Share
Share |
Gaining share in challenging markets |
Q3 market share |
Financial services |
5 November 2015 |
Share price performance
Business description
Next events
Analysts
Share is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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.
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 |
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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 |
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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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