Investors in Rathbones must be rubbing their hands with glee at the takeout multiple secured by Brewin Dolphin, its rival wealth management group. Royal Bank of Canada’s £1.6 billion offer last week represented a 62 per cent premium to the undisturbed share price, or roughly 23 times earnings forecast by analysts for next year, head and shoulders above an average multiple of 14 over the past decade.
For Rathbones, that meant an immediate 12 per cent rise in the FTSE 250 constituent’s share price and a steady re-rating ever since. But while the Brewin bid might have increased the likelihood of an offer emerging, that doesn’t mean it will be as generous.
Rathbones has been a long-time laggard of both Brewin and Brooks Macdonald, the smaller discretionary management specialist. Takeover offer aside, Rathbones’ shares have generated a decent enough total return of 50 per cent since the first lockdown took effect in March 2020, but that’s almost half that delivered by Brewin and less than the 85 per cent generated by Brooks. Stretch that comparison back to the Brexit referendum and that gap widens. Rathbones has a return of 4.8 per cent, versus 61 per cent delivered by Brewin and 78 per cent by Brooks.
Even after gaining heat over the past week, the group is still valued at just under 13 times forward earnings, cheaper than Brewin than even prior to the RBC approach emerging. But there are good reasons for that. The core investment management business has been growing at a slower organic rate, recording net inflows of £800 million last year after excluding its acquisition of Saunderson House. That equates to net annual growth of 1.8 per cent, versus the 4.4 per cent recorded by Brewin Dolphin over its last financial year. The same dynamic was present in 2020.
Margins over the next two years are expected to decline from the 27.7 per cent recorded last year to somewhere around the mid-20s as Rathbones steps up investment in technology upgrades, primarily across client-facing platforms, and takes the impact of wage inflation. Ploughing £40 million into technology over this year and next means that Shore Capital expects flat earnings per share until 2024. The risk? That the timeframe or budget for those projects slips, even if Rathbones isn’t undertaking a more burdensome overhaul of its custody and settlement systems, which has caused wealth managers to slip up in the past.
Yet Rathbones still has a “a rarity value”, reckons Shore. Indeed, with Brewin taken out, its scale, legacy and the strength of the brand within the wealth management sector make it a prime target for a larger rival or bank seeking to move into a structurally growing industry.
Shore puts a fair value of £25 on Rathbones’ stock, applying a 10 per cent discount to the group for its slower organic growth and unit trusts business, which accounted for almost a fifth of funds under management at the end of last year. That price might be 17 per cent higher than the present share price, but it still equates to only 17 times the earnings forecast by analysts next year, below the Brewin takeout multiple.
The burden on household budgets from increased costs might result in more spending and less saving, but savers that have enough to stump up for the services of a discretionary wealth manager such as Rathbones, where investors hand over the day-to-day running of their portfolio, should be more insulated against the pinch of inflation. The volatility affecting markets adds another opportunity for would-be bidders. It seems a matter of when, not if, someone takes a shot at Rathbones.
ADVICE Hold
WHY Likelihood of a bid emerging has increased given the lack of larger-scale wealth managers in the UK market
4imprint
Think of ways to play the economic revival and banks and recruitment firms are the most obvious candidates. A more left-field nominee might be 4imprint.
The company makes promotional pens and mugs and other branded merchandise for corporate clients. Fewer trade events and training days mean fewer orders, so the pandemic was bad news for business, but recovery from the worst days of Covid-19 was a natural catalyst for the shares last year and that could continue in 2022 — although inflation and its impact on smaller and medium-sized businesses in the United States, where 4imprint makes the bulk of its revenue, could stymie that.
The more immediate impact on the group’s cost base has been mitigated in part by price increases, but that needs to be finely balanced against remaining competitive when taking market share is the main growth avenue.
There are other levers to pull on the cost side. The greater use of online marketing versus direct mail, along with a recovery in underlying demand, meant that revenue per marketing dollar rose to $6.17 last year, from $6.03 the year before. There is a virtuous circle between 4imprint’s place as the largest distributor of branded promotional merchandise in America and its desire to take a greater share of what is a highly fragmented market, in the geographical span of its reach and the breadth of product range.
Orders were above the 2019 level during the second half of last year, which gives confidence that, on an annual basis, revenue could fully recover to the pre-pandemic level this year.
When rising rates mean that highly rated technology stocks are falling out of favour, smaller companies, which by virtue of their size can have greater growth potential, could be a good alternative. Peel Hunt, the house broker, reckons that earnings will grow at a compound annual rate of 33 per cent out to 2024. Shares in 4imprint might have risen by almost half over the past two years, but a price/earnings growth ratio of 0.9 indicates that its earnings recovery potential has been underappreciated by the market.
ADVICE Buy
WHY Recovery potential has not been built into share price
