Zeus Capital said today that it’s analysis of interim results, released on 5th December, confirm that Tatton Asset Management (LON:TAM) is growing strongly: the number of firms using its services has risen by 16% YoY, the 1H Group revenue is up 30% YoY, the 1H adjusted PBT is up 55%.
The quality of TAM’s revenue and profit growth can be seen from analysing the components of growth:
Growth in IFA firms using Tatton Capital Limited (TCL). Over the year to September the number of firms using TCL has risen 38% to 286, following investment in marketing, combined with TCL’s successful 4-year track record. Our forecasts assume growth continues at 20% pa.
Number of customer accounts per IFA firm. Over the past year the average number of accounts per IFA firm has fallen, as the number of IFAs has risen fast. Over time we expect the average to return to over 171.
Growth in assets per account. We calculate that the average value of assets in client accounts has risen by c7% pa; we expect this to continue.
Growth in AuM/Firm. We calculate the mean average assets per firm is currently £17m and note that some IFA firms have over £40m on Tatton. Over time we expect the 286 firms using TCL to increase the group AuM to £11bn.
MiFID II may encourage IFAs to switch to DFM Model Portfolio Service (MPS).Over 60% of IFAs use MPS as their Centralised Investment Proposition: two thirds use their “own MPS”; a third use “DFM MPS”. New MiFID II rules discourage “own MPS”. We expect an increasing number of IFAs to switch from “own” to DFM MPS.
Tatton (TCL) is the leading DFM MPS. It has the lowest charges, an impressive track record versus benchmarks, is on 10 platforms and, we estimate, it has over 15% market share. While our forecast assume only 200 additional IFAs using TCL over the next three years, the increase might be as high as 270 or 330 (i.e. 27% to 33% of c. 1,000 firms).
Zeus Capital Valuation
At 190p, Tatton Assest Management Plc shares are trading on 3.4% prospective dividend yield and on 20x FY(Mar)18e adj EPS. In our opinion, this does not reflect the quality of its growth.
Looking to the following year, we see prospects for over 20% EPS and DPS growth: the dividend yield rises to 4.1%; PER falls to 16.8x, the PEG is 0.80x. On a FY(Mar)19e PEG of 1.0x Tatton shares would trade on 237p.
Looking to FY(Mar)20E with £7.3 bn of AuM the PER on our forecasts falls to 13.9x and 4.8% dividend yield. When the AuM reaches £10.0bn, we expect the PER to fall to 10x and dividend yield rise to 6.7%.
In our opinion when TCL has £10 bn of AuM, group EPS should reach 18p and the stock, TAM, could trade on circa 20x (i.e. 360p). Discounting this back at a risk discount rate of 40% pa, implies a mid-2018 valuation of 255p.