Cantor Fitzgerald Europe reiterates BUY on Brooks Macdonald
Reacting to the latest results from Brooks Macdonald, Cantor Fitzgerald Europe’s Keith Baird, financial services analyst, reviews the business and its outlook.
BRK LN (1,999p, TP 2,200p), Market Cap: £269m
Our view: Adjusted PBT before acquisition costs and amortisation for the first half increased in line with our expectations to £8.9m (H116 £7.1m) +24%, with EPS of 51.8p (42.6p) +22% and an interim dividend of 15p (12p). Total AUM as at the half year grew 12% to £9.3bn with net organic inflow of 8% annualised. Assuming that markets remain supportive, the outlook for growth in the second half of the year will continue favourable. We retain our BUY recommendation and 2,200p target.
- Adjusted PBT up 24%. Adjusted PBT before acquisition costs and amortisation for the first half increased to £8.9m (H116 £7.1m) +24%, with EPS of 51.8p (42.6p) +22% and an interim dividend of 15p (12p). Revenues rose to £45.3m (£38.7m) +17%, driven by higher management fees on the back of the rise in AUM. Investment management rose to £32.8m (£27.8m), financial planning to £2.3m (£2.0m), funds and property management to £3.8m (£3.1m), and international to £6.5m (£5.7m). Expenses rose 19% to £38.3m (£32.3m).
- First half AUM increases 12%. As flagged in the pre-close update, discretionary AUM increased 12% to £9.3 billion (June 2016 £8.3bn) compared with the WMA Balanced Index which was up 7.8%. Asset Management, Funds and International AUM all grew. Net organic growth was 4% (8% annualised) from inflows of £0.3bn which remains sector leading, despite the negative market backdrop driven by the Brexit vote and the US election which damaged client sentiment. Investment performance has remained good. Positive markets contributed a further £697m to total AUM.
- Outlook. Assuming that markets remain supportive, the outlook for growth in the second half of the year will continue favourable. Our current expected annualised net inflows for FY17 are 11% of opening AUM, which gives adj. PBT of £18m and EPS 108p. Chris Macdonald who is retiring will be replaced by Caroline Connellan from April.
- Valuation. The shares have been somewhat range-bound in the last year which likely reflects the relatively high valuation coupled with concerns over the sustainability of growth. They currently trade on an above average FY17 (year end June) PE of 16.9 falling to 14.4 for FY18. Brooks Macdonald has achieved a premium rating because of the relatively high growth of AUM. The 5 year average PE is nearly 17 suggesting that the shares still offer value. The yield however compares poorly with comparators at just 2.3%.
- Risks. As a wealth manager, the risks are client inflows, market levels and staff retention.