Tatton Asset Management (LON:TAM), interim results to 30 September 2018 reveal:
29.5% YoY rise in Tatton’s assets under management to £5.7bn (Sept 18: £4.4bn); an increase of £0.8bn in 6 months;
Average AUM inflows were ~£90m, up from ~£80m per month at Sept 2018 (Zeus forecasts assume £87m a month for FY(Mar)19E);
Group revenue rose 15.7% YoY to £8.45m and adj profit rose 8.3% to £3.35m, mainly driven by TIML;
Tatton Investment Management (“TIML”) grew its revenues by 45.0% to £4.03m and profit grew 60% to £2.05m;
Paradigm Mortgage Services increased its client base and its revenues by 24% to £1.28m and profit contribution by 36% to £0.7m;
Paradigm Partners, IFA support services business, grew its client base but revenues fell 10% to £3.12m and profit contribution fell 14% to £1.54m;
Operating cash generated was £4.4m; closing net cash was £11.6m.
Paul Hogarth, Founder and CEO, observed: “We have delivered a positive first half with continued growth in revenue, profit and earnings underlining the strong demand by independent financial advisers for our low-cost discretionary fund management service for the mass affluent. … Paradigm Mortgages performed very well and continues to gain market share and we look forward to the re-branding of Paradigm Partners in January 2019. We remain confident of achieving further progress through the rest of the financial year.”
Zeus view: As expected TIML was the main driver of revenue and profit growth. The Paradigm business units have been growing their client bases and with the rebrand to “Paradigm Consultants” in January 2019, the Paradigm businesses should contribute to profit growth. Overall these results support our expectation of adj PBT growth of 21% and adj EPS growth of 18%. We have adjusted the composition of our forecasts (assume no market appreciation), nudge up our revenue forecasts, but leave our Adj EPS and DPS forecasts unchanged.
Valuation: At 250p, Tatton shares are trading on a March 2019 3.4% prospective dividend yield, on 22.0x adj EPS and a PEG of just over 1x. The quality and sustainability of the Group’s growth arguably suggests investors could value this stock on 22x our 2020 forecast adj EPS of 13.7p (i.e. 301p a share).As we have observed before, when TAM has £10 bn of AuM, Group EPS should reach 18p and the stock, TAM, could trade on circa 20x (i.e. at 360p per share). Discounting this back at a risk discount rate of 40% pa, implies a late-2018 valuation of 301p per share (i.e. 20% above the current price of 250p). See our research published in January 2018 for further details of our analysis.