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 15 March 2022, the Company will release the H1 FY22 financial results.

Recent trend of dividend payments

CBG had paid 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 (also encapsulates details of a trading update released on 21 January 2022)

• Robust Asset Management Performance: The Company got benefitted from the rising markets as the Asset Management division generated good net inflows of 8%, with managed assets reaching £16.6 billion as of 31 December 2021 (31 July 2021: £15.6 billion). Furthermore, the total client assets also increased from £17.0 billion as of 31 July 2021 to £18.0 billion as of 31 December 2021.
• Banking Division: Despite sustained high repayments in the Property sector, the loan book climbed 2.9% to £8.69 billion as of 31 December 2021 when compared with £8.44 billion as of 31 July 2021. The growth was boosted by the intense new business levels in Asset Finance & Motor Finance and higher utilization in Invoice Finance.
• Reduction in Bad Debt Ratio: The Company had demonstrated a significant reduction in the bad debt ratio from 2.3% in FY20 to 1% during FY21.

Key Risks

• Sluggish UK Macroeconomic Indicators: The UK Composite PMI fell marginally to 53.4 in January 2022 from 53.6 in December 2021, while the UK consumer price inflation breached a nearly 30-year high of 5.4% in the 12 months to December 2021.
• 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.
• Federal Reserve Meeting: The latest Federal Reserve Meeting indicated an interest rate hike by March 2022. Thus, it may cause a significant decline in Global Equities.
  

Key Fundamental Statistics & Shareholding Pattern of Close Brothers Group PLC.

Aberdeen Standard Investments (Edinburgh) is the most significant shareholder as it holds nearly 19.21 million shares as of 31 December 2021. 

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

 (Source: Company Filings)

• 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.

Financial Ratios (FY21)

Share Price Performance Analysis

(Source: Refinitiv, Research done by Kalkine Group)

On 28 January 2022, at 11:05 AM GMT, the Company’s shares were trading at GBX 1,258.00, down by around 1.02% from the previous day closing price. Stock 52-week High and Low were 1,702.00 and GBX 1,234.00, respectively.

From a technical perspective, the stock price is hovering between the lower Bollinger band and the middle Bollinger band. Moreover, the 14-days RSI stood at ~32.67. Thus, there can be an upside momentum in the stock price. 

Valuation Methodology: Price/Book Approach (FY22E)

Business Outlook

The Company has witnessed good business momentum in FY22 so far as it managed to capitalize on most of the opportunities in the core markets. Moreover, CBG had depicted a decent loan book growth at strong margins in Banking and continued growth momentum in Close Brothers Asset Management. 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 decent growth in loan book, increase in net interest margin during FY21, significant improvement in bad debt ratio, consistent dividend payments, 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 1,258.00 (as on 28 January 2022 at 11:05 AM GMT), with lower-double digit upside potential based on 1.37x Price/NTM Book Value per share (approx.) on FY22E book value per share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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