Tatton Asset Management PLC (LON:TAM) is the topic of conversation when Zeus Capital’s Research Director Robin Savage caught up with DirectorsTalk for an exclusive interview
Q1: Zeus Capital helped list Tatton Asset Management on to the AIM market earlier this year, what is it that they actually do?
A1: TAM provides support services to Independent Financial Advisers, to IFA’s. In 2007, it launched Paradigm Partners which provides compliance and other services to IFAs and later launched Paradigm Mortgages provides a mortgage club to over 1,000 IFA firms.
In 2012 the Group launched its on-platform discretionary fund management service proposition for IFAs, it’s essentially DFM services that are normally provided to very wealthy individuals but they provided it to IFA’s who maybe servicing wealthy individuals or people of more modest means. This business is called Tatton Capital and it is a market leader in this particular type of DFM service & in 2016 and 2017, TAM was awarded Best Boutique Wealth Manager at the Wealth Adviser Awards.
So, in short, they provide DFM and other services to IFAs.
Q2: What is the main driver of the company’s revenue, profits and dividends?
A2: Well, the revenues from the 2 Paradigm divisions, Paradigm Partners and Paradigm Mortgages, cover the group overheads, Tatton Capital the boutique DFM for IFA’s is the main source of revenue and profit growth. There will be revenue growth in the other areas, or there should be, but the main source is going to be from the DFM business and they the key variable is the Assets under Management (AUM).
At the end of March 2017, so earlier this year, their AUM was £3,853 million so £3.9 billion and it is growing. Prior to the IPO in July 2017, the management said that it is receiving around £80 million to £100 million a month of net inflows and that’s about 2%-2.5% growth per month so that’s very very fast.
Our forecasts assume no rise in the equity or bond markets, a good indicator for that is the Wealth Management Index, the WMA index, that is up 0.8% since March 2017. So, there shouldn’t be any movement because of markets and we are expecting, in the first 6 months of the company being floated, £420 million of net inflows, that is only £70 million a month because we decided to set the bar at a level which they should be able to exceed.
So, if the IFA’s continue to direct client funds to the company’s award-winning platform then we would expect AUM, revenues and profits to rise. The management will probably make a statement on its trading performance for the 6 months to 30 September in October and they will report the interim results in November or December this year.
We expect their earnings to grow around about 20% per annum, driven by the growth in the assets which then drives the growth in the revenues and then the gross profits profit and dividends.
Q3: Now, the price of Tatton shares at IPO was 156p, shares now are trading around 14% higher at about 178p. So, is this a good time to buy shares?
A3: Since the IPO, 10 million shares have been traded and the weighted average price is 184p so this is actually 3% above the current price so judged by the activity since the IPO, this is actually a good time to be buying. The highest price that’s been paid for Tatton shares was £2 and this is 11% above the current price. So, arguably, you are buying, if you were to buy them now, at what is a better price than many people have bought the shares at.
Most importantly, their forecast growth rate is above its Price Earnings (PE) ratio so the Price Earnings ratio at the moment is around about 19p for the current year and is expected to deliver 20% growth. That should be seen in the context of its peers, the private clients, stockbrokers which are trading on PE Ratios which are much higher than their growth rates so the discretionary managers like Brewin Dolphin and Rathbones where the underlying growth is significantly less than 10% and Rathbones is actually trading at a higher PE.
I think that Tatton Asset Management at 178p is good value compared to Brewin Dolphin which is trading on a PE ratio of 18.4 with much lower growth rates and Rathbones which is trading on over 20 times. I think the peer stocks are fairly rated because the quality of the earnings streams from those businesses is high but the quality of the earning streams from Tatton are also high and the share price should also reflect the growth rate.
So, I think if you buy the shares, clearly you are expecting it to continue to grow and I urge everyone to have a look at the Tatton Asset Management website for further information – http://www.tattoninvestments.com/investors/
