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Tatton Asset Management Plc

Tatton Asset Management Plc 1H trading update

What’s new: Tatton Asset Management Plc (LON:TAM), has provided an unaudited update ahead of its interim results to 30 September 2018, which will be released on 15 November. Highlights are:

Tatton’s assets under management rose 16.3% in 6 months to £5.7bn (March 2018: £4.9bn) an increase of £0.8bn in 6 months (29% rise YoY);

Paradigm Mortgage Services added 71 member firms in 6 months to reach 1,290 firms (i.e. 5.8% rise from March 2018: 1,219 firms; 12.9% rise YoY);

Paradigm Partners added 14 firms in 6 months to reach 382 member firms (i.e. 3.8% rise from March 2018 to 368 firms; 7.3% rise YoY);

Management remain confident that the Group continues to trade in line with the Board’s full year expectations.

Paul Hogarth, Founder and CEO, observed: “We have delivered a good start to the year and we remain confident of achieving further progress through the rest of the financial year. We are pleased with the continued growth of our assets under management which is a further endorsement of our DFM proposition that both lowers the cost of investment and delivers against given investment objectives while maintaining the highest investment management standards.”

Zeus view: All Tatton’s divisions are growing well. While there was no comment on revenues, profit or cash generation, the growth in AuM and member firms support our expectation of adj PBT growth of 21% and adj EPS growth of 18%.

We note that the Wealth Managers’ index (WMA Index, Bloomberg code: FTPIBP) rose 5.8% in the 6m period to 4310. Adjusting for this market rise, we calculate net inflows were c £86m a month (i.e. in line with our forecasts which assume £87m a month for FY(Mar)19E).

In October 2018, the WMA index has fallen 3.4% to 4162 but is still 2.2% above 31 March 2018 levels. We are confident in our forecasts, which assume no market appreciation.

Valuation: At 267p, Tatton shares are trading on a March 2019 2.9% prospective dividend yield, on 23.5x adj EPS and a PEG of just over 1x. The quality and sustainability of its growth arguably suggests investors can look to value this stock on 2020 forecasts: 3.4% dividend yield, on 19.5x adj EPS and a PEG of 1x.

As we observed in our research published in January 2018, 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. 12.7% above the current price).