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.

The interim dividend is scheduled for payment on 27 April 2022 to shareholders on the register at 25 March 2022.

Investment Rationale – BUY at GBX 1,190.00

• Solid Underlying Performance: CBG reported a strong income growth in the Banking division and witnessed positive momentum in the Asset Management division as well. The Board’s confidence in the business model is reflected in the 22% year-on-year increase in the interim dividends.
• Key Performing Indicators: At the end of H1 FY22 vs H1 FY21, CBG reported 1.9% and 1.1% growth in the loan book and total client assets, respectively.
• Strong Balance Sheet: CBG maintained a robust capital, liquidity, and funding as it ended H1 FY22 with a common equity tier 1 capital ratio of 15.1%, significantly above the applicable minimum regulatory requirements
• Undervalued Multiples: On a forward 12-month basis – EV/Sales, Price/Book, and Price/Earnings valuation multiples are undervalued than the median of the Financials sector.
• Technical Indicator: From a technical standpoint, the current market price is trading above the 20-day EMA (GBX 1,177.82), reflecting a bullish price momentum.

Key Risks

• Emerging Risk: CBG is mindful of the uncertain external environment, including rising inflation, increasing geopolitical tension, and wider subdued financial market conditions.
• Business Risk: It is also exposed to an uncertain economic environment, while its loan book can face high impairment provisions amid subdued consumer confidence.

Recent News 

Management Change: On 2 March 2022, CBG appointed Eddy Reynolds to succeed Martin Andrew as chief executive of Close Brothers Asset Management.

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

(Source: Company Website)

• Increased Operating Profit: During H1 FY22, CBG’s operating profit increased by 1% to £128.9 million despite a reduction in trading income in Winterflood.
• Dividend: There was a 22% increase in interim dividend per share to 22 pence in H1 FY22 against 18 pence in H1 FY21.

One Year Share Price Chart

(Data Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: Price/Book Approach (FY22) (Illustrative)

*Peer: Paragon Banking Group PLC, Provident Financial PLC, Intermediate Capital Group PLC, and Standard Chartered PLC.

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

Conclusion 

CBG has witnessed an encouraging start to FY22 with its proven and resilient business model. The growth momentum across all divisions looked robust with the improvement in loan book, strong net inflows, increased managed assets, and growth in client assets.

Nevertheless, 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.

Based on the strong trading performance, solid capital position, ongoing demand for services, with support from the valuation as done using the above method, we have given a “BUY” recommendation on Close Brothers Group PLC at the closing market price of GBX 1,190.00 (as of 25 March 2022), with lower double-digit upside potential based 1.33x Price/Book (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.

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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