Quilter PLC (LON: QLT) – Operating with strong solvency position and solid balance sheet to drive shareholder returns.

British based, Quilter PLC is a FTSE-250 index listed Financial Service Company, which is engaged in wealth management, advisory and investments in the UK and Internationally.  As of 30 September 2020, it has been managing approximately GBP 109.5 billion of investments for over 9 lacs customers. It is divided into business segments - Wealth Platforms and Advice & Wealth Management. The Company provides three essential services – Financial advice, Investment solutions and Wealth platforms. Its major offices are located in Southampton, London, and on the Isle of Man. The group was listed on the London Stock Exchange (LSE) on 13 April 2018 and had a secondary listing on the Johannesburg Stock Exchange (JSE).

On 10 March 2021, the Company expects to provide full-year results for FY20.

(Source: Investor Presentation)

Dividend Track Record

During H1 FY20, QLT paid a dividend of 1.0 pence, representing a pay-out ratio of 41%, as compared to 1.7 pence of dividend in Q1 FY19 with pay-out ratio of 46%. The last interim dividend was paid on 21 September 2020. The decision on FY20 dividend is dependent upon share buyback progress, market conditions and business outlook.

Growth Prospects and Risk Assessment

Quilter has multi-channel investments and proposition, which drives long-term customer relationships and integrated flows. QLT is a leading UK wealth manager Company with nearly £100 billion of customer assets. It has competitive products, pricing, and quality with a combination of scale, capabilities, and market position. It has a strong balance sheet position with low gearing to generate substantial cash and shareholder returns.

Moreover, the Company has almost completed the re-platforming project. The new integrated platform shall yield expansion in business capabilities. Apart from platform migration scheduled in Q4 FY20, the integration of Lighthouse acquisition is progressing well. Adjacently, the changing demographics towards ageing population create a demand for wealth solutions.

(Source: (Source: Investor Presentation)

However, Covid-19 pandemic has been putting pressure over gross inflows. Moreover, the challenging external environment could impact the funds under management and the ability to attract new advisers. Furthermore, the volatility in the financial markets can negatively impact solvency, capital, and liquidity position of the Company. There are also certain risks and uncertainties associated with administrative complexity, increased competitive pressure, complying with changing regulations, external threat to security systems, among others.

Industry Outlook Dynamics

Quilter operates in an industry with secular potential as the UK is regarded as the fifth largest wealth management market in the World. The growing aging population, individual savings responsibility, and increase in accessibility from Pensions Freedom have been acting as growth drivers. As per the publication from Markets and Markets, the wealth management platform is projected to reach US$3.20 billion by 2022, which was US$1.52 billion in 2016, representing a CAGR of 13.4% between 2016 to 2022. The major drivers for growth are rise in the number of high net worth individuals, compliance with strict regulations, and digitalisation and process automation.  Similarly, the pension reform is providing an opportunity for consolidation and flexibility to manage retirement assets. Moreover, government initiatives are supporting auto-enrolment into pensions. MiFID II is further increasing transparency for customers.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Quilter Plc.

Q3 FY20 Trading Update (as on 21 October 2020)

(Source: Company Website)

• At the end of September 2020, the Assets under Management and Administration (AuMA) stood at £109.5 billion, which increased from the 30 June 2020 closing position. This was supported by excellent investment performance from the Wealth Select and Cirilium Active ranges in Q2 and Q3 of FY2020.
• Despite a more challenging market backdrop, the Company has reported a steady performance, with substantial improvements in the third-quarter net inflows against the last year's corresponding period.
• The gross sales for Q3 FY20 were broadly stable at £2.7 billion (2019: £2.8 billion), with year-to-date net inflows of £1.2 billion (2019: £0.2 billion net outflows).
• In the three months and nine months ended 30 September 2020, total integrated net flows were stable at £0.4 billion and £1.8 billion, respectively, which continues to demonstrate the strength of the Quilter business model.
• Further, the strategic plans are well-positioned with the major migration of assets to the new platform from the existing platform. The major second migration was confirmed with clients and advisers to be completed in the last week of November 2020.
• The capital return programme stays on track, with the current trading continues to be in line with the expectations.
• The Company witnessed a solid Quilter Investment Platform, with gross flows of £1.2 billion and stable net flows of £0.1 billion (which was ahead of major migration in November 2020).
• Moreover, the structural optimisation and tactical cost-saving plans were on track to achieve expected benefits in the financial year 2021.
• The investment platform transformation project remained on track, and 80% of assets are expected to be migrated by year-end.
• On 16 October 2020, the Company has already completed £375 million of share buyback.
• However, due to the economic impact of the Covid-19 pandemic and geopolitical uncertainties, QLT would remain cautious in the short run, and therefore, mortgage and protection business is likely to be muted during H2 FY20, and further margin erosion is expected.

Share Price Performance Analysis

On 25 January 2021, at the time of writing (before the market close, at 8:20 AM GMT), Quilter’s shares were trading at GBX 153.75, down by 0.55% against the previous day closing price. Stock 52-week High was GBX 174.95 and Low of GBX 97.60, respectively.

In the last three months, QLT’s stock price has delivered a positive return of +18.82% return as compared to +15.10% return of FTSE-250 index and +19.39% return of FTSE All Share Financial index, which shows that the stock has outperformed the benchmark index; however, it underperformed against the benchmark sector.

From the technical standpoint, 100-day EMA (145.51), 100-day SMA (140.92), and 14-day RSI (47.73) are currently supporting an upside move, which means the stock price could increase in the short term.

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

Business Outlook Scenario

Quilter’s structural optimisation plan and tactical cost savings remained on track to produce benefits in FY21. It has stable net flows and solid investment platform to drive growth. The investment platform transformation projected remained on track, and 80% of assets are expected to be migrated by year-end. On 16 October 2020, the Company has already completed £375 million of share buyback. Moreover, the tactical cost savings and structural optimisation plans progressed well to provide expected benefits in FY21. However, due to the economic impact of the Covid-19 pandemic and geopolitical uncertainties, QLT would remain cautious in the short run, and therefore, mortgage and protection business is likely to be muted during H2 FY20, and further margin erosion is expected.

(Source: (Source: Investor Presentation)

Considering a strong rebound in AuMA, the improved year-on-year third-quarter net inflows, continued robust solvency position, solid capital position, significant Platform migration scheduled for Q4 2020, added new investment managers, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Quilter at the current price of GBX 153.75 (as on 25 January 2021, before the market close at 8:20 AM GMT), with lower-double digit upside potential based on 20.51x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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

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