We initiate today on Brooks Macdonald. Prospects for revenue and profitability growth look encouraging as we examine a number of key factors including:
- Management's ambitious organic and acquisitive growth plans.
- BM is operating in a huge market with substantial medium-to-long-term tailwinds.
- It has a track record of delivering superior investment returns, which is one of the most important factors used by financial advisers when selecting an investment manager.
- FUM growth has been solid in recent years (12% CAGR over 4-5 years), fuelled mainly by investment performance and attractive-looking acquisitions, with quarterly flows accelerating sharply over the last 18 months, and expected to contribute more to FUM growth in the future.
- It is in the final stages of completing a multi-year re-engineering of operational processes and technology. Benefits are already being realised but a platform for scalability has been created, with the potential to increase profit margins as the business grows.
Funds under management (FUM) totalled £17.3bn on 31 Dec 21 and in its last full financial year (FY21 to 30 Jun 21) BM’s revenue was £118m (up 8.8% on FY20: £109m) and underlying PBT was £30.6m (up 32.5% on FY20: £23.1), which is evidence of operational leverage kicking in.
Based on its growth ambitions (reaching £26-£27bn FUM in the next 5-6 years, excluding growth from acquisitions) and the potential for further operational leverage, our fundamental DCF valuation is 3,250p per share, 49% above the current price (although this gap has widened with recent equity market falls). In addition, BM’s PER of 17.4 is 30% below the sector median of 24.7.
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