Share plc — Encouraging trends

Share plc — Encouraging trends

Share’s H117 figures announced in August were ahead of management expectations, reflecting robust trading volumes and the benefit of partnership agreements feeding into volumes and revenue. This has prompted us to increase estimates for this year and next. For the moment profitability is still muted because of the investment the company is making in IT in order to deliver a better customer experience. Assuming continued growth in the number of customers and assets under administration (AUA), operational leverage could provide further positive surprises.

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Written by

Share

Encouraging trends

H117 results & trading update

Financial services

8 September 2017

Price

27.62p

Market cap

£40m

Net cash (£m) at end June 2017

7.8

Shares in issue

143.7m

Free float

31%

Code

SHRE

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.8

12.1

(2.6)

Rel (local)

4.5

13.0

(10.2)

52-week high/low

29.00p

23.75p

Business description

Share plc’s main subsidiary is The Share Centre, which is a self-select retail stockbroker that also offers share services for corporates and employees. It has a relatively high proportion of income from fees.

Next events

Q3 trading update

October 2017

Analyst

Andrew Mitchell

+44 (0)20 3681 2500

Share is a research client of Edison Investment Research Limited

Share’s H117 figures announced in August were ahead of management expectations, reflecting robust trading volumes and the benefit of partnership agreements feeding into volumes and revenue. This has prompted us to increase estimates for this year and next. For the moment profitability is still muted because of the investment the company is making in IT in order to deliver a better customer experience. Assuming continued growth in the number of customers and assets under administration (AUA), operational leverage could provide further positive surprises.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/15

14.1

0.6

0.40

0.74

69.3

2.7

12/16

14.6

0.0

0.00

0.25

N/A

0.9

12/17e

18.0

0.5

0.29

0.30

94.3

1.1

12/18e

19.0

0.8

0.43

0.50

64.1

1.8

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

H117 results

Share’s AUA increased by 14% to £4.3bn from end 2016 compared with an increase of 3.3% in the FTSE All-Share. Total revenues increased by 23% from H116, within which dealing revenues increased by 45% and fee income 8%. Operating costs increased by 15%, partly reflecting spending arising from the digital transformation programme. This left the operating loss lower at £0.2m versus £0.7m, while underlying pre-tax profit increased from £0.11m to £0.31m. Shortly after the results, a supplementary trading update reported that a potential partnership agreement Share announced it was working towards last year will not proceed. It will receive £0.9m in compensation for the costs already incurred, which will augment the cash position of £7.8m at the half-year end.

Outlook

After a period of sustained strength there is a risk that UK equity market volatility may rise given the range of political and economic uncertainties that prevail. However, for the moment investor confidence is holding up and Share itself reports trading volumes remain well ahead of last year. On a longer view the investment being made in IT systems should help sustain the market share gains Share has made while increasing the scope for a geared improvement in profitability as the company gains scale.

Valuation

When compared with two peers, Hargreaves Lansdown and Alliance Trust Savings, Share appears reasonably or modestly valued (page 10). A DCF valuation allows us to capture both the near-term muted profitability and a potential strong improvement as operational gearing comes into play. This gives an indicative valuation of 30.5p (29p previously).

Investment summary

Online execution-only stockbroker

Share plc operates the Share Centre, a retail stockbroker that offers investors dealing, ISA, SIPP and investment club accounts. Share has total assets under administration of £4.3bn and c 250,000 customers. As well as signing up clients individually, it has acquired business through partnerships with companies such as Henderson, Barclays and Computershare. As an example, in the case of Computershare it provides a share dealing service for companies that use Computershare’s corporate sponsored nominee dealing service. This is branded as Computershare but uses the Share platform and services.

Share adopted a flat fee structure in 2013 under which account fees do not vary with assets under administration. Income from transaction charges may be on a percentage basis but can also be fixed per bargain. Share also earns an interest margin on money held on deposit, but this is now much lower than in earlier years following the reduction in interest rates and accounts for less than 4% of total revenue.

Last year Share embarked on a programme of investment with the aim of delivering a digital transformation in order to improve the customer experience and create greater flexibility and scalability.

Balance sheet strength

At the half year end Share had net cash of £7.8m including cash held in trust for clients of £1.3m. In terms of regulatory capital the company has substantial headroom with capital resources at the end of June 2017 of £15.3m, 2.7 times the requirement.

While Hargreaves Lansdown has signalled a higher regulatory capital requirement during the summer, this reflected the substantial growth in scale and increased complexity of the business, and we do not expect Share to be subject to the same considerations.

Valuation

While Share is undertaking investment in IT, profitability is being depressed and prospective P/E ratios are elevated. However, looking further ahead Share should see the benefits of operational gearing assuming it can achieve growth organically and through partnerships and acquisition. When compared with Alliance Trust Savings (appraised value) and Hargreaves Lansdown, Share’s valuation relative to revenue is lowest (after adjusting for surplus capital). Its adjusted value to AUA is markedly cheaper than Hargreaves Lansdown but more expensive than Alliance Trust Savings, although Share does earn a higher yield on AUA than the latter (for further details see Exhibit 12, page 10).

Our DCF model produces an indicative value of 30.5p (previously 29p), but we note the sensitivity of this calculation to the pace with which profitability improves following the completion of the digital transformation programme.

Sensitivities

Among the sensitivities for Share are developments in the equity market, changes in competitor behaviour, resilience of the IT systems on which the business depends and the potential for regulatory changes to increase costs and influence the competitive environment.


Retail stockbroker with a flat fee structure

Business background and profile

The Share Centre, Share’s main business, was established in 1991 by the current chairman, Gavin Oldham, to provide execution-only stockbroking services to individual investors. The company’s shares were admitted to trading on AIM and PLUS Market in 2008.

In addition to share dealing accounts, The Share Centre also offers accounts for ISAs, SIPPs and Investment Clubs. It has c 250,000 customer accounts and £4.3bn of assets under administration. Customers are signed up individually and through corporate partnerships such as those with Henderson (ISA service to investment trust investors), Barclays (certificated and investment club dealing services), Computershare (certificated and corporate sponsored nominee dealing and a white-label share trading platform) and Invesco Perpetual (ISA accounts). As part of the Share Centre offering Share manages three funds of funds (AUM £90m), which provide investors with a diversified entry-point to equity investing. Revenue is generated from three sources: account fees, trading commissions and interest income; split 40%, 56% and 4%, respectively, for H117.

In 2013 Share introduced a flat monthly account administration fee, which differentiates it from many peers that have fees based on the value of assets under administration. Transaction commissions are either charged at 1% with a minimum of £7.50 or, for those who deal frequently or in large sizes, on a flat £7.50 per bargain basis with a £20 quarterly fee (a 30% discount is offered to holders of 500 or more shares in Share plc). This means that the accounts frequently rank favourably in comparisons of providers (depending on portfolio size and frequency of trading).1

  See, for example, reports with comparative tables prepared by the lang cat.

Exhibit 1 shows the evolution of assets under administration (AUA) since 2006,with an acceleration evident in more recent years probably supported by new clients attracted by the flat fee structure, augmented by market strength and partnerships or acquisitions such as those agreed with Barclays and Henderson.

Exhibit 1: Share plc AUA

Exhibit 2: Share plc revenue analysis over time

Source: Share plc

Source: Share plc

Exhibit 1: Share plc AUA

Source: Share plc

Exhibit 2: Share plc revenue analysis over time

Source: Share plc

An analysis of the growth in Share’s revenue is shown in Exhibit 2. Total revenue has been broadly maintained in recent years in the face of falling interest rates, the elimination of trail commission and the adoption of the flat fee structure, which reduced the gearing of revenues to AUA. As a result of these developments the contribution of interest income to revenue declined from 35% in 2008 to 4% in H117, fee income’s contribution increased modestly, reflecting growth in the number of customer accounts, and commissions have increased from 27% to 56% between 2008 and H117 as the asset base has expanded.

Strategy

Share sets out its strategy under three headings: (1) putting customers first; (2) focus on the core business; and (3) strategic partnerships and acquisitions.

Putting customers first involves a concentration on providing a high quality of service not only with the initial interface, as exemplified by the website and now a mobile app, but also in other areas such as dealing with corporate transactions, which requires adequate back office resourcing and systems to manage the complexity involved. The simple flat fee structure remains a feature of the business that many investors are likely to find attractive in comparison to value-based charging structures. In a customer-friendly initiative Share has announced that it will reduce the ongoing charges figure on its funds of funds by at least 25%. Other recent steps to improve the customer offering were the early launch of a Lifetime ISA and the relaunch of the SIPP product (operated in partnership with Curtis Banks). Reflecting the focus on customers, Share notes that it has won the Investment Trends UK Online Broking Report award for best stockbroker in 2017 with highest overall investor satisfaction rating, a position it has retained for four years. While receiving a small number of critical reviews, Share also scores strongly on Trustpilot, with a score of 8.4 out of 10 based on 634 reviews at the time of writing.

Improving the customer experience and investing in ITplay an important role in the second strategic heading: the focus on the core Share Centre business. Share last year embarked on its digital transformation project, which aims to enhance the overall customer experience. The project has already seen the replacement of the underlying database technology for core systems and involves steps to enhance the website including the addition of a new funds research centre in the first half. A mobile app is also live, with an update allowing customers to trade and fund their accounts from within the app due to be released shortly. Work is also being done to transform back office systems. During 2016 withdrawal from the non-core authorised corporate director activity was agreed and this was completed in April this year through the sale of Sharefunds to Treasury Capital (as noted earlier, management of the funds of funds has been retained).

In addition to organic growth, Share continues to pursue additional scale through strategic partnerships and acquisitions. In FY16 three books of business were acquired including Barclays Bank and Invesco, as mentioned above, and European Pensions Management (following its insolvency). In addition a partnership agreement was signed with Computershare, with the certificated and nominee dealing service being launched in May this year. These transactions contributed approximately half the revenue growth seen in the first half. The growing number and scale of these partnerships is likely to increase Share’s credibility as a counterparty for large financial organisations looking to outsource these services. Although the company has announced that one potential partnership will not proceed (see comments on the trading update below), management reports that there are a number of other partnerships under discussion and while further additions would require some additional resource there should be an opportunity to secure significant benefits from operational gearing.

H117 results and August trading update

Share reported H117 results (9 August) that were ahead of management expectations. Revenues were more than 20% ahead of H116, led by growth in the level of dealing commissions. The results reflected strong trading volumes and the benefit of the partnership agreements highlighted above. Share has also continued to gain revenue market share against the Compeer-collected peer group that it monitors. The cost of investment in IT meant that the company remained in loss at the operating profit level, but the loss has been reduced significantly compared with H116 and there was an increase in underlying profit before tax. The balance sheet remains strong with net cash of just below £8m at the end of June. See Exhibit 3 for details of the profit and loss for the half year periods.

The main points are highlighted below, with changes against H116 unless indicated:

Assets under administration(AUA) at £4.3bn increased by 14% from the year end, reflecting net inflows and a moderate equity market increase (FTSE All-Share +3.3%).Compared with H116 the increase was 26% (FTSE All-Share +13.8%) and within this the increase in assets held in funds was much more rapid at 59% (to £1bn). Segregated cash deposits held on behalf of clients have almost kept pace with overall AUA (+22% to £359m).

The three in-house funds of funds, while still small, now manage £90m compared with £70m at the end of 2016.

Revenues were up 23% and, within this, dealing commission increased by 45% and account fees 8%. Reflecting lower rates, interest income contracted further (-31%) despite the increase in cash balances and only accounted for 4% of total revenue. Half of revenue growth was organic rather than derived from acquisitions or partnership agreements.

Overall costs increased by15%.Higher transaction costs contributed to this, particularly related to the Computershare partnership where Share retains a share of commission, paying the rest to Computershare. Staff costs increased partly as a result of the digital transformation programme and amortisation costs arising from purchased customer accounts and capitalised software costs.

The operating loss, struck before equity dividends, other investment income and disposal gains, was reduced from £0.668m to £0.199m, reflecting the positive gap between revenue and cost growth.

Reported pre-tax profit was £0.075m versus £0.190m, including a small gain of £0.066m on the sale of Sharefunds this year versus a £0.628m gain on London Stock Exchange shares last year. Underlying PBT (removing disposal gains, the FSCS levy and share-based payments) increased to £0.31m compared with £0.11m.

Underlying, basic, diluted EPS was 0.2p versus 0.1p.

The balance sheet remains strong with end-June net cash of £7.8m (£11.4m at end December), within which cash held in trust for clients, pending settlement and dividend payments, was £1.3m (£1.6m end-December).

Exhibit 3: H117 results profit and loss summary

Year-end 31 December (£000 except where shown)

H116

H216

H117

H117 vs H116 %

Account fees

3,271

3,513

3,533

8.0

Dealing commissions

3,443

3,597

4,992

45.0

Interest and other income

510

276

350

(31.4)

Revenue

7,224

7,386

8,875

22.9

Total costs

(7,892)

(8,064)

(9,074)

15.0

Operating profit/(loss)

(668)

(678)

(199)

(70.2)

Investment revenues

230

18

207

(10.0)

Other losses and gains

628

1,491

67

(89.3)

Non-recurring items

0

0

0

Pre-tax profit

190

831

75

(60.5)

Other gains and losses

(628)

(1,494)

(67)

(89.3)

Non-recurring items incl. FSCS

228

71

96

(57.9)

Senior management changes

0

0

0

Profit share impact of above

12

142

(65)

(641.7)

Normalised pre-tax profit

110

(156)

310

181.8

Tax

(56)

(228)

(62)

10.7

Post-tax profit

134

603

13

(90.3)

Normalised post-tax profit

132

(128)

255

93.2

Source: Share plc

Share monitors trends in its revenue and market share against an industry peer group compiled by ComPeer.2 Exhibit 4 compares changes in Share’s revenue with the peers. Notable here is the outperformance in dealing commissions, presumably reflecting overall AUA growth and the benefit of the partnerships outlined above. As in previous periods, Share’s now relatively small interest income has continued to suffer relative to peers, some of which have large banks as parents, which may choose to grant a higher rate internally on customer deposits. Revenue market share (Exhibit 5) has shown an encouraging upward trend, particularly in the first half. Excluding interest, this stood at 12.0% compared with 9.8% for the same period last year.

  Alliance Trust Savings, Barclays Stockbrokers, Equiniti, Halifax Share Dealing (Lloyds Bank), HSBC Stockbrokers, Saga Personal Finance, Selftrade and TD Direct Investing. Industry leader Hargreaves Lansdown is excluded because it does not submit monthly information to ComPeer.

Exhibit 4: H117 change in revenue, SHRE and peers

Exhibit 5: Share plc revenue market share progress

Source: Share plc, ComPeer

Source: Share plc, ComPeer

Exhibit 4: H117 change in revenue, SHRE and peers

Source: Share plc, ComPeer

Exhibit 5: Share plc revenue market share progress

Source: Share plc, ComPeer

On interest income, Share indicates that the FCA has granted it permission to put 60% of customer deposits on up to 95 days’ notice. Management notes that this leeway is unlikely to be used in full and that the effect will be more to support the existing reduced level of interest income rather than permitting a significant increase in contribution.

Trading update

At the end of August Share announced that it would receive a one-off payment of £0.9m this year from a prospective partner company in the wealth management sector to compensate it for preparatory work undertaken on a product/service that will not now be launched. Share notes that the relationship between the companies remains strong. While there is some disappointment that the project did not proceed, Share continues to work on a pipeline of other partnership/acquisition opportunities. Reflecting the significant development of the third-party relationship business, Share has appointed Linda Roberts, who has been with the company for eight years, to the Share Centre board as director of partnerships and change, subject to regulatory approval.

The one-off payment will be treated as an exceptional item and excluded from underlying earnings. Share also confirmed that current trading remains strong, in line with market expectations and substantially ahead of the prior year.

In the next section we discuss the broader market background and outlook for Share’s business.


Background and outlook

The next two charts illustrate recent trends in the UK equity market, highlighting a sustained period of strength in the FTSE All-Share Index despite relatively short periods of fluctuation around events such as the Brexit vote and the UK election.

Exhibit 6: FTSE All-Share Index (total return)

Exhibit 7: FTSE100 Implied Volatility Index

Source: Thomson Datastream

Source: Thomson Datastream

Exhibit 6: FTSE All-Share Index (total return)

Source: Thomson Datastream

Exhibit 7: FTSE100 Implied Volatility Index

Source: Thomson Datastream

This is echoed in the Volatility Index, which has generally followed a downward trend since the Brexit vote, interrupted only briefly by the outcome of the UK election.

These positive trends could be attributed to the resilience of the UK and US economies together with signs of improvement in Europe and continuing supportive policies from central banks. This seems to have encouraged investors to look through a range of geopolitical developments that might have been expected to unsettle markets more noticeably. The relatively calm equity market environment in turn appears to have encouraged greater activity levels among retail investors from H216 onwards.

London Stock Exchange retail investor trading volumes are no longer published, but we have used data for retail equity fund sales (to June) from the Investment Association together with the Lloyds Bank Index for UK shares (to August) to give an indication of trends in retail investor confidence. Exhibit 8 shows how net retail equity fund sales were in negative territory last year, reflecting the effect of the EU membership referendum. This followed three years of historically strong sales (the 10-year average to end 2016 was net sales of £6bn). Looking at the shorter-term trend in Exhibit 9, the move from equity fund outflows to inflows is evident but has shown monthly variability, as might be expected. Investment sentiment towards UK equities has shown a clear improvement from the recent low but does appear to have shown some cooling.

Exhibit 8:Retail equity fund net sales from 2012

Exhibit 9:Fund sales and investor sentiment index

Source: Investment Association

Source: Investment Association, Lloyds Bank

Exhibit 8:Retail equity fund net sales from 2012

Source: Investment Association

Exhibit 9:Fund sales and investor sentiment index

Source: Investment Association, Lloyds Bank

This broadly fits with Share’s own experience with its clients, where it reports that strong activity levels have carried on beyond the half year end, subject to a normal seasonal slowdown. It remains to be seen whether retail investor activity will resume at a higher level following the holiday season. There are certainly sufficient uncertainties, both economic and geopolitical, to prompt renewed volatility, but for the moment the market has remained calm, potentially creating a favourable background for the trading commission element of Share’s revenue.

Beyond fluctuations in the market background, Share’s fortunes are likely to be dependent on industry developments such as changes in competitive behaviour and consolidation, while Share’s implementation of its own strategic priorities, outlined earlier, including its digital transformation and partnership/acquisition, will also be key.

In terms of the competitive environment, the main recent change has been the acquisition of TD Direct Investing by Interactive Investor. Announced in October 2016, this was completed in June 2017, creating a business with total AUA of £21bn and more than 300,000 customer relationships. This makes it second in size to, although still some way behind, Hargreaves Lansdown (£79.2bn, 954,000 accounts). So far, announcements about changes in the combined group are limited, although a new CEO was appointed at Interactive Investor in March (previously a non-executive director at the company from 2015). The merger is also reported to result in a potential change of SIPP administrator for TD Direct Investing customers (AJ Bell currently). Of particular interest from a Share perspective will be whether the existing Interactive Investor pricing model is adopted for the enlarged business (as would seem logical). Interactive Investor follows a fixed fee approach, similar to Share’s, so this would seem likely to encourage retention, although the impact on individual customers will depend on portfolio size and dealing frequency. The implementation of any merger involving migration to new systems can be disruptive for customers so there could be an opportunity for Share to gain from any fall out, but on a longer view the enlarged platform should have scale advantages. These could result in greater profitability or be used to fund increased marketing or more aggressive pricing, with the latter options clearly being less favourable for Share.

Encouragingly, as shown earlier, Share has been gaining market share and, with an established competitive pricing model and a programme of work to upgrade systems and improve website and app customer interfaces, should be well placed to extend these gains. Further partnership deals or acquisitions could accelerate growth and there is more benefit to come from existing partnerships. As an example, the Computershare UK company nominee share service now has 28 company clients compared with 25 in August last year (see Exhibit 10).

Exhibit 10: Computershare UK company nominee share service clients

Arris International

GroupeFnac

Orange (France Telecom)

Standard Chartered

Aviva

International Airlines Group

Perrigo

Steris

Ball Corporation

Janus Henderson Group

Perseus Mining

SuperGroup

Barclays Contingent Value Rights

Liberty Global (Virgin Media)

Prothena Corporation

Thomson Reuters

Colfax

Matra Petroleum

Rio Tinto

Uniper

E.On

Mondelez International

Royal Bank of Scotland

Vodafone Group

Groupe Eurotunnel

Myraid Group

South32

XL Group

Source: Computershare

The regulatory focus on transparency of costs for retail investors combined with the expected growth in the number of self-directed investors would seem to fit well with Share’s offering on a longer view, while the FCA work on investment platforms is focused on areas such as complex charging structures and obstacles to competition, which do not appear to pose a particular concern for the company. On a shorter view Share does note that regulatory changes including MiFID 2 and General Data Protection Regulations will involve some costs to adjust the way in which data is held and communicating with investors.

In summary, there are the usual uncertainties relating to the equity market background, but for the moment activity levels remain relatively strong. More strategically successful delivery of the digital transformation will be key for Share, while partnerships and acquisitions of books of business have the potential to enhance growth further.

Financials

Exhibit 11 sets out the changes in our estimates following the H117 figures and August trading statement. Reflecting the strong first half this year and continuing contributions from partnership agreements in 2018, our revenue estimates are increased by 9% and 8%. Profitability is currently depressed, reflecting investment in the digital transformation, but is on an improving trend with the potential to extract operational leverage as the initial investment in improving systems is completed and as organic and partnership-related revenue growth flows through.

Exhibit 11: Estimate revisions

Revenue (£m)

PBT* (£m)

EPS* (p)

Dividend (p)

Old

New

% chg

Old

New

% chg

Old

New

% chg

Old

New

% chg

2017e

16.5

18.0

9%

0.3

0.5

57%

0.12

0.29

138%

0.30

0.30

0%

2018e

17.5

19.0

8%

0.7

0.8

17%

0.36

0.43

19%

0.50

0.50

0%

Source: Edison Investment Research. Note: *PBT and EPS are normalised, excluding exceptional items and share-based payments.

Share’s capital exceeds the regulatory requirement set by the FCA by a healthy margin. Capital resources at the end of June 2017 stood at £15.3m, 2.7 times the requirement of £5.7m.The increase in capital requirement indicated to Hargreaves Lansdown (HL) by the FCA in August this year reflected the increased scale and complexity of the business. The HL board concluded that it needed to retain an additional £50m of capital, taking the total estimated requirement to £133m.These considerations would not apply to Share so there is no implication that it would be subject to a proportionate increase in capital requirement.

As noted earlier, end-June net cash stood at £7.8m compared with £11.4m at the end of 2016. The reduction in cash mainly reflected working capital movements (net -£2.5m) together with a small operating loss and spending on the digital programme, which is evident in intangible purchases (mainly) and capex of £0.8m. The dividend absorbed a further £0.35m. Prospectively, the second half will see the payment of the £0.9m compensating Share for work undertaken on the partnership project that was cancelled. This and a positive swing in working capital could see net cash of c £10.4m at the full year. Currently our estimates suggest a further, smaller outflow in 2018, but cash flow could turn positive on our tentative estimates for 2019 (not included in this note).

See the financial summary on page 11 (Exhibit 14) for further detail.

Sensitivities

The sensitivities for the Share business include:

Equity market developments, particularly the level of volatility, are likely to affect the confidence of retail investors positively or negatively and hence their propensity to trade on the Share platform.

Competitor behaviour, including marketing and pricing may help or hinder customer acquisition and retention.

Maintaining a robust IT platform is central for the business.

Regulatory developments can impose additional costs and may influence the competitive landscape over time, but, as noted earlier, Share appears relatively well placed in this regard given its pricing model and range of services.

Valuation

Our comparative table in Exhibit 12 includes selected measures for Share, Alliance Trust Savings (an unquoted subsidiary of Alliance Trust) and Hargreaves Lansdown. As in previous notes, this underlines the scale of Hargreaves Lansdown with AUA of £79bn in total compared with Alliance Trust Savings at £15bn and Share on £4.3bn. Given the potential benefits of scale, we would expect further consolidation to follow the Interactive Investor/TD Direct Investing combination on a medium- to longer-term view with potential benefits for both buyer and seller.

Hargreaves Lansdown, as market leader by a large margin with an established record of strong growth and profitability, is the most highly valued across each of the measures. Share is more expensive than Alliance Trust Savings in terms of adjusted value to AUA, but this can be explained by the higher revenue yield earned by Share, while in terms of adjusted value to revenue Share is valued below the other two companies. Increased scale through acquisition or organic growth would be likely to benefit profitability and hence valuation on these metrics.

Exhibit 12: Peer comparison

£m unless stated

Share

Alliance Trust Savings

Hargreaves Lansdown

Market capital

39.7

6,342.0

Surplus capital (assumes cover of twice the regulatory requirement)

4.0

-75.0

Adjusted value

35.7

61.5

6,417.0

Revenue

17.8

21.6

385.6

AUA

4,300

15,000

79,200

Number of accounts (active clients HL)

250,000

114,000

954,000

Market capital/revenue (x)

2.2

N/A

16.4

Market capital/AUA (%)

0.9

N/A

8.0

Adjusted value/revenue (x)

2.0

2.8

16.6

Adjusted value/AUA (%)

0.8

0.4

8.1

Source: Edison Investment Research, companies’ disclosure. Note: valuation and AUA for Alliance Trust Savings from H117 results and revenue FY16.Hargreaves Lansdown AUA and revenue from FY17. Share revenue H117 annualised.

We have also updated our DCF model, factoring in our new estimates. We allow for two years of rapid growth in revenues between 2020 and 2021 following a move into operating profit in 2019 (growth of 60%), followed by seven years of growth at 5%. We also assume a terminal multiple of 10x and a discount rate of 10%. Exhibit 13 sets out the sensitivity of the value output to changes in the discount rate and 2020-21 growth assumption. Our central valuation of 30.5p compares with our previous figure of 29p. We note the calculation is particularly sensitive (in both directions) to assumptions regarding the pace at which the business moves into stronger operating profitability and cash generation. The operational gearing of the platform and scope to gain scale through acquisition are considerations here.

Exhibit 13: Discounted cash flow valuation sensitivity (pence per share)

Discount rate

2020-21 growth

8%

9%

10%

11%

12%

0%

21.9

19.3

18.6

18.0

17.4

30%

29.4

25.1

23.9

22.8

21.9

60%

38.8

32.3

30.5

28.9

27.5

70%

42.3

35.0

33.0

31.2

29.6

Source: Edison Investment Research


Exhibit 14: Financial summary

£000

2014

2015

2016

2017e

2018e

Year end 31 December

PROFIT & LOSS

Account fees

6,610

6,400

6,784

7,530

7,831

Dealing Commissions

6,610

6,400

7,040

9,786

10,373

Interest and other income

1,800

1,250

786

711

769

Revenue

 

15,042

14,050

14,610

18,027

18,973

Cost of Sales (exc amortisation and depreciation)

(14,579)

(14,812)

(15,727)

(18,003)

(18,725)

EBITDA

 

463

(762)

(1,117)

23

248

Depreciation

 

(104)

(111)

(121)

(131)

(150)

Amortisation

(11)

(21)

(108)

(390)

(400)

Operating profit (pre-exceptional)

 

348

(894)

(1,346)

(498)

(302)

Exceptionals

0

0

0

900

0

Other

60

1,479

2,119

67

0

Investment revenues

308

276

248

220

198

Profit Before Tax (FRS 3)

 

716

861

1,021

689

(104)

Profit Before Tax (norm)

 

1,615

584

(46)

516

768

Tax

(109)

(196)

(284)

(133)

0

Profit After Tax (FRS 3)

 

607

665

737

557

(104)

Profit After Tax (norm)

 

1,416

555

4

409

602

Average Number of Shares Outstanding (m) - exc treasury

143.5

139.2

139.3

139.7

139.7

EPS - normalised (p)

 

0.99

0.40

0.00

0.29

0.43

EPS - FRS3 (p)

 

0.42

0.48

0.53

0.40

(0.07)

Dividend per share (p)

0.62

0.74

0.25

0.30

0.50

EBITDA Margin (%)

3.1%

(5.4%)

(7.6%)

0.1%

1.3%

Normalised operating margin (%)

8.3%

2.2%

(2.0%)

(3.4%)

3.0%

BALANCE SHEET

Fixed Assets (mainly Investments)

 

9,405

8,083

8,341

9,753

9,903

Current Assets

 

21,316

19,716

23,883

21,980

22,509

Total Assets

 

30,721

27,799

32,224

31,733

32,412

Current Liabilities

 

(8,450)

(7,681)

(13,384)

(11,830)

(12,430)

Long term Liabilities

(1,594)

(1,418)

(1,096)

(1,158)

(1,158)

Net Assets

 

20,677

18,700

17,744

18,745

18,824

CASH FLOW

Operating Cash Flow

 

199

(2,104)

492

1,092

250

Net cash from investing activities

(434)

1,990

483

(1,495)

(502)

Net cash from (used in) financing

(736)

(878)

(1,217)

(590)

(419)

Net Cash Flow

 

(971)

(992)

(242)

(993)

(671)

Opening net (debt)/cash

 

13,626

12,655

11,663

11,421

10,428

Closing net (debt)/cash

 

12,655

11,663

11,421

10,428

9,757

Source: Company accounts, Edison Investment Research

Contact details

Revenue by geography

Oxford House,
Oxford Road,
Aylesbury,
Bucks,
HP21 8SZ
+44 (0)1296 414141
www.shareplc.com

Contact details

Oxford House,
Oxford Road,
Aylesbury,
Bucks,
HP21 8SZ
+44 (0)1296 414141
www.shareplc.com

Revenue by geography

Management team

Executive Chairman: Gavin Oldham

Chief Executive: Richard Stone

Gavin is the founder and controlling shareholder of Share plc, having previously established Barclayshare (now Barclays Stockbrokers) for Barclays Bank. He is a regular contributor to radio and television. Gavin is an elected member of the General Synod and a church commissioner.

Richard, a qualified chartered accountant, joined Share plc in April 2006, assuming the CEO role in 2014. His previous experience includes a directorship at Huntswood, a financial services sector outsourcing business, a role as group financial controller at ECSsoft (now CIBER Inc) and as an investment analyst at Robertson Stephens, a US investment bank.

Finance Director: Mike Birkett

IT Director (not on board): John Sargeant

Mike joined Share plc in 2014 and was previously finance director at Thomas Cook Online, the e-commerce centre of excellence in Thomas Cook Group. Prior to this he worked for eight years with Betfair Group, initially as head of financial planning and analysis and then as finance director of Betfair Group’s financial trading exchange, LMAX.

John joined The Share Centre in November 2014 from One Stop, the retail convenience subsidiary of Tesco, where he was head of IT. Before his seven years with One Stop, John was business systems manager with Signet Jewellers.

Principal shareholders (as at 31 December 2016)

(%)

Oldham family and connected trusts

68.8

Other directors and staff

5.3

Customers (exc Oldham family and directors)

20.7

Shareholders on general register

5.2

Companies named in this report

Hargreaves Lansdown (HL), Alliance Trust (ATST)

Management team

Executive Chairman: Gavin Oldham

Gavin is the founder and controlling shareholder of Share plc, having previously established Barclayshare (now Barclays Stockbrokers) for Barclays Bank. He is a regular contributor to radio and television. Gavin is an elected member of the General Synod and a church commissioner.

Chief Executive: Richard Stone

Richard, a qualified chartered accountant, joined Share plc in April 2006, assuming the CEO role in 2014. His previous experience includes a directorship at Huntswood, a financial services sector outsourcing business, a role as group financial controller at ECSsoft (now CIBER Inc) and as an investment analyst at Robertson Stephens, a US investment bank.

Finance Director: Mike Birkett

Mike joined Share plc in 2014 and was previously finance director at Thomas Cook Online, the e-commerce centre of excellence in Thomas Cook Group. Prior to this he worked for eight years with Betfair Group, initially as head of financial planning and analysis and then as finance director of Betfair Group’s financial trading exchange, LMAX.

IT Director (not on board): John Sargeant

John joined The Share Centre in November 2014 from One Stop, the retail convenience subsidiary of Tesco, where he was head of IT. Before his seven years with One Stop, John was business systems manager with Signet Jewellers.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Share and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney+61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney+61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Share and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney+61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney+61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Regeneus — Preparing for a clinical licence deal in Japan

Regeneus is aiming to sign one or more clinical development licence deals for Progenza in the current financial year. It is well placed to achieve this goal, having already granted AGC an exclusive licence to manufacture Progenza for Japan, reported promising signs of efficacy from the successful Phase I trial of Progenza in knee osteoarthritis and been granted a Progenza patent in Japan. Regeneus reported an A$3.3m profit in FY17, thanks to the US$5.5m upfront payment and US$1m milestone from the AGC licence deal; further milestone payments are likely to keep it in the black in FY18. Other potential catalysts for FY18 include results from the ACTIVATE Phase I cancer vaccine trial and the CryoShot Canine pre-pivotal trial. Our valuation is virtually unchanged at A$146m or A$0.70/share.

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