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Hardman & Co

Arbuthnot Banking Group Plc Big special dividend, accelerated investment

Hardman & Co ReportArbuthnot Banking Group Plc (LON:ARBB) in its recent trading statement, advised it would make a special dividend of 300p per share (cost £45m) in Q416 against our forecast 150p. Additionally, it has accelerated its expansion into commercial banking and expects to hire six additional experienced staff early in 2017 as well as opening a Manchester office. It also advised that Q316 drawdowns had been a little slower than expected. The overall effect is to see a reduction in 2016/2017 earnings estimates, primarily from higher investment costs, while 2018 is broadly unchanged with the new staff starting to deliver greater business growth.

 

► Special Dividend of £3 per share: Given the capital gains ABG made earlier this year, we had been expecting a further 150p p/shr special dividend. In the event a further special dividend of 300p p/shr (cost of c £45m) was declared. It will be paid on 18 November 2016 to shareholders on the register on 21 October 2016.

► Accelerated investment in commercial banking. Management also advised that it was accelerating investment as “the disruption in the larger UK banks has led to a number of direct approaches from experienced bankers”. We have built an extra £1m of cost into our forecasts in 2017 with payback starting in 2018.

► Other issues: Management note that drawdown of approved lending is a little slower so we have reduced our 2016 year end loan book by £15m (2017 by £20m). As expected, the fall in interest rates will squeeze deposit margins. There was no comment on the 18.9% associate Secure Trust Bank’s performance.

► Valuation: Our base case valuation is now 1920p (formerly 2009p) giving an upside of 18%. The sum of the parts uses 2017 estimates which have been reduced (on 2018 numbers the fall would be marginal). In our Gordons Growth model, we value the capital repatriated at par rather than at a 1.5x multiple.

► Investment summary: Arbuthnot Banking Group Plc offers strong franchise and continuing-business profit growth. Its balance sheet strength means it has wide ranging strategic options to develop organic and inorganic opportunities. The latter are likely to increase in uncertain times. Management has been both innovative but also very conservative in managing risk. Our base case valuation has 18% upside, rising to 26% on the full deployment of capital.