Tatton Asset Management plc (LON:TAM) is the topic of conversation when Zeus Capital’s Research Analyst Robin Savage caught up with DirectorsTalk for an exclusive interview.
Q1: Tatton Asset Management released its interims to the 30th of September, what were the key points that you noted?
A1: Well, they had previously put a trading update out in October in which they said that there had been a 12.6% rise in the revenues to £11 million, 21.9% rise in first off adjusted operating profits of £5 million and a 17.4% rise in the assets under management over the six month period to £7.8 billion. So, they have restated that, obviously, because that’s the numbers for the period.
These interims also reveal that the current level of assets under management is up 3.8% to £8.1 billion in the third quarter and they’ve also released that the adjusted EPS was up 21.5% to 6.55p and they have increased the interim dividend by the 9.4% to 3.5p per share.
Obviously, there’s the disclosure of the balance sheet, the most important part of which is the £13.3 million net cash position and they have also renewed their bank facility, £10 million bank facility, which is unused but this now has a £20 million according facility should they need it.
Q2: So, with all that in mind then, how are you going to change your forecasts?
A2: Between the interim dividend of 3.5, we have set our full year dividend expectation at three times the interim so that is 10.5p, which is 3% up on our previous estimates of 10.2p per share. But apart from that, we’re going to leave our forecast unchanged. So, uh, with the first half revenue of 11, we’ve got £22 million for the second half and with the first half profits before tax of £5 million, we’re going for a £10 million expectation for the full year.
So, we’re going to leave our forecasts as they are for the year to March 2021 and the main reason for that is that there still is some uncertainty, there is some volatility, there are a lot of things happening over in the US in terms of the presidential election and the appointment of Biden , no doubt on the 20th of January. Here in the UK, we’ve still got Brexit going through at the end of this year and obviously, we’ve still got the pandemic which is causing the world to have various types of economic lockdown, which is slightly disruptive to say the least.
So, I think it’s the right thing to do to leave our forecast where they are which is with market expectations set at the 30th of September so in other words, 3/4% down from where we are at the moment.
So, we’re going to leave our forecasts for this year unchanged but we are going to set an expectation for the year to March ’22. There again, we’re going to leave our market expectations at the 30th of September 2020 level and and we’re going to expect an 11% rise in revenue, a 10% growth in adjusted EPS and a 4% rise in dividend share and dividend per share being set at 10.9p. So adjusted EPS of 14.4 and dividend per share being set at 10.9p.
So, you might say, well that isn’t extremely fast growth but it is 10% growth in the business and in the earnings and as I’m setting up the expectations at a very prudent level, I genuinely expect to be able to raise those expectations over the next 12/18 months.
Q3: What does that mean in terms of valuation implications?
A3: At 284p a share at the moment, that share price does reflect its record of delivering double-digit revenue and profit growth. Yes, I would accept that moment we’re expecting, if the economic conditions remain volatile and we end up with implications of economic lockdown, that the growth might only be 10%, but in more favourable conditions, you can expect the growth to be higher than that.
So, Tatton Asset Management, at the moment, trading on a current year PE ratio of around about 22 times which does reflect this level of growth but the dividend yield is 3.7 so good dividend yields with growth coming through and its balance sheet, you can feel very comfortable about that.
On our’ 22 forecasts, which assume market at current levels and with only 0.8 of a billion pounds of net inflows so below the billion plus that we would normally expect, the company is trading on under 20 times PE ratio and at 3.8% dividend yield.
So, I would reflect that this is a business which is able to double its assets under management without getting any new clients, through natural organic transfer of client assets from the IFA firms it’s got established relationships with. It’s got a very strong balance sheet, it’s got substantial net cash and it’s got a very cash-generative business model which enables it to pay an attractive and growing dividend.
I think this is a business which is set to grow and deliver an attractive dividend.