Brooks MacDonald has now released their interim results for the year ending 2017.
Revenues increased when compared to the first half of last year due to a £5M growth in investment management revenue, a £779K increase in Channel Islands revenue, a £640K growth in fund and property management revenue and a £228k increase in financial planning revenue. Amortisation grew by £508K, share based payments were up £266K and other admin costs grew by £5.3M. We also see a £109K gain from changes in the value of assets, a £207K reduction in impairment charges and a £1.3M gain from changes in the value of deferred consideration which meant that the operating profit grew y £2.4M, although discounting these non-core items the operating profit grew by £643K. There was a £133K reduction in finance costs of deferred consideration and the share of losses from the joint venture fell by £92K so that after tax charges grew by £481K the profit for the period came in at £6.6M, a growth of £2.2M year on year.
When compared to the end point of last year total assets decreased by £2M driven by a £1.1M decline in client relationship contracts, a £1.1M fall in available for sale financial assets and an £866K decrease in receivables, partially offset by a £1.1M growth in cash. Total liabilities also decreased during the year due to a £3.1M reduction in payables and a £2.8M fall in deferred consideration. The end result was a net tangible asset level of £21.9M, a growth of £4.7M year on year.
Before movements in working capital, cash profits increased by £1.8M to £10M. There was a cash outflow from working capital but this was less than last time and after taxes were broadly flat, the net cash from operations came in at £6.3M, a growth of £2.5M year on year. The group spent £440K on fixed tangible assets, £943K on intangible assets and £1.6M on deferred consideration although they received £1.2M in proceeds from the sale of available for sale financial assets which gave a free cash flow of £4.6M. This covered the £3.1M spent on dividends and the £541K spent on their own shares which meant there was a cash flow of £1.1M for the half year and a cash level of £20.5M at the period-end.
The pre-tax profit of the Investment Management business was £9.8M, a growth of £1.2M year on year as it continued to grow its professional connections. They have seen continued traction across all of their client service lines. In particular they have renewed their focus on the Bespoke Portfolio Service and continue to benefit from changes in the pension landscape as well as growth of ISAs. The pre-tax profit of the Financial Planning business was £177K, an improvement of £190K when compared to the first half of last year.
The pre-tax loss of the Funds and Property Management business was £17K, an improvement of £1.1M when compared to the first half of 2016. Funds had a strong period largely due to growth in the Multi Asset Funds and the Defensive Capital Fund which now exceeds £300M. The Levitas risk rated funds continue to grow in scale but at a slower rate than originally forecast at the time of acquisition which has resulted in a reduction of £1.3M in the estimated fair value of the deferred consideration payable. The property management business saw an increase in value of property assets under administration over the period to £1.21BN which has been reflected in an improvement in earnings.
The pre-tax profit of the International division was £339K, an increase of £152K year on year following the fall in revenue which resulted from the change in focus from advisory to discretionary clients in 2016.
Funds under management grew by over £1BN in the period and all three investment businesses, investment management and funds in the UK along with the Channel Island funds achieved double digit growth. This consisted of £332M of organic growth and £697M of investment growth. The discretionary funds under management rose to £9.33BN representing an increase of 12.4% compared to the WMA index which rose by 7.8%.
The group have made substantial progress on the delivery of their IT upgrade which is due to complete in July this year. They hope shortly after this to be able to merge their two back office departments into one entity which will enhance reporting for their clients. The board have also reviewed the opportunities offered by adding further UK regional offices to their existing geographic footprint and will be expanding their coverage through the opening of an office in Cardiff later in the year.
During the period the group disposed of its holding in the Student Accommodation fund at a market value of £484K, realising a gain of £13K; and its holding in GLIF at a market value of £735K, realising a loss of £9K. Also during the period the group acquired an offshore bond at a cost of £5K and concerted an existing loan of £150K issued to a third party into redeemable preference share capital. The loan was previously included within receivables and has been reclassified as an available for sale financial asset. The preference shares carry an entitlement to a fixed preferential dividend at a rate of 8% per annum.
It has been announced that Chris MacDonald will retire as CEO in April having led the business for the last 25 years. He will remain on the board as Deputy Chairman, however. Caroline Connellan will replace him as CEO having most recently been head of UK Premier and Wealth at HSBC.
As of the period-end the carrying amount of the group’s investment in joint venture North Row Capital has been further reduced to an estimated recoverable amount of zero by recognising an impairment loss of £193K. This arose as the forecast future cash flows from the partnership are estimated to accumulate slower than originally expected and as a result it is not expected that the group will realise a return on investment in the joint venture for the foreseeable future.
Going forward the group are on track to deliver in line with their expectations for the full year.
At the current share price the shares are trading on a PE ratio of 32.6 which falls to 21.8 on the full year consensus forecast. After a 25% increase in the interim dividend, the shares are yielding 1.6% which increases to 1.9% on the full year forecast.
On the 26th April the group released an announcement of funds under management for Q3. Discretionary funds under management totalled £9.932BN, an increase of 6.45% over the quarter. Of this, £291M was net new business and £311M investment performance. As a comparison the WMA index increased by 2.78% over the same period. Going forward, whist some concerns over client sentiment remain given the economic outlook, Brexit negotiations and upcoming elections, they are focused on maintaining the impetus during Q4.
Overall then this has been a very strong period for the group. Profits increased, net assets grew and the operating cash flow rose with plenty of free cash being generated. All parts of the business saw an improved performance with investment management doing very well and the funds and property management business nearly breaking even. This all comes at a price, however, and with a forward PE of 21.8 and yield of 1.9% these shares look a little pricey to me.
On the 27th July the group released a trading update covering the whole year where they state that underling profits will be in line with expectations. They enter the new financial year with strong momentum across the group while remaining cautious around markets and client sentiment. As of the year-end, discretionary funds under management totalled £10.5BN compared to £8.3BN at the same point of last year. Of this 26% growth, 11.5% was net new business and 14.5% was investment performance. This compares to the FTSE Private Investor Balanced Index which increased by 10.5% over the year. In Q4, FUM rise by 5.3% with 3.2% of this new business and 2% performance compared to the index which was up just 0.3% over the quarter.
Allowing for future growth, the group will be investing more broadly in their functional capabilities and as a priority will be focusing on enhancing their risk management and operational framework. They will be increasing their capabilities, including the appointment of a Chief Risk Officer and a COO. These initiatives will add about £4M to operating expenses in 2018, half of which will be repeated in subsequent years.
Also, following a review they have decided to deal proactively with certain legal matters arising from the former Spearpoint business which was acquired in 2012. These matters relate to a number of discretionary portfolios. The group intend to contact relevant clients shortly to explain how they propose to resolve these matters. While they are accepting no legal responsibility they are acting to protect their client’s best interest. They expect this exercise will cost £6.5M which will be taken as an exceptional item this year.