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Is Brewin Dolphin's turnaround now priced in?
by Danielle Levy on May 28, 2014 at 15:44
As Brewin Dolphin delivered a six-month 25% pre-tax profit rise, analysts are divided over how much further its recovery story has to run.
Over the six months to the end of March, pre-tax profits soared to £29.7 million, while assets under management rose from £20.4 billion to £22.7 billion year-on-year. Its profit margin also increased to 20.3% from 17.1% in the same period last year, edging closer towards the company's strategic target of over 25%. Total revenue rose 5% to £146.3 million over the period.
However, it was not all cheer. The company, headed by David Nicol (pictured), faces a £32 million tech writedown in its next accounting period as it ditches plans to implement the Figaro software system across its discretionary business, alongside £15 million in additional costs to be committed.
RBC Capital Markets reacted to the results by downgrading the stock to a 'sector perform', as analyst Peter Lenardos suggests that the company's turnaround is already priced in, with the stock trading 306.7 pence. At 15:30 it was up 1.2% on day.
'Brewin's management team has accomplished much in their short time at the company. They recapitalised the balance sheet, committed to both higher margins and higher dividends, and set a strategy to grow and simplify the business. We believe the accomplishments to date are impressive,' he said.
'However, we also believe that the benefits of an investment in Brewin (increasing operating profit margin, dividend payout ratio of 60%-80%, increasing proportion of discretionary funds under management, high proportion of recurring revenue) are reflected in the share price.'
In the analyst's view, the upside potential to RBC's price target excluding dividends is 4% and he is concerned whether growth in discretionary assets is fast enough to justify a premium to the sector.
'While Brewin should provide shareholders with a predictable and increasing dividend, the share price appreciation should be more in line with the sector average in our opinion. In addition, growth in Brewin’s discretionary funds under management during the first half of the financial year 2014 was only 5.6% annualised and we do not believe that Brewin is growing fast enough to justify a significant premium to sector multiples,' Lenardos added.
RBC Capital Markets has now placed a price target of 315 pence on the stock.
Daniel Stewart & Company reacted more positively to the news, however, taking the view that Brewin is the most attractive stock in its sector.
Analyst Simon Willis noted: 'Brewin has made good progress towards its 25% target for the adjusted profit before tax margin and, given the valuation, we view the stock as one of the most attractive in the sector.'
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