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Hardman & Co

Arbuthnot Banking Group Plc Tripedalism – three legs are better than two

Hardman & Co ReportArbuthnot Banking Group Plc (LON:ARBB) now has three legs to its business, each offering good growth options. First, the Private Bank, Arbuthnot Latham (AL) has invested heavily in staff, products and new offices with the profit payback now visible. Secondly, ABG owns a 18.9% stake in Secure Trust Bank the rapidly growing challenger bank (market value £76m). Finally, we estimate ABG has c£150m of surplus capital. With surplus liquidity, it has the capacity for significant organic or inorganic growth. The options to deploy this capital are virtually limitless. Our capital fully deployed valuation basis is 55% above the current price.
► Strategy: The capital released by selling 6m STB shares gives ABG enormous flexibility. It has built an infrastructure for growth but can now accelerate this dramatically. In uncertain times, niche lending opportunities may offer excellent returns and value-added acquisition opportunities may be more available.

► H116 results: In H116 AL delivered further excellent growth with lending up 13%, deposits up 22% and assets under management up 14%. Underlying divisional profits grew from £3.8m in H115 to £4.3m. The sales of Everyday Loans Ltd and STB saw a net post-tax, post minority gain of £167m.

► Valuation: Our base case valuation is £20.09 slightly above the current NAV. Using assumptions based off deploying all the surplus capital, this increases to £23.23 with further upside potential from acquisitions. These valuations provide both significant current upside and steady progressive growth going forward.

► Risks: As with any bank the key risk is credit. AL’s existing business should see below market volatility and so the main risk lies in new lending. We believe management is cognisant of the risk and has historically been very conservative. Other risks include reputation, regulation and compliance.

► 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 34% upside, rising to 55% on the full deployment of capital.