Tatton Asset Management Analyst Q&A: AuM 4% above Zeus Capital expectations (LON:TAM)

Tatton Asset Management plc (LON:TAM) is the topic of conversation when Zeus Capital’s Research Analyst Robin Savage caught up with DirectorsTalk for an exclusive interview.

Q1: Tatton Asset Management has provided a 6 month trading update to 30th September, what key points did you note in this update?

A1: The company is the provider of asset management and other services to UK Independent Financial Advisors and it’s 6 month trading update reveals a 17% rise in Assets under Management, double digit revenue growth and increasing operating margin as the business scales and they’ve made a positive outlook statement.

So, in terms of the numbers, what they have released is group revenues for the first half of £11.0 million and that is up 12.6%. They’ve announced first half operating profits of £5 million which is up nearly 22%. As I mentioned, they’ve released their Assets under Management on the 30th September o £7.8 billion which is up over 17%.

Market movements and performance added 12.5% to the asset growth and net inflows added £238 million which is 4.9% at opening Assets under Management and interims will be announced on Wednesday 18th November

Outlook commentary concludes that “we remain optimistic and confident that the Group will continue to grow and make progress” and we wait for the detailed commentary which will come out on 18th November.

Q2 How does this compare to your forecasts?

A2: Well, we expected the Assets under Management to get to £7.5 billion so actually, the actual assets, as it turned out, were 4% above our expectations and I would say that is mainly due to outperformance relative to the Wealth Manager’s index.

In October, the Wealth Manager’s index has risen a further 1.6% and assuming flat markets and net inflows of £80 million a month over the next 6 months, we expect the company’s AUM to reach £8.4 billion by 31st March 2021. We maintain our estimated average AUM of £7.5 billion to the year to March 2021 and we maintain our P&L forecasts.

With first half revenue of £11 million and first half operating profit of £5 million, we continue to expect full year revenue of £22 million and £10 million operating profit, which prudently implies the same P&L in the second half as in the first half.

When we get the full interims on the 18th November, we’ll get the divisional revenue and profit split and that should help forecasting for the year to March 2021 and even maybe forecasts beyond 2021.

Q3: How do you view Tatton Asset Management in terms of a valuation?

A3: First of all, the company has a strong balance sheet, it’s got no debt, it’s got substantial surplus net cash and it has a cash generative business model which enables it to pay dividends so it’s in a good position.

I suppose I should say that’s it’s got a social distanced business model whereby it can continue operating pretty much unimpacted by the impact of any lockdown measures.

Over the past 6 months, the company’s share price has risen 13% from 250p to 283p at the close of play yesterday, after having reached a high of 304p. This morning, the shares have risen 7% to 302p and that 302p, the shares are trading on 23 times current year estimate, our current year estimates of fully diluted earnings per share of 13.1p and on a 3.4% dividend yield, assuming our estimate of 10.2p total dividend for the year.

So, the dividend yield looks attractive and the PE ratio of 23 effectively reflects the strong growth that the company has and should continue to deliver in terms of its dividend.

While market forecasts creates difficulty for precise forecasts, the company’s trading update confirms that its processes enable IFA’s to manage client assets safely through these volatile markets and it’s very very encouraging.

This update suggests the full interim results on 18th November will impress the market while the update today made no mention of a dividend, we would expect the interims to include an interim dividend which may, to many investors, help prove the value.

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