St. James’s Place PLC (LON: STJ) - Well positioned to benefit from the long-term market growth rate trajectory

Established in 1991, St. James’s Place PLC is a FTSE 100 listed Company, offers wealth management and investment funds management services. Wealth management includes mortgages, investment planning, wills, philanthropy, estate planning, and retirement planning. Investment funds include pension funds, life funds, Spanish international funds, unit trust group funds, Asia international funds, and international funds.

It offers products and services through branch offices, wealth advisors, and online portals to high net worth individuals, wealthy families, and corporates in the UK and Asian region. Since it started trading in 1992, the Company has grown rapidly with around £115.7 billion of client funds under management. With more than 760,000 clients, it has established itself as one of the UK’s leading wealth managers. Presently, it has nearly 4,324 qualified advisers to establish long-term client relationships and aims to grow the number of advisers by 6% to 8% per annum.

On 27 October 2020, the Company expects to announce the third-quarter new business announcement.

 (Source: Company Website)

Growth Prospects and Risk Assessment

The Company has a distinctive approach to investment management as it has no in-house team of investment managers so that no investment house can have a monopoly of investment expertise. It rather selects external advisors from around the world to manage funds. It has constantly been increasing client numbers, client retention, adviser number and funds under management over the past five years. In FY19, the Company had around 763,000 clients, with 97% client retention and adviser retention rate. It has also accelerated the pace of technology investment to facilitate digital processes.

 (Source: Refinitiv, chart created by Kalkine Group)

 (Source: Refinitiv, chart created by Kalkine Group)

However, there are certain principal risks and uncertainties such as failure to deliver good quality administration services, increased competitive pressure, potential issues with manufactured products, operational failures by material outsourcers, failure to retain new advisers or partners, failure to comply with changing regulations, and risk of external fraud to security systems.

Industry Outlook Dynamics

As per the Global Data, it is estimated that there are over 11 million individuals in the UK with investable assets in between £50,000 and £5 million. The sector is projected to control around £2.5 trillion of investable assets by 2023. Meanwhile, the UK sector is ageing, and corporate sectors are shifting the burden of retirement on individuals. Such favourable demographics amid increasing tax complexity shall create long-term demand for wealth management services. As per PwC, the global assets under management is estimated to grow from US$84.9 trillion in 2016 to US$145.4 trillion in 2025. The key drivers of growth are changes in technology, products, regulation, and people skills. 

Key Trends: The industry has been facing margin pressure as clients allocating towards cheaper products and seeking to renegotiate fees. Moreover, the asset management firms have been slower than other financial services sector to adopt technological advancements. Also, the clients reduced exposure to hedge fund and active equity in 2019.

(Source: Company Presentation)

Key Fundamental Statistics

Key Shareholders Statistics

FUM Analysis

 (Source: Company Website)

Financial Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 28 July 2020)

 (Source: Company Website)

• In H1 FY20, the Company remained resilient, with a net inflow of funds of £4.5 billion and a gross cash inflow of funds of £7.3 billion.
• The funds under management (FUM) stood at £115.7 billion, with 96% client funds retention.
• The net income from FUM was £218.9 million that was improved from £199.8 million in the corresponding period of the last year. The growth in net income from FUM reflects new business activity.
• Investment division had £29.8 billion, whereas Unit Trust & DFM and Pension businesses had £32.2 billion and £53.5 billion FUM, respectively.
• The European Embedded Value (EEV) reported a £365.3 million of new business profit and a £418.7 million of operating profit in H1 FY20.
• In H1 FY20, the new business contribution of £365.3 million (H1 FY19: £386.3 million, FY19: £793.0 million) was 5% lower than the previous period.
• James's Place generated profit after tax of £178.1 million that was mainly driven by the positive impact of the life insurance tax.
• STJ will decide for the dividend payments for FY20 in February 2021; however, the Company withheld the decision to pay a final dividend of 11.22 pence for FY19.
• As on 30 June 2020, the solvency ratio for the Life business was 124%, and it improved from 115% a year ago.
• The Company’s solvency ratio was 140%, with liquid assets of value close to £1,108.0 million.
• Total adviser numbers were up by 1.2% to 4,324 in H1 FY20 as compared with the previous period (31 December 2019: 4,096).
• In H1 FY20, the clients increased by 9% year-on-year to 763,000, with client retentions rate of 97% and adviser retention rate of 97%.
• Overall, the strategic collaboration, growing numbers of HNWIs and their wealth, and positive outlook towards the equity market of the UK may offer significant growth opportunities for STJ.

Financial Ratios

In H1 FY20, the reported pre-tax ROA and ROE stood at negative 0.1% and 7.3%, respectively, which were lower than the industry median. The reinvestment rate was 18.1% in H1 FY20, which was higher than the industry median of negative 2%. On leverage front, the debt-equity ratio of the St. James Place Plc’s was 0.55x, which was higher as compared to the industry median of 0.16x, reflecting that the company is more leveraged as compared to the peers.

Share Price Performance Analysis

 (Source: Refinitiv, chart created by Kalkine Group)

On 12 October 2020, at the time of writing (before the market close, at 8:00 AM GMT+1), St. James's Place Plc shares were trading at GBX 978.80, up by 0.36% against the previous day closing price. Stock 52 week High and Low were GBX 1,206.00 and GBX 614.00, respectively.

 (Source: Refinitiv, chart created by Kalkine Group)

From the technical standpoint, the shares were trading above the short-term support level of 200-day simple moving average price. Also, MACD line is placed above the central line, indicating a bullish setup. It has delivered a positive return in the last six months of around 19.22%.

In the last five years, St. James's Place share price has delivered 12.79% return as compared to the negative 5.37% return of FTSE 100 index, which shows that the stock has outperformed the index during the last five years.

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

Investment Multiples 

(Source: Refinitiv, chart created by Kalkine Group)

Business Outlook Scenario

STJ anticipates a period of recuperation for the UK as the population at large recovers from the Covid-19 led restrictions. The business flows for the Q3 FY20 are expected to be slightly lower as compared to Q2 FY20; however, it should see momentum build through the Q4 FY20. Overall FY20 is likely to be another year of major inflows with business resilience, and the Board appears to be confident to deliver growth over the longer term given the business strength and favourable market dynamics.

Over the medium to long-term, the Company’s ability to retain and attract new client investments shall grow funds under management, which would result in increased cash profitability. Furthermore, it is quite confident that the depth, quality, and strength of the rising partnership will help them to stay well-positioned. Strategic collaboration, growing numbers of high-net-worth individuals and their wealth, and positive outlook towards the equity market of the UK may offer significant growth opportunities for STJ.

Considering the strong solvency position, decent fundamental performance in H1 FY20, robust liquidity position, and support from the valuation as done using the above method, we have given a “Buy” recommendation on St. James's Place at the current market price of GBX 978.80 (as on 12 October 2020, before the market close at 8:00 AM GMT+1) with lower double-digit upside potential based on 5.97x Price/NTM Book Value (approx.) on FY20E book value 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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