluations

104

455

(1)

Total operating income

8,002

8,461

8,988

6.2

12.3

Operating expenses

(5,211)

(5,503)

(5,879)

6.8

12.8

Operating profit before impairments

2,791

2,958

3,109

5.1

11.4

Impairment on loans and advances to customers

(1,469)

(1,895)

(2,142)

13.0

45.8

Associates profit

46

(91)

59

VAT recovery

52

36

113

Profit before tax

1,420

1,008

1,139

13.0

-19.8

Income tax expense

(184)

(16)

(122)

Income tax rate

13%

2%

11%

Net profit

1,236

992

1,017

2.5

-17.7

Minority interests

0

5

12

Net attributable profit

1,236

997

1,029

3.2

-16.7

Key ratios and balance sheet

NIM (NII as % average loans)

11.2

8.7

8.5

Impairment charge % average loans

1.8

2.1

2.1

Cost income ratio (%)

65.1

65.0

65.4

ROE (%)

12.1

9.0

8.9

Loan as % deposits

95.8

83.4

91.5

Total capital ratio (%)

17.0

16.0

17.8

Stage 3 loans as % net loans

5.2

7.2

8.3

Impairments % stage 3 loans

85.1

85.9

52.6

Loans (£ thou)

170,035

181,581

211,445

16.4

24.4

Equity (£ thou)

20,986

21,870

23,133

5.8

10.2

Source: Manx Financial Group, Edison Investment Research

Valuation: Undemanding multiples

There are currently no consensus forecasts for MFG. However, MFG is currently trading at an FY20 P/BV of 0.49x, which is 32% below the selection of peers in Exhibit 8 despite MFG’s last reported full fiscal year (FY20) ROE being above their average. We note that MFG usually delivers ROEs that are above its COE (we would estimate this at 10–11%). We think that if this type of profitability continues after the end of the pandemic, the bank would likely deserve to be at a premium to its book value and not such a large discount, despite its relatively small market capitalisation.

Exhibit 8: Challenger/specialist lender comparative table

Price
(p)

Market cap
(£m)

P/E (x)
FY20

P/E (x)
FY21

Div. yield (%)

FY 21

ROE (%)
FY20

ROE (%)
FY21

P/BV (x) last reported

MFG

7.05

8.0

5.7

N/A

2.4

8.8

N/A

0.49

Arbuthnot Financial

885

133.4

29.1

23.9

0.0

n.a.

2.3

0.66

Close Brothers

1116

1686.2

8.7

8.3

0.0

13.9

12.0

1.08

Metro Bank

90

156.6

-0.8

-1.8

0.0

NULL

-9.4

0.15

Secure Trust Bank

1255

234.1

5.5

8.0

4.5

6.9

14.9

0.78

Paragon

467

1153.7

8.5

7.6

5.6

12.6

12.9

0.94

Average

10.2

9.2

2.0

6.7

6.5

0.72

MFG versus average

-44%

N/A

21%

31%

n/a

-32%

Source: Refinitiv, Edison Investment Research. Note: Priced at 03 March 2022.

Exhibit 9: Financial summary

Year end 31 December

FY17

FY18

FY19

FY20

£’000s except where stated

Profit and loss

Net interest income

16,637

15,568

17,929

15,470

Net commission income

(5,298)

(2,738)

(1,630)

384

Other income

196

336

233

551

Total operating income

11,535

13,166

16,532

16,405

Total operating expenses

(8,355)

(9,748)

(11,632)

(11,394)

Operating profit pre impairments

3,180

3,418

4,900

5,011

Impairment charges on loans

(585)

(857)

(1,900)

(3,950)

Associates

38

30

124

54

VAT recovery

65

119

(101)

906

Profit before tax

2,698

2,710

3,023

2,021

Corporation Tax

(240)

(243)

(350)

(53)

Tax rate

9%

9%

12%

3%

Profit after tax

2,458

2,467

2,673

1,968

Minority interests

0

0

0

(33)

Net income attributable to equity shareholders

2,458

2,467

2,673

1,935

Reported underlying earnings after tax

2,458

2,467

2,673

1,935

Shares and per share ratios

Average basic number of shares in issue (m)

110.9

131.1

131.1

119.0

Average diluted number of shares in issue (m)

152.5

172.8

172.8

155.5

Period end shares in issue (m)

131

131.1

131.1

114.1

Reported diluted EPS (p)

1.77

1.54

1.55

1.24

Underlying diluted EPS (p)

1.77

1.54

1.55

1.24

Ordinary DPS (p)

0.00

0.00

0.00

0.00

NAV per share (p)

11.3

11.4

12.9

14.4

Tangible NAV per share (p)

8.7

8.9

9.4

10.1

Income ratios

Net interest/average loans

13.9

11.5

10.9

8.3

Impairments /average loans

0.5

0.6

1.2

2.1

Cost income ratio

72.4

74.0

70.4

69.5

Return on average equity

16.2

13.3

12.7

8.8

Return on average TNAV

21.6

17.2

16.9

12.3

Balance sheet

Net customer loans

122,546

148,278

179,370

193,143

Other assets

50,500

48,636

73,517

74,818

Total assets

173,046

196,914

252,887

267,961

Total customer deposits

142,272

158,500

209,933

218,285

Other liabilities

13,512

18,691

20,635

27,241

Total liabilities

155,784

177,191

230,568

245,526

Net assets

17,262

19,723

22,319

22,435

Minorities

0

0

0

0

Shareholders' equity

17,262

19,723

22,319

22,435

Reconciliation of movement in equity

Opening shareholders' equity

Profit in period

2,458

2,467

2,673

1,968

Other comprehensive income

(63)

(6)

(77)

(292)

Ordinary dividends

0

0

0

0

Minority changes from subsidiaries

0

0

0

(1,560)

Closing shareholders' equity

17,386

19,723

22,319

22,435

Balance sheet ratios

Loans as % deposits

86.1

93.6

85.4

88.5

Loans to equity (x)

7.1

7.5

8.0

8.6

Stage 3 as % loans

N/A

2.8

5.9

10.6

Impairments as % stage 3 loans

N/A

327.3

75.1

51.5

Total capital ratio (%)

17.5

18.1

16.9

19.3

Source: Manx Financial Group

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This report has been commissioned by Manx Financial Group and prepared and issued by Edison, in consideration of a fee payable by Manx Financial Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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This report has been commissioned by Manx Financial Group and prepared and issued by Edison, in consideration of a fee payable by Manx Financial Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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MPC Capital — Improved results under refined business model

MPC Capital reported a significant operational improvement in FY21, highlighted by a rise in PBT to €10.4m from €1.3m recorded in FY20. As the company operated under an optimised business model, moving operating management services in the shipping segment into joint venture (JV) structures, the revenue recognition method changed to proportionate consolidation. This led to an apparent decline in total sales despite a 28.3% y-o-y increase in fees from transaction services to €13.8m. We note that assets under management (AUM) expanded during the period (to €4.9bn from €4.4bn in FY20), which supported management fees.

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