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Tatton Asset Management Plc

Tatton Asset Management Year End update

What’s new. Ahead of its results on Monday 3 June, Tatton Asset Management (LON: TAM) has confirmed that the Group is growing strongly and as a result “Group revenue and operating profit are within the range of analyst estimates” (Consensus range: revenue £16.9m to £17.5m; adj operating PBT £7.2m to £7.8m).
The update reveals:

Tatton’s assets under management (AuM) have risen 24.5% YoY to £6.1bn (Zeus forecast £6.0bn);

Paradigm Consulting has increased its member firms by 6.0% to 390 (1H: 3.8% growth; 2H: 2.1% growth), but notes “downward pressure on revenue from consultancy services and the impact of reduced flows on the Paradigm wrap platform” will be evident;

Paradigm Mortgage Services has increased its firms by 14.3% to 1,393 (5.5% above Zeus forecast of 1,320 firms for March 2019) and it is outperforming the mortgage market and gaining market share.

Paul Hogarth, Founder and CEO, observed “Tatton Investment Management … continues to increase AUM and attract net inflows in difficult markets. The sustained growth in AUM and new firms using Tatton is confirmation that the service and proposition continue to resonate with IFAs and their clients by delivering consistent investment returns at a competitive market price.”

Zeus view: Group AuM of £6.1bn is just above our forecast of £6.0bn and Paradigm Mortgage Services is growing its membership faster than forecast. Our forecasts assume a 10% fall in Paradigm Consulting revenue, following the 10% fall in revenue 1H on 1H. Wrap fees in FY18 were £4.18m and £1.96m in 1H19; wrap fees for 2H19E may be lower than the £1.89m we had forecast.
We leave our financial forecasts unchanged. We will review our forecasts for 2020 and 2021, when we see the divisional and consolidated results on Monday 3 June. We note that Tatton’s group operating margin is over 40% and incremental profit margins are high.

Valuation: At 234p, Tatton shares are trading on a 3.6% dividend yield and on 21x EPS for the year to March 2019. In our opinion, this does not reflect the quality of its growth.
For the year to March 2019, we see prospects for over 20% EPS and DPS growth: the prospective dividend yield is 3.9%; prospective PER is 17x, and PEG is 0.9x. On a FY(Mar)20e PEG of 1.0x Tatton shares would trade on 288p (i.e. 23% above the current share price of 234p).

Looking one year further forward to FY(Mar)21e with £8.9 bn of AuM, the PER on our forecasts falls to 14x and dividend yield to 4.7%.