TEAM plc is the topic of conversation when Hannam & Partners’ Director and Research Analyst Ben Williams caught up with DirectorsTalk for an exclusive interview.
Q1: Ben, last week you initiated research indicating significant upside for investors against today’s share price. What is it that you like so much about the company?
A1: Thanks for the question, and it’s a big question, right? I want to start with wealth management, wealth management is a lovely space in that there’s a significant unmet need for financial advice, and so I think it’s a structural growth area, it’s one I spend a lot of time on. It’s also one where you see strategic investors paying a lot more for wealth management assets than the public markets at the moment are doing. So, for example, Pollen Street Capital just bought Mattioli Woods at 16 times forward earnings.
I also like that when wealth management companies achieve scale, they tend to end up with sustainably high capital returns, you see good operating margins in all of the bigger players.
Within wealth management, the highest growth you’ve seen has been in the provision of what are called managed portfolio services so where a wealth manager is actually the asset manager. They’re doing the investment, but in a very structured, disciplined, programmatic way and that tends to be very scalable so, for example, it was a major part of Bruin Dolphin, which was bought by Royal Bank of Canada. I believe that part of the reason that Bruin was bought by RBC was exactly that they had a well-developed MPS within it.
So, that’s the industry.
Coming to the company, I first met Executive Chairman Mark Clubb a couple of years ago. He’s a proper investor, he’s fascinated by markets, he understands the need for financial advice and was already thinking about how can I provide that service to wealthy individuals in the international financial centres.
The company at that point, it already had links with advisors in Gibraltar, Spain, Portugal, and South Africa but that was before the major recent acquisitions. The company at that time, it had a Jersey base, now I love Jersey, it’s a safe, secure, established jurisdiction, it’s very attractive, I would say, to people working aboard who want to be absolutely certain that there’s stability there.
By April 2022, the company had bought and started to put together Omega and Concentric, which were, if you like, the engine, they were the managed portfolio service and advisors. So, initially, the company was operating as a consolidator of, if you like, financial advisors within Jersey, which was a really attractive thing to do because there are no other consolidators in Jersey, which is very different to the UK, where there’s lots of competition.
The performance of the NPS is staggering, right? A really strong performance. So as, if you like, a product suite of investment possibilities for your clients, I thought that was really good so that’s then, and now let’s fast forward to where we are now after results.
The company’s just raised £1.2 million, it’s shown again backing of significant institutional shareholders and some new shareholders have come in at the same time. As the Chairman Mark Clubb has said at the time of the full year results and more
recently, there’s clearly visibility to that magic break-even point and the operating leverage in the model is huge so the expression that I think they’ve been using is the concept of escape velocity. When the flows come in, you should see in a lovely, relatively automatic way, the profits flow.
On top of that, you’ve got the fact that management have been buying shares, they’re heavily incentivised already, management have been buying shares, Mr. Clubb’s just bought another £170,000, he’s up to 13.4% of the company so I like that.
They’re massively ambitious, they have this midterm ambition of hitting £20 million of revenues, 30% plus EBITDA margin and £4 billion of AUA, so assets under advice and management. Those, to my understanding, given the size of the funnel, which I think we’ll come to at some point, that seems logical to me.
Q2: Now, you describe the company as a Jersey mini-Tatton, fuelled by expat growth. What did you mean by that?
A2: It is a little bit cheeky to use the name of Tatton, which is clearly a bigger business, but it’s factually correct in the sense that Tatton is a highly successful provider of a suite of managed portfolios, so of an MPS, a managed portfolio service. Tatton’s now up to £14 billion of AUM and has a 51% operating margin, and it’s achieved that mostly within the UK so I wanted to lead investors to think of those dynamics.
The expat growth bit is the fact that in the second half of 2023, the company made a couple of acquisitions, mostly in developed Asia, but also Africa, or major international finance centres, precisely designed to be a really, really big funnel to drive growth.
So, the way it works is that the level of incentivisation of the advisors within those acquisitions have been put together to create, TEAM International is very high. So that, as a division of TEAM PLC is not designed to be creating profit at that point, the profit comes from the flow of those assets back to the engine in Jersey, where they will be managed and the incremental cost of managing those new assets is negligible, that’s the whole point.
In the UK context, that’s why Tatton is special, and that’s why the company is special as well, because as more AUA flows to become assets actually under management by the Managed Portfolio Service in Jersey, the profits from that should drop straight down to the bottom line.
Q3: What will you be expecting from the company over the coming 12 months or so?
A3: So, the company has been a really acquisitive business, it’s issued equity and some cash to put together the components that are required for future growth. So, as I said, there were initially this consolidation of some advice firms in Jersey, and then the managed portfolio service, and then recently, this what I think is a significant marketing machine, in what’s now called TEAM International. This is now about the organic growth and the drop through of assets coming from TEAM International to the engine in Jersey.
So, specifically, as you’ll see in the research, we have expectations of flows from TEAM International of about £200 million of new AUA in FY24 and £450 million in FY25 and if you look at the size of that marketing funnel, there are already 58 advisors, plus another 18 in the pipeline, and you know that flows in recent periods are already 100 plus, you can see that that’s already happening.
So, the specific KPI, if you like to be checked at the next news release will be, well are flows coming through in the way you expected?
I have a logical reason to believe that that’s likely to be the case for the reasons I’ve outlined, famous last words but there’s not technological risk, I don’t think there’s regulatory risk, it literally is if the flows come in, the profits will follow.
So, those are the key things to be looking out for.
Q4: Just turning back to your note, how did you get to a 70 pence per share fair value?
A4: Obviously in terms of my expectations, I see this as a very high growth business. So it’s always difficult to know how many years to look out. As I said, the company is given a midterm ambition of £4 billion of AUA and of £20 million of revenues. I have explicit forecast out to 2027 and I’ve run my estimates to that point, I’ve used a 10% discount rate and after my explicit forecast, I’ve used a 15% growth rate i.e. massively below what I explicitly expect in the next few years.
That leads me with a business that, I think, in the next 12 months reporting period at the back end of that is when the company should be break even. So, my 2027 operating margin expectation is 18%, now 18% is really low in the context of the industry and frankly, that should just climb as more assets come in but that’s nonetheless the basis for my medium term and then longer term cash flow still running at that 18%.
Now, those are the inputs that give me a 70p fair value, and that’s obviously discounted back to today but I don’t think it’s right to use just one angle to look at these things, I’m not cherry picking one valuation metric. If I look at the earnings that I expect in 2027, simply if I do 14 times 2027 earnings, I’d be looking at a share price of just under a pound in 2027, if I discount that back today, that would be 65p. Simply, if I put roundabout that midterm target, if I put that on just 10 times forward earnings and discount that back today, I’d be around about 80p and frankly, 10 times would be,
if this growth comes through, that would be way too low a multiple. So could it be 15? Yes.
So, there are lots of different metrics that get me to 80p to 100p, I think, frankly, with a 22p share price on the screen today, as an investor, I’m thinking about upside/downside, which is why I’m very happy to speak to anybody, very happy to hear that anybody’s bought the equity, which I can’t do.
Q5: Finally, then, where can people access your research?
A5: Well, our research, it’s on the Hannam Partners research website, you just have to register, you can download it there. It should very soon be available on the company’s website, and it’s also on Research Tree and many of the other aggregators so it should be easy to find.
