Close Brothers Group PLC (LON: CBG) 

Close Brothers Group PLC is an FTSE 250 listed leading UK merchant banking group providing lending, deposit taking, wealth management services and securities trading. Moreover, the Company employs around 3,700 people in the UK.

On 18 November 2021, the Company will release the Q1 FY22 trading update.

Recent trend of dividend payments

The Company will pay a final dividend of 42 pence per share attributable for FY21 on 23 November 2021, while the ex-dividend date was 16 October 2021. It will take the full-year dividend to 60 pence per share, an increase of around 50% from the FY20 levels, boosted by the continued confidence in the business model and financial position.

(Source: LSE; Charts created by Kalkine Group)

Growth Prospects

• Robust Asset Management Performance: Driven by a higher income during FY21, the Asset Management division generated good net inflows of 7%, with managed assets up 24% to £15.6 billion (31 July 2020: £12.6 billion).

• Strong Funding Position: CBG had maintained a strong capital, funding, and liquidity position with a common equity tier 1 ("CET1") capital ratio increasing from 14.1% as of 31 July 2020 to 15.8% at the end of FY21.
• Reduction in Impairment Charges: The Company had demonstrated a significant reduction in the impairment charges from £183.7 million in FY20 to £89.8 million for FY21, which resulted in a drop in bad debt ratio during FY21.

Key Risks

• Legal Risk: Changes in the legal and regulatory frameworks could adversely affect the performance of the Company. It could also result in the payment of heavy penalties and fines. Regulatory changes could also result in the product offering becoming less profitable.
• Market Risk: Any volatile movement in the market or forex could have a material impact on the operations of the Company.
• Counterparty Risk: Failure by third parties to fulfil obligations or settlements could result in financial or operational losses.
• Rise in Interest Rates: The recent hawkish comments made by several central governments regarding a hike in the interest rates could make fundraising difficult for the Company.

Now, we will analyse the Key Fundamental Statistics & Shareholding Pattern of Close Brothers Group PLC.  

Aberdeen Standard Investments (Edinburgh) is the most significant shareholder as it holds nearly 20.55 million shares as of 30 September 2021. 

FY21 Financial & Operational Highlights (for twelve months ended 31 July 2021, as of 28 September 2021)

 (Source: Company result)

• Higher Net Interest Margin: On the profitability front, the Company had shown marginal improvement of around 20 basis points from 7.50% during FY20 to 7.70% for FY21.
• Surge in Banking Adjusted Operating Profit: The Banking division’s adjusted operating profit rose by around 114% to £212.5 million because of the rigorous cost discipline and a significant reduction in impairment charges.
• Improvement in Bad Debt Ratio: CBG had managed to bring down the bad debt ratio from 2.3% during FY20 to around 1.1% for FY21, positively driven by a strong underlying credit performance across the Commercial, Retail and Property businesses.

Financial Ratios (FY21)

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 29 October 2021, at 09:44 AM GMT+1, CBG.’s shares were trading at GBX 1,437.00, down by around 0.35% from the previous day closing price. Stock 52-week High and Low were 1,702.00 and GBX 1,048.46, respectively.

From a technical perspective, the stock price is hovering between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price. Moreover, the 14-days RSI of ~34.63 indicates an upside momentum in the stock price.

Over the last one year, CBG’s stock price has delivered a positive return of ~34.90%, and it has outperformed the FTSE 250 index (benchmark index) with a return of approximately 34.57%.

Valuation Methodology: Price/Book Approach (NTM) (Illustrative)

Peers used in the valuation methodology (Price/NTM Book Value per share)

Business Outlook

The Company remained optimistic regarding the business growth because of gradual improvement in the economic outlook. Moreover, the Company remained well positioned to maximise on the opportunities in the current cycle for the Banking division. Meanwhile, CBG would continue to seek opportunities for potential new initiatives alongside growth in the existing market niches. However, Winterflood had demonstrated a slowdown in volumes and trading performance over the last few months. Nonetheless, Winterflood remains well-positioned to continue trading profitably in a range of market conditions. In a nutshell, the Company would keep generating long term returns for the shareholders supported by a resilient business model and robust balance sheet.

Considering the solid industry dynamics, increase in net interest margin during FY21, significant improvement in bad debt ratio, robust profitability, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Close Brothers Group PLC at the current price of GBX 1,437.00 (as on 29 October 2021 at 09:44 AM GMT+1), with lower-double digit upside potential based on 1.69x Price/NTM Book Value per share (approx.) on FY22E book value per share (approx.).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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