Tatton Asset Management PLC (LON:TAM) is the topic of conversation when Zeus Capital’s Research Director Robin Savage caught up with DirectorsTalk for an exclusive interview
Q1: Now, Tatton Asset Management, which was listed on AIM in July, they’ve just released their interim results for the six months to 30th September. What is it that Tatton Asset Management do?
A1: Tatton provides support services to Independent Financial Advisers, to IFA’s, and in 2016 and 2017, Tatton was awarded Best Boutique Wealth Manager at the Wealth Adviser Awards. Recently, it was voted Best Discretionary Fund Manager, beating the likes of Rathbones, Brewin Dolphin, Old Mutual and all the other familiar names, it was voted Best Discretionary Fund Manager at the ILP MoneyFacts Awards.
Tatton Capital manages the wealth of over 44,000 clients introduced by 286 IFA firms.
In addition, the group also provides compliance and other services to 356 directly-authorised IFA firms and it also runs a Mortgage Club for thousands of directly-authorised IFA firms.
So, in short, Tatton Asset Management provides services to directly-authorised IFA firms, at present its market share of IFA firms is under 5% and over the past year, Tatton has increased the number of firms it services by 17%. Over the past 6 months, it has also grown its relationships by 20% and this growth should continue.
Q2: How do these interims results compare to your expectations?
A2: Well, the Tatton Capital, the boutique DFM (Discretionary Fund Manager) is the main source of revenue and profit growth. The key variable there is the Assets under Management (AUM).
Over the 12 months, to 30th September 2017, the AUM rose 33% to £4.4 billion and we’d expected it to get to £4.3 billion so it was just ahead of our expectations.
The net inflows continue to flow at a rate of over £80 million per month and this is over 2.1% growth per month.
As a result of these interims, we have nudged up our expectations for the financial year to 31st March 2018 by 5% and the revenue for Paradigm Partners and Paradigm Mortgage Services by 8%.
For 2019, we’ve increased the revenue expectations by 5% for Tatton Capital and 5% for the mortgage services and Paradigm Partners.
So, we’ve nudged up our revenue expectations, but we’ve also nudged up the cosy expectations so that we can leave the earnings per share and dividend per share expectations unchanged. When we get closer to the year-end, we will have another look at where we are when they have a trading update.
Overall, we continue to expect Tatton’s earnings per share to grow at around about 20% per annum.
Q3: Tatton shares are currently trading at 190p, do you think this is a good time to buy Tatton shares?
A3: Well, the share prices should reflect both the quantum of the company’s earnings but also its growth potential. At about 190p, I think it’s 187p at the moment., it’s trading on calendar year 2018 PE ratio of around about 18 times and that compares to 17 times for Brewin Dolphin and 18 times for Rathbones.
So, if you were to compare the growth rates for the three businesses, what you’d see is that Tatton has considerably higher growth rate than its larger peers.
I expect Tatton to be able to grow its earnings at 20% per annum, whereas Brewin Dolphin and Rathbones will be lucky to get 10%.
So, I think the peers, Brewin Dolphin, are fairly rated, because the quality of their earnings are high but in my opinion, the quality of Tatton’s earnings is higher than its peers. This is because the revenue margins, the amount the customers actually pay, is lower and therefore, the sustainability of that business is higher.
So, I expect Tatton’s Price Earnings Ratio to rise above 20 times and this is because it’s underlying growth rate of earnings is around about 20% per annum and the quality of the growth is high.
With a 70% dividend pay-out ratio and 20 times PE ratio implies a dividend yield of 3.5% but remember the double-digit growth rate should mean that that dividend yield will grow as the earnings grow.
So, I think this is a very good time to think about buying Tatton shares.