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Brewin revenues fall on trail switch

Brewin revenues fall on trail switch

(Update) Brewin Dolphin’s revenues took a tumble over the 12 months to the end of June, as its switch out of trail and fall in commission income took its toll.

Nonetheless, the firm’s discretionary asset growth drive continued unabated over the three months to the end of June with a £1 billion inflow.

Discretionary assets stood at £23.7 billion at the end of June, up from £21.3 billion at the end of September. This represents a growth rate of 7% year-to-date on an annualised basis. Total asset growth was more muted however.

Assets under management grew by £0.6 billion to £36.7 billion over the three months to July, compared to £34.9 billion at the end of September, representing a 2% growth rate on an annualised basis.

Advisory assets were down 27% at £5.6 billion compared to the end of September 2013, while execution-only assets rose 10% to £7.4 billion over a nine-month period, benefitting from £0.6 billion of transfers from other services, in particular advisory dealing. The group said net outflows from advisory services of £0.4 billion over the quarter was a result of the final phase of repricing and a service review, which had led £0.1 billion to be successfully converted over to discretionary.

Total income at £73.1 million at the end of June was down £0.2 million year-on-year, as a 12% fall in commissions to £20.9 million took effect.

Other income declined by 40% to £18 million year to date due to the firm’s switch to non-trail paying fund units. The group also highlighted the current low interest rate environment and said the overall fall in income was common with industry trends. Within this category, financial planning revenue increased 22% to £9.5 million year-on-year.

Core income of £67 million over the quarter was 5% higher year-on-year, however.

Higher assets under management and the firm’s move to a national rate card drove a 10% rise in core income to £201.4 million year-to-date.

Chief executive David Nicol commented: ‘The outlook remains positive as the transformation and growth strategy for the business is implemented. Solid performance in the quarter, underpinned by a robust balance sheet, gives us confidence that continued delivery against this strategy will create long term value for both clients and shareholders.’

The results follow Brewin's decision back in May to take a £32 million hit and a further potential £15 million on IT costs as the firm opted to not to implement Figaro software after the project overran.

At 9:04 Brewin Dolphin's shares were trading at 301.1 pence, up 0.3% on the day.

RBC Capital Markets reacted to the results by maintaining a sector perform rating and upping its price target up from 315p to 320p.

Analyst Peter Lenardos highlighted £0.5 billion in positive investment performance from its discretionary assets on a beginning balance of £22.7 billion, representing an investment return of 2.2%. As this exceeds the FTSE 100 rise of 2.1% and 1.6% by the FTSE WMA Private Investor Series Balanced index, he concluded: ‘Brewin’s investment performance outperformed where it mattered.’

RBC also highlighted 81% of assets in discretionary, a trend they anticipate will continue, reaching 82% at year-end, 83% at year-end for the 2015 financial year, and 84% the following year.

‘We believe Brewin warrants a slightly higher multiple than the sector average of 13x since the company benefits from stable cash flows, a high proportion of recurring revenue, a strong balance sheet with surplus capital, and ongoing margin expansion potential,’ analyst Lenardos noted.

‘Further, we believe shareholders should benefit from higher and more predictable capital returns as a result of the company’s dividend policy to distribute between 60% and 80% of adjusted diluted EPS on an annual basis.’

Nevertheless, RBC is cognisant of the potential headwinds facing the stock, These include volatility in markets and Brewin failing to control costs and improve efficiencies within the business to the level expected.

‘In addition, wealth managers, like Brewin Dolphin, could face increased regulatory scrutiny, which could increase operating costs,’ the note added.

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