Brewin Dolphin got whacked yesterday, its shares down by 11 per cent, yet on the face of it, there was not much in the wealth manager’s first-half results to explain the sell-off.
Under David Nicol, its chief executive, the company is reaping the rewards of its greater focus on discretionary wealth management and a more disciplined attitude to costs. There was further progress in fattening up the profit margin, which improved again to 22.3 per cent, from 20.8 per cent in the previous half, not far shy now of Mr Nicol’s 25 per cent goal. Discretionary assets under management grew by 6 per cent, with outflows of £600 million from defecting clients more than offset by £1.1 billion of new money.
However, in private meetings with institutional investors and analysts, the management mood was a little subdued. Revenue margins may be slimmer because of greater flows from intermediaries for lower-margin off-the-peg services. In the core discretionary business, organic growth — new business won by the existing workforce — was a disappointing 4 per cent. Some rivals are doing rather better.
The tailwinds for the wealth management industry are excellent. Favourable demographics and pension reform should generate a lot of new business.
There are, however, two risks. One is the old-fashioned business model still pursued by Brewin, under which it takes commission income from clients for share trades. The more it turns over a client’s portfolio, the greater its revenues. Brewin is moving towards a greater emphasis on fees based purely on assets under management, but rather more slowly than its peers.
The other worry for some analysts yesterday was whether the focus on cost-control might alienate some clients or dampen future growth. That weak organic growth number could be signalling something.
After yesterday’s retreat to 315p, the shares trade on 17 and a half times expected profits this year. The prospective yield is 3.6 per cent. Most of Mr Nicol’s future efficiency improvements are already priced in. The aim now has to be to convince investors that the more streamlined Brewin is still able to keep existing clients happy — and win new ones. Share price progress may be slow until that case is made.
Mkt cap £879m
Yield 3.6%
£150,000 Typical minimum client pot
MY ADVICE Take profits
WHY The margin-fattening story has run its course; the company’s ability to grow its client base is unproven
The latest missive from Card Factory was reassuringly solid for shareholders who signed up at the float last year. Like-for-like sales growth is holding up in the shops; new store openings are continuing apace; the main online business is doing well; and the bonus dropping like an unexpected banknote from the greetings card was the promise of a cash return before the end of the financial year in January.
Card Factory has defied the sceptics, growing to 783 stores, of which only five are loss-making. It reckons there is room for 1,200 in the UK, giving it scope for years more growth before saturation or cannibalisation sets in. Its success stems from its vertical integration. It sources most of its products not from China but from its Wakefield-based factory of card designers, printers and motto-writers.
After a 5p fall in the share price to 336p yesterday, the company trades on a pricey 19 times forecast profits this year. If the cash return is done via a special dividend, as opposed to a share buyback, the yield could easily be more than 5 per cent.
That will help to support the share price, but over-expansion has left card retailers horribly soggy before. It is only three years since Clinton Cards went bust.
Mkt cap £1.15bn
Margin 25%
MY ADVICE Avoid
WHY Pretty track record, shame about the valuation
Not many asset classes have done quite as well as continental commercial property in the past six months. There’s been money to be coined from German office blocks and French shopping centres. TR Property Investment Trust, which holds property shares and a small dollop of physical property, has been a huge beneficiary.
Its net asset value grew by 24.8 per cent in the year to March. Indeed, the return would have been even more impressive but for the 14 per cent slide in the euro against the pound. In local currency terms, eurozone property equity returns rocketed by more than 40 per cent.
All this has very little to do with tenants paying more rent and everything to do with the European Central Bank’s continuing €60 billion-a-month stimulus package, which has intensified a desperate search for yield, pushing up asset values. At some point that stimulus gets switched off or even reversed.
However, there are two reasons for confidence, TR says. First, there is no sign of the speculative development that has presaged crashes in the past. Second, asset values are not being pushed up by leverage.
The shares, at 314p, trade on a 1.3 per cent discount to net assets. A final dividend of 4.75p gives a 7.7p total, putting the shares on a yield of an unexciting 2.5 per cent. While TR warns that its income could fall this year because of the redevelopment of its Colonnades development in Bayswater, it says it is prepared to dip into reserves to sustain the payout.
Mkt cap £996m
Yield 2.5%
MY ADVICE Sit tight
WHY Well-managed property vehicle, but no longer cheap
And finally…
Weir Group’s shale agony has further to run, according to a bearish note from Panmure Gordon. The pump maker’s key oil and gas division will suffer another year of sliding profits next year, it said, because of a further contraction in the US shale industry, whose capital support via junk bonds was “a financial ticking-bomb”. Short-sellers led by Lansdowne Partners are big bears of Weir, with outstanding down bets of £219 million against the company. The shares fell 14p to £19.88.
