Tatton Asset Management Plc (LON:TAM)
In the fast-moving world of UK financial services, firms of Independent Financial Advisers (“IFAs”) need support. In 2007, Tatton Asset Management (the “Group”) launched Paradigm Partners (“PPL”) which provides compliance and other services to IFAs; it also created Paradigm Mortgage Services (“PMS”) which now services c.1,100 firms.
In 2012, the Group’s third division*, Tatton Capital Limited (“TCL” or “Tatton”) launched its on platform discretionary fund management service to IFAs. In 2016 and 2017, it received Wealth Adviser Award, Best Boutique Wealth Manager. In this new space, Tatton is viewed as a market leader.
As Group Assets under Management (“AuM”) benefit from the combination of increasing numbers of firms using Tatton and increasing average AuM/firm, we expect group revenues and profits to rise by over 20% pa.
The Group’s management is, in our opinion, one of the most experienced executive teams in the IFA services industry.
Growth in firms using TCL comes both from the circa 350 IFA firms which use PPL’s services and other Directly Authorised (“DA”) firms. Investment in marketing, combined with TCL’s successful 4-year track record, should enable the Group to grow the number of firms using TCL by over 15% pa.
Growth in AuM per firm, based on our calculations, was 13% pa in FY16 and 15% in FY17. We calculate the mean average assets per firm is currently £18m and note that some IFA firms have over £40m on Tatton. Our forecasts assume growth in AuM per firm of 7% pa.
The Group’s exposure to regulatory risk is low as its client IFAs are Directly Authorised. Low regulatory risk means low regulatory capital requirements and consequentially would enable a generous dividend distribution policy, in our opinion, of over 70% of earnings.
The Group has a strong balance sheet: cash of over £10m (18p per share) and no debt.
Valuation. At 178p, circa 10% of Tatton Asset Management Plc share price is surplus capital and Tatton shares are trading on 3.6% prospective dividend yield and on 19.2x FY(Mar)18e adj EPS.
Looking forward to the following year we see prospects for over 20% EPS and DPS growth.
With £4.0 billion AuM on 12 May 2017, Tatton’s enterprise value is 2.24% of the AuM.
