Close Brothers Group PLC

Close Brothers Group PLC (LON: CBG) is an FTSE 250 listed UK merchant banking entity that provides services related to lending, deposit taking, wealth management services, and securities trading.

Investment Rationale for Valuation –Buy at GBX 1,108.00

• Sustained Momentum: On 20 May 2022, CBG unveiled an update regarding the Q3 FY22 (period from 1 February 2022 to 30 April 2022), and reported
  • Strong momentum in lending business with robust demand in core markets.
  • Common Equity Tier 1 ratio was stood at 14.9% on 30 April 2022 (31 January 2022: 15.1%), well above the applicable minimum regulatory requirement.
  • The loan book surged 1.8% YoY to £8.8 billion, driven by solid new business volumes in Commercial, Motor Finance, and in Property divisions.
• Dividend Growth: Following the solid income growth and continued confidence in the business model, the ordinary dividend per share grew by 22% to 22.00 pence in H1 FY22, compared to 18.00 pence in H1 FY21.
• Technical Indicator: From a technical standpoint, the MACD line has given bullish crossover against the signal line, reflecting a bullish price momentum.
• Undervalued Multiples: On a forward 12-month basis, CBG’s key valuation multiples (EV/Sales, Price/Earnings, and Price/Book) are undervalued against the average of the Financials sector.

Key Risks

• Macroeconomic Risk: Markets are likely to remain jittery in the short term over rising interest rates, the strongest U.S. dollar in two decades, concerns over inflation and possible recession.
• Subdued Winterflood Division: The Winterflood division showed recovery in Q3 FY22, although trading remained volatile. It can lead to a reduction in trading income.

Financial Highlights (for the six months ended 31 January 2022, as of 15 March 2022)

(Source: Company Website)

• Marginal Rise in Operating Profit: The Group reported a slight increase in adjusted operating profit to £129.80 million in H1 FY22, compared to £128.50 million in H1 FY21.              
• Liquidity Position: The Group reported a decent liquidity position with common equity tier 1 at 15.1% as of H1 FY22 end, comfortably above the applicable minimum regulatory requirements.
• Asset Management Division: This vertical witnessed decent momentum during the period and delivered annualized net inflows of 8% during H1 FY22. The adjusted operating profit grew by 18% to £14.5 million during the period.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Book Approach (FY23E)

*Peers: Secure Trust Bank PLC, OSB Group PLC, and Intermediate Capital Group PLC.

*All selected peers are LSE-listed Companies from the Financials sector.  

Conclusion

Based on the resilient performance, decent liquidity position, good performance from the banking division & asset management vertical 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 market price of GBX 1,108.00 (as of 27 May 2022, at 12:35 PM GMT+1) with lower double-digit upside potential based on 1.16x Price/NTM Book (approx.) on FY23E Book Value per share (approx.).

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

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.

Note 5: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.’

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 unfavorable movement in the stock prices.

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