Close Brothers has been an example to other lenders that have come to the stock market in how to be a disruptor and take market share away from the incumbents. The banking side, about 90 per cent of revenues, has grown its book in areas such as car loans, commercial finance and housebuilding because it has been able to step in and provide finance during the financial crisis when the big banks were unwilling to do so.
The problem is that perhaps those other lenders, including Shawbrook and Aldermore, that specialise in lending to SMEs may have learnt that lesson too well and are now providing some competition. Close’s strategy is plain: it will not sacrifice margin for loan book growth even if its rivals choose to do so.
Close says the overlap with those other banks represents just a quarter of its business, but the competition is there. It is difficult to read too much into one reporting period, but the loan book in the six months to the end of January grew by just 1.7 per cent, a sharp contraction from 2.7 per cent in the first quarter and 9.6 per cent year on year. Most analysts, though, expect loan book growth to revert to a more normal 7 per cent or so over the full year.
Aside from that caveat, Close saw all three sides of the business grow in its first half. Winterflood Securities gained from the turbulent markets that either saw retail clients snapping up bargains or exiting. The fund management business still looks sub-scale, with assets under management of a bit more than £10 billion, but has been refined with the disposal of underperforming businesses.
In banking, the stand out was property lending. Close, like most others in the sector, eschews the central London market but is expanding in the regions where there are plenty of small housebuilders desperate to cash in on the housebuilding boom.
The dividend has not been cut for 34 years and yesterday’s interim payout was up 5 per cent at 20p. The forward yield on the shares, up 21p at £15.60, is a useful 3.9 per cent. The shares, on 12 times earnings, are a dilemma. They were well below £10 just after the EU vote and anyone who took this column’s advice and bought should take some profits. The overall trajectory is still up.
My advice Buy
Why Some profit-taking looks understandable but Close retains strong positions in its chosen markets and the outlook is positive
TP Icap
No great surprise that barely two months after TP Icap, the former Tullett Prebon, took over the voice-broking activities of Icap, the inter-dealer broker has found yet more available cost savings, raising its annual target by £20 million to £80 million by 2019.
TP is now the biggest such broker globally, so the figures for 2016 apply to the old Tullett and are largely historical, although the improvement in its markets in the last quarter as the US election reintroduced volatility into forex and interest rate derivatives markets is encouraging. This does not seem to have continued into 2017, according to TP, judging by reported figures from Icap’s electronic platforms and with revenues flat in real terms.
Things will get tougher from here on as the translational benefits of the lower pound drop away. Against this, broker compensation costs, which measure the productivity of staff, have improved and were heading further down even before the merger.
A look at the pro-forma figures, which explain what the group would have looked like had the deal been done at the start of last year, is instructive. Margins at Icap were significantly lower than at Tullett, which shows the progress that can be made. The problem with IDBs is that although the long-term outlook is good in terms of banks coming back into the market, there is no short-term visibility. The shares, off 20p at 466p, sell on 12 times earnings and are up from well below £3 last June, which does not suggest an immediate upside.
My advice Avoid
Why The shares have come up some way on the Icap deal
SIG
The most obvious solution to SIG’s problems of high debt and lagging performance would be a rights issue, but this apparently has been ruled out; and indeed given that the shares, up 7¾p at 115p, were at above £2 in mid-2015 before the first of two profit warnings, this would be an expensive way out.
SIG, a supplier of heavy building materials, was so absorbed with initiatives such as a new IT system and distribution network that the company failed to serve existing customers well enough.
This coincided with a difficult price war in some of its markets. Falling profits, down 19 per cent last year on an underlying pre-tax level at £77.5 million, meant that debt rose to more than twice earnings. The company insists that this can be reduced by slackening off on those initiatives, through efficiencies and through its strong cashflow, while the dividend has been cut.
The market remains competitive and price inflation is increasing in the UK, half its business, as noted by others in the sector, while debt reduction will be a slow business. The shares had started to recover and sell on 12 times earnings, but it looks too soon to get on board.
My advice Avoid
Why Recovery and debt reduction are some time away
And finally...
Burford Capital is one of those stocks that it has taken the market a while to get a handle on — it invests in litigation finance and has just bought a large competitor, Gerchen Keller Capital. The 2016 figures were startlingly good — net profits up by 75 per cent and with an 83 per cent rise in commitments to new litigation investment. Burford has also achieved the sale of part of one earlier investment on lucrative terms. The shares, tipped at the start of this year at 572½p, added 21½p to 754p.
