Today we confirm our forecasts for FY(Mar)19E and FY(Mar)20E for Tatton Asset Management (LON:TAM) and publish for the first time our forecasts for FY(Mar)21E.
Key points in this note include:
The underlying growth in AuM from new firms using Tatton Investment Management, “TIML” is >20% pa. Since 31 March 2017 (i.e. just before IPO), the number of firms using TIML has increased by ~168 (i.e. 71%) while the total AuM has risen by 48%: new firms start with a few clients and small AuM, and then grow by >20% p.a. before AuM growth moderates.
As new firms add AuM to TIML, inflows should rise to over £100m p.m. AUM inflows per month rose by 12.5% YoY to £90m (Sept 2018: £80m).
We can foresee AuM rising £5.7 billion to £10.8 billion, if the 236 recently joined firms increased their average AuM on TIML from £5.1m to that of more established firms which have ~£26.6m on TIML (Exhibit 4). The increase in AuM could add £10m of revenue and £8m of adj PBT.
TIML is the main driver of Group revenue and PBT growth of 14% and 20% 3-yr CAGR to March 2021, respectively.
We calculate the lifetime value of £300,000 for a typical firm with the potential to contribute £30m of AuM to TIML, based on an 11% discount rate.
Paradigm units (Paradigm Consultants & Paradigm Mortgage Services) generate ~£5m and central costs are ~£2m. Although they are growing their client bases by ~10% pa, profit growth broadly offsets growth in central costs.
Forecasts: We have maintained our forecasts for FY19E and FY20E. We publish for the first-time forecasts for FY21E which assume 100 new firms join TIML in the year to March 2021 and the rate of growth of AuM per firm for those firms which joined post IPO continues to be in line with experience.
We assume surplus capital continues to build on the Group balance sheet. Alternatively, the Board could raise its pay-out ratio for FY20E and FY21E from 67%.
Valuation: As Tatton Asset management has material surplus equity and two very different business units growing at different rates, we have calculated a sum of the parts (SOTP) valuation (Exhibits 3 and 20) which suggests a current value of 283p (17% above the current price of 242p) and November 2019 value of 355p a share.
Our SOTP valuation suggests 90% of equity value appreciation might be justified by the growth of firms using TIML (assuming existing firms continue to grow).
As we have observed before, when the Group has £10 billion of AuM, Group EPS should reach 18p and the stock, could trade on circa 20x (i.e. at 360p per share).
