IFG Group — Update 6 December 2016

IFG Group

Meeting near-term headwinds

Update to end October

Financial services

6 December 2016

Price	144.63p
Market cap	£152m
€1.18/£
Net cash at 30 June 2016 (£m)		23.5

Shares in issue	105.4m
Free float	95%
Code	IFP

Primary exchange	ISEQ
Secondary exchange	LSE

Share price performance

%	1m	3m	12m
Abs	(5.1)	(9.0)	(13.4)
Rel (local)	(5.9)	(7.1)	(18.9)

52-week high/low

186.4p

143.9p

Business description

IFG provides financial services, comprising a platform for retirement wealth planning and personal advisory business primarily operating in the UK. Through James Hay Partnership it is one of the largest UK platform providers.

Next events

FY16 results

March 2017

Analysts

Andrew Mitchell	+44 (0)20 3681 2500
Julian Roberts	+44 (0)20 3077 5748

financials@edisongroup.com

Edison profile page

IFG Group is a research client of Edison Investment Research Limited

In its trading update IFG reported that performance has been in line with management expectations. The cooling effect of market uncertainty on growth in James Hay and financial advice client numbers, together with the impact of low interest rates, remain a near-term head wind for revenues. Even so, with Saunderson House continuing to increase profits, IFG expects to match 2015 earnings. The long-term growth opportunity presented by an ageing population and pension freedoms remains in place and to address this IFG is continuing investment to enhance its service and increase operational gearing.

Year end	Revenue (£m)	PBT* (£m)	EPS* (p)	DPS (p)	P/E (x)	Yield (%)
12/15	71.3	11.5	8.3	4.4	17.4	3.0
12/16e	77.5	10.6	8.3	4.9	17.4	3.4
12/17e	80.2	12.3	9.2	5.4	15.7	3.7
12/18e	89.3	15.6	12.1	5.9	12.0	4.1

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Trading in line

IFG reports that total assets under administration (AUA) at the end of October stood at £26.4bn, up 8% from the end of June and 12% from end December. At James Hay Partnership the number of clients, which remains the principal revenue driver, was stable although the average value per account has risen, which should be positive over time for the take up of more elements of the modular MiPlan offering. At Saunderson House, AUA increased from £4.1bn at end June to £4.5bn with the number of clients increasing by 2.6% to 1,945 over the same period. Clients are still seeking advice at higher levels than in previous years, reflecting uncertain market conditions; this increases fee income but has some impact on new client acquisition.

Outlook

We have raised our estimates for the current year to reflect the management statement’s guidance that the company is, as a whole, trading in line with 2015. Our subsequent year estimates are, at this stage, little changed although it is possible that more stable market conditions could allow growth rates for both business areas to be stronger than we have assumed.

Valuation

We have updated our DCF valuation and, reflecting the stability of our longer-term estimates, our central valuation is unchanged at 181p/share. Factoring this into a sum-of-the-parts valuation, based on an increased 2016 earnings estimate, means that lower multiples are required to match the 181p value but at 22x this would still reflect the assumption of good longer-term growth. Delivery of the expected performance for this year and resumption of faster growth in client numbers are potential catalysts for a re-rating towards our central value.

Trading in line with management expectation

In its interim management statement for the period to end October, IFG indicated that trading has been in line with management expectations as reported with the half-year results in September. Key points from the statement were as follows.

■

Management sees the business as being on course to deliver a solid set of results, in line with 2015.

■

James Hay (retirement wealth platform, leading SIPP administrator) AUA was £21.9bn at end October, up 12% from £19.5bn at the end of 2015. Net inflows of £1.4bn over this period were equivalent to 7% of the opening balance, while market and other movements accounted for the remaining 5% increase.

■

The number of accounts at James Hay was broadly stable at c 55,000 compared with both the end of 2015 and the end of June. Additions, running at 8.0% on an annualised basis, were below historical levels in the mid-teens, reflecting the unfavourable market background and were largely offset by attrition of 6.8%. At the half year IFG noted that fee changes had prompted a faster than expected drop-off from the tail of smaller accounts and this remains a factor within the rate of attrition.

■

The average account value at James Hay rose from c £0.35m (end December) to c £0.40m. As mentioned earlier, this is unlikely to influence near-term revenues significantly but should be a positive factor over time as larger accounts are more likely to use a wider range of segments within the modular MiPlan product. MiPlan now accounts for AUA of £8.6bn (39% of the total) with 23,000 clients (average value £0.37m).

■

At Saunderson House (financial adviser, discretionary manager) AUA stood at £4.5bn at the end of October, an increase of 12.5% since the end of 2015 and 9.8% from the end of June. The number of clients stood at 1,945 compared with 1,895 at the end of June (+2.6%) and 1,809 at the end of 2015 (+7.5%). As highlighted at the half-year stage, the uncertain background created by the EU referendum contributed to a higher than usual requirement for financial advice for clients. This generated higher revenue, reflecting chargeable hours, but has tended to limit the time available for client acquisition. This pattern has persisted into the second half but is still expected to normalise in due course.

■

The strategic focus of the group on developing and investing in its retirement wealth platform and financial advice business is unchanged following the assumption of the CEO role by former CFO John Cotter in September. For James Hay the main focus will be on distribution through financial advisers, although IFG reports that it is seeing growth in its direct to consumer offering given the availability of online account opening. The emphasis at Saunderson House is mainly on organic growth in advisory and discretionary services, but acquisitions would be considered, subject to cultural and operational alignment.

Financials

We have updated our estimates in line with the management’s statement that the performance will be similar to that of 2015. Previously, after the reduction of growth estimates following first half figures we had allowed for a substantial reduction in profitability (over 20% at the EBITDA level for 2016). This now appears too cautious and we have increased our FY16 EBITDA estimate by 11%. At this stage we have kept our forecasts for 2017 and 2018 close to their previous values (within 3%).

Exhibit 1: Estimate revisions

	Revenue (£m)			EBITDA* (£m)			PBT** (£m)			EPS** (p)			DPS (p)
	New	Old	% chg.	New	Old	% chg.	New	Old	% chg.	New	Old	% chg.	New	Old	% chg.
2016e	77.5	77.3	0.3%	14.8	13.3	11.2%	10.6	9.2	16.3%	8.26	7.16	15.3%	4.90	4.90	0.0%
2017e	80.2	81.3	-1.4%	16.3	16.0	1.6%	12.3	12.0	2.2%	9.23	9.03	2.1%	5.39	5.39	0.0%
2018e	89.3	89.7	-0.5%	19.7	20.0	-1.5%	15.6	15.9	-1.9%	12.13	12.42	-2.4%	5.93	5.93	0.0%

Source: IFG Group data, Edison Investment Research. Note: *Excludes exceptional items, share-based payments and discontinued businesses. **Additionally excludes amortisation of acquired intangibles, unwind of contingent consideration.

Valuation

Leaving the assumptions for our DCF valuation unchanged (including a 10% discount rate, 10x terminal multiple and 4% longer-term growth following faster, 10% growth for 2019-20), we generate the same central value as previously (181p), reflecting stable longer-term estimates for the business. Exhibit 2 shows the sensitivity of the valuation to assumptions for the discount and long-term growth rate.

Exhibit 2: Discounted cash flow valuation (p) sensitivity

Discount rate (right) and long-term growth	8%	9%	10%	11%	12%
2%	191	180	169	160	152
3%	198	186	175	165	156
4%	205	192	181	170	161
5%	212	199	187	176	166

Source: Edison Investment Research

As in our previous note, published in September, we have updated our sum-of-the-parts calculation setting the total in line with our central DCF valuation. Because our estimate for 2016 has increased, the multiples applied are lower than previously (total 22x versus 25x), although this can still be seen as reflecting the expectation of a resumption of more rapid growth (which in turn is built into the assumptions that feed into our DCF valuation).

Exhibit 3: Sum-of-the-parts valuation

	2016e post-tax profit, £m	Multiple, x	Value, £m
James Hay Partnership	6.8	20.5	139.2
Saunderson House	5.4	16.0	85.7
Operating units	12.1	18.5	224.9
Central cost	(3.4)	10.0	(34.0)
Total	8.7	21.8	191.0
IFG group value per share (p)			181
IFG group value per share (€)			2.14

Source: Edison Investment Research

Exhibit 4: Financial summary

Year end 31 December	£000s	2014	2015	2016e	2017e	2018e
PROFIT & LOSS
Revenue		65,096	71,316	77,536	80,210	89,270
Cost of sales		(54,459)	(55,864)	(61,327)	(62,564)	(68,381)
Gross profit		10,637	15,452	16,209	17,646	20,889
Gross margin %		16.3%	21.7%	20.9%	22.0%	23.4%
Other underlying expenses		(328)	(1,414)	(1,389)	(1,396)	(1,209)
EBITDA		10,309	14,038	14,820	16,250	19,680
Depreciation		(1,190)	(1,091)	(1,108)	(1,235)	(1,221)
Amortisation (exc acquired intangibles)		(950)	(1,094)	(1,941)	(2,134)	(2,350)
Share based payment charges		(287)	(204)	(197)	(230)	(230)
Total underlying operating expenses as reported by divisions		(2,755)	(3,803)	(4,635)	(4,994)	(5,010)
Underlying operating profit as reported by divisions		7,882	11,649	11,574	12,652	15,879
Amortisation of acquired intangibles		(1,701)	(1,809)	(1,781)	(1,576)	(1,395)
Operating profit before exceptional items		6,181	9,840	9,793	11,076	14,484
Exceptional items		(1,353)	(1,350)	(799)	0	0
Operating profit		4,828	8,490	8,994	11,076	14,484
Finance Income		284	569	396	92	104
Finance expense		(504)	(482)	(492)	(483)	(483)
Profit Before Tax (FRS 3)		4,608	8,577	8,898	10,685	14,105
Profit Before Tax (norm)		7,825	11,539	10,643	12,261	15,591
Tax		(3,310)	(1,900)	(2,339)	(2,351)	(2,693)
Discontinued businesses		(497)	246	0	0	0
Non-controlling interests		(134)	(598)	0	0	0
Profit After Tax (FRS 3)		667	6,325	6,559	8,334	11,412
Profit After Tax (co norm)		5,652	8,568	8,593	9,591	12,597
Profit After Tax (Edison norm)		5,889	8,731	8,750	9,774	12,780
Average number of shares outstanding (m)		104.6	105.2	105.4	105.4	105.4
EPS - Company adjusted (p)		5.40	8.14	8.15	9.10	11.95
EPS - normalised (p)		5.61	8.26	8.26	9.23	12.13
EPS - FRS3 (p)		0.64	6.01	6.22	7.91	10.83
Dividend per share (p)		4.04	4.44	4.90	5.39	5.93
Underlying EBITDA margin (%)		15.8%	19.7%	19.1%	20.3%	22.0%
Reported operating margin (%)		12.1%	16.3%	14.9%	15.8%	17.8%
BALANCE SHEET
Non-current assets		59,972	57,946	57,066	56,321	55,580
Property plant and equipment		2,491	2,597	2,754	2,719	2,723
Intangible assets		54,398	55,314	54,303	53,593	52,848
Other non-current assets		3,083	35	9	9	9
Current assets		48,405	56,359	56,803	62,045	70,341
Trade receivables		19,079	22,255	20,376	21,826	24,335
Cash & equivalents		29,326	34,089	36,427	40,219	46,007
Other current assets		0	15	0	0	0
Held for sale assets		3,544	0	0	0	0
Total Assets		111,921	114,305	113,869	118,366	125,922
Current liabilities		21,909	30,347	27,558	28,828	31,018
Borrowings		2	6,831	6,831	6,831	6,831
Trade payables		20,741	22,813	17,788	19,054	21,244
Provisions		1,015	703	1,796	1,798	1,798
Other current liabilities		151	0	1,143	1,145	1,145
Non-current liabilities		11,390	4,760	4,823	4,823	4,823
Borrowings		6,639	0	0	0	0
Provisions		1,726	1,857	2,038	2,038	2,038
Deferred tax		3,025	2,903	2,785	2,785	2,785
Held for sale liabilities		1,908	0	0	0	0
Total liabilities		35,207	35,107	32,381	33,651	35,841
Minority interests		(4)	0	0	0	0
Shareholders' equity		76,718	79,198	81,488	84,715	90,080
CASH FLOW
Operating Cash Flow		8,091	13,803	9,279	16,066	19,362
Net Interest		(188)	(162)	(216)	(391)	(379)
Tax		(2,331)	(2,226)	(1,264)	(2,351)	(3,103)
Capex		(5,087)	(5,221)	(3,965)	(4,200)	(4,225)
Acquisitions/disposals		8,602	1,800	2,934	0	0
Issue of equity		529	403	162	0	0
Dividends		(4,068)	(4,188)	(4,711)	(5,333)	(5,866)
Other		378	529	(4)	0	0
Change in net cash		5,926	4,738	2,215	3,791	5,788
FX changes		(222)	(167)	123	0	0
Opening net (debt)/cash		16,983	22,687	27,258	29,596	33,388
Closing net (debt)/cash		22,687	27,258	29,596	33,388	39,176

Source: IFG Group data, Edison Investment Research

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New York +1 646 653 7026

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Level 25, Aurora Place

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Wellington +64 (0)48 948 555

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

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