Zeus Capital analysis of maiden full year results, released on 27th June, confirms that Tatton Asset Management Plc (LON:TAM) is growing strongly: the number of firms using Tatton’s DFM MPS has risen by 44% over the past year and group operating profit has risen 45%.
The quality of TAM’s revenue and profit growth can be seen from analysing the components of growth:
Growth in IFA firms using Tatton Capital Limited (TCL). Over the year to March 2018 the number of firms using TCL has risen 44% to 341. The increase of 100 follows investment in marketing, combined with TCL’s successful 5-year track record. We expect growth to continue at 100 firms pa.
Number of customer accounts per IFA firm. Over the past year, the increase in firms has depressed the average number of accounts per IFA firm by 14% to 143. Over time we expect the average to return to over 170.
Growth in AuM/Firm. We calculate the mean average assets per firm is currently £16.7m and note that some IFA firms have over £30m on Tatton. N.B. 341 firms with £30m/firm implies potential AuM of £10.2 bn (see page 4).
MiFID II may encourage IFAs to switch to DFM Model Portfolio Service (MPS). Many IFAs use “Advisory MPS” as their Centralised Investment Proposition. To these IFAs the attractions of Tatton’s new style “DFM MPS” evolved by Tatton are clear (i.e. good performance, low costs). In addition, new MiFID II rules discourage “own Advisory MPS”. We expect an increasing number of IFAs to switch from “own Advisory MPS” to DFM MPS operated by Tatton.
Tatton (TCL) is the leading DFM MPS. It has the lowest charges, an impressive track record versus benchmarks, is on 11 platforms, and we estimate Tatton has over 15% market share of a growing market.
Zeus Capital Valuation
At 232p, Tatton shares are trading on a March 2019 3.4% prospective dividend yield, on 20.5x EPS and on a PEG of 1.0x. In our opinion, this valuation reflects the quality of its growth.
For the years to March 2019 and 2020, we see prospects for over 20% EPS and DPS growth. On a FY(Mar)20e PEG of 1.0x Tatton shares would trade on 287p (i.e. 24% above the current share price of 232p).
In FY(Mar)20e with £7.2 bn of AuM, the PER on our forecasts falls to 17x and dividend yield to 4.0%.
In our opinion, when Tatton Asset Management Plc 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 mid-2018 valuation of 255p per share (i.e. 10% above the current price of 232p).
