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Is it time to back next stage of Brewin turnaround?

Is it time to back next stage of Brewin turnaround?

Brewin Dolphin’s strategy to improve profitability and make the business more efficient looks like it starting to pay off.

A £4.8 million outlay on redundancy costs, and an additional FSCS levy of £1.1 million weighing on pre-tax profit which was down 4% on the year to £28.6 million. Nonetheless, the national wealth manager has reaped the rewards of moving to a unified pricing structure with a 25% fee rise to £152 million over the year. After a strategic review in 2011 under old chief executive Jamie Matheson to make the group 'leaner', Brewin said it was on track to achieve an operating margin of 25% by the end of the financial year in 2016. Its strategy is underpinned by initiatives to improve market competitiveness and drive organic growth, lower costs and achieve operational efficiency.

Analysts have welcomed the progress Brewin Dolphin has made so far alongside the market - with a 48.5% share price over the past year to 282.9 pence - but should investors back the next stage of the company's turnaround?

Canaccord Genuity analysts Robin Savage and Arun Melmane remain positive on the new management's prospects, upgrading Brewin Dolphin from a hold to a buy and increasing its price target to 304p from 285p.

This is a far cry from October, when the analysts downgraded the stock to a hold in expectation of lukewarm results.

At the time, they had demanded more clarity from Brewin, particularly following the closure of three of its branches in Inverness, Hereford and Teesside - a move aimed at bringing about greater efficiencies and cost savings in the business.

The analysts noted: ‘These results and the accompanying investor presentation confirm that management are on track to meet our forecasts and achieve a 25% earnings before interest and tax (Ebit) margin in 2016.’

They were 'particularly impressed' by the quality of Brewin's assets under management, pointing to 14% of sitting in portfolios over £5 million for 250 high net worth families.

RBC Capital Markets also reacted positively to the results, upgrading its rating on the stock to an ‘outperform’ and raising its price target to 310p on 25 November.

Increased dividend forecasts

Brewin Dolphin’s board upped the final dividend by 40% to 5.05p, and increased the full year dividend by 20% to 8.6p.

Daniel Stewart & Co analyst Simon Willis welcomed Brewin’s new dividend policy, based on a target pay-out ratio of 60%-80% of adjusted earnings per share, describing the group's preliminary results as ‘above all expectations’.

In light of this, Canaccord Genuity increased the dividend per share (DPS) forecasts for 2014 by 10% to 11p, and 25% for 2015 to 15p, but maintained its profit and loss forecasts.

The analysts see potential upside of 8.6% to their new 304p December 2014 price target, representing an increase in relation to their 285p June 2014 target.

Looking ahead, Canaccord Genuity is upbeat. ‘Over the next twelve months we are positive on the UK and see scope for the APCIMS index to rise 5% [per annum], and Brewin Dophin shares to generate a 13% TSR,’ the analysts noted.

On Thursday at 10:50 Brewin Dolphin’s share price was trading at 282.9 pence, up 2.56% since Brewin's results.

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