UK fund manager Rathbone Brothers presented the market with the opportunity to indulge in a little optimism on Wednesday after beating expectations for full-year profits, raising its final dividend and saying it is strong enough to take advantage of growth opportunities.
Rathbone reported a 9.5% fall in pretax profit from continuing operations to £42.8 million in 2008—a considerably smaller decline than that of the FTSE 100 index, which dropped 31.3% over the year.
The group’s core business, Rathbone Investment Management, actually managed to increase revenues and divisional profits on the back of underlying net organic growth in funds under management (FuM) of 7.4%. The division’s FuM fell 16% during 2008 to £9.4 billion but net inflows grew by 11% to £1.3 billion. In contrast, Rathbone’s unit trust division performed poorly over the year, with FuM falling by 54%.
The wealth manager proposed to raise its final dividend by 4% to 26p, bringing the company’s full-year dividend to 42p—just ahead of the market’s 41p forecast.
Reacting to the results, analyst Katrina Preston at Canaccord Adams highlighted that management has indicated that its investment management business would remain profitable at a sustained FTSE 100 level of 2,500 points. Preston’s own forecasts assume an average FTSE 100 level of 4,500 for 2009 but following today’s results she does not at present intend to change her EPS forecast of 51.9p for the year.
Rathbone also revealed this morning that its minimum regulatory capital requirement is £64 million, leaving it with a £50 million capital surplus. This minimum figure is £20 million more than Preston had expected and therefore reduces Canaccord Adams’ target price on the stock to 765p from 886. With immediate upside potential now limited to around 6%, Preston said she is forced to reduce the recommendation to Hold from Buy.
The analyst concluded, however, that Rathbone's longer-term investment case is clear and its longstanding track record of gaining market share in the wealth management space and growing earnings. “Investors are also protected by its strong capital position and a clear commitment to the dividend,” Preston concluded.
Altium Securities appeared to be similarly enamoured with the group, favouring it for its discretionary FuM and consequent high-quality earnings. Analyst Catherine Heath repeated her Buy advice today but said she is likely to trim her estimates as the original assumption of a flat FTSE 100 market in 2009 now looks to be somewhat optimistic. “We continue to believe that there will be scope for interesting acquisition opportunities this year and expect Rathbone to be well positioned in this regard,” Heath concluded.
Looking at the group’s share price, which traded 1.2% higher at 735p on the FTSE 250 index at last check, FinnCap analysts said it is a good stock but is rated as such in the current market, leaving little scope for short-term upside. Arden Partners seemed to agree: “Rathbone is a strong business and is performing defensively, but much of the premium it deserves is in the price.” The broker said the stock remains expensive compared to peers such as Close Brothers, trading on 2.8% of FuM compared with 1% for Brewin Dolphin and 1.5% for Rensburg Sheppards.
