Metro Bank PLC

London-headquartered Metro Bank Plc is engaged in the business of banking and related services. The group provides business and personal banking services. The bank is primarily focused on catering retail customers and small and medium-size corporations.

Recent News
On May 17, 2019, the banking group announced that it has successfully raised around £375 million through its share placing, which was exercised on May 16, 2019. Existing and new investors shown a strong demand for the stock, which was issued at GBX 500 per share.

Q1 Trading Update 2019 (as on 1^st May 2019)



(Source: Trading Results, Company Website)

During the quarter ended March 31, 2019, the group reported growth of 97,000 in customers to account against 88,000 recorded in a year-ago period. Total customers account as on March 31, 2019, stood at 1.7 million. During the first quarter of FY19, personal current account recorded an increase of 24 per cent against the previous year and commercial current account expanded by 23 per cent on a YoY basis. Total deposits during the Q1 FY19 period registered a growth of 19 per cent to £15.1 billion against the corresponding period of the previous year. However, on a Q-o-Q basis, deposits impacted on account of adverse January's trading update.

On a YoY basis, advances grew by 38 per cent to £15.2 billion, and on a Q-o-Q basis, loan book grew by £0.9 billion. During the first quarter of FY19, loan to deposit ratio increased to 100 per cent against 91 per cent in the same period of the previous financial year.
Total revenue increased by 2 per cent to £107.5 million as compared to £91.8 million in Q1 FY18. Underlying pre-tax profit stood at £6.9 million against £10.0 million in Q1 FY18, and statutory pre-tax profit stood at £4.3 million against £8.6 million in a year ago. Underlying basic earnings per share stood at 5.1 pence against 8.8 pence marked a year-ago period.

Share Price Performance

Daily Chart as at June-12-19, before the market closed (Source: Thomson Reuters)

On 12^th June 2019, at the time of writing (before the market close, GMT 10:02 AM), MTRO shares were trading at GBX 603.50, up by 0.083 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 3,512.00/GBX 474.50. The company’s stock beta was 0.13, reflecting significantly lower volatility as compared to the benchmark index.

Valuation Methodology


Conclusion
The growing cards and payments channel in the UK may provide growth opportunities for the bank. The bank could benefit from venturing into FinTech arena as it is fast changing the way banking is done and challenging the regulatory structure. Introduction of new products and services enable the bank to grow organically and enhance its customer base. The bank has been taking various initiatives, which has been enabling to grow organically.
Despite cash injection of £375 million, which will bring Metro's tier-1 capital ratio to 15.6 per cent, a 5% above the regulatory threshold level, but overall growth depends upon the lender's strategy and corporate governance. During the AGM, around 28% of the votes were cast against the re-election of Mr Stuart Bernau and Gene Lockhart, that signals that shareholders trusts have been jolted significantly.

The company expects more decent deposit growth in the financial year 2019 with Metro Bank transitioning to a run rate of around 20 per cent after 2019. It also intends to open around 8 new stores in FY19, added two C&I funded stores in Liverpool and Manchester. The group will also manage its loan to deposit ratio between 85-90 per cent, due to the RWA efficiency. Cost to income ratio will be around 85-90 per cent in 2019.

Based on the above rationale and valuation done using the above methodology, we have given a “Buy” recommendation on the stock at the closing price of GBX 603 (as on June 11, 2019) with single-digit upside potential, based on the 2.5x NTM Peers Average EV/Sales Multiple (approx.) on the FY19E sales (approx.).

Arrow Global Group PLC

Arrow Global Group Plc (ARW) is a credit management services provider. The company carries out the acquisition and management of underperforming consumer debt portfolios. Group's business activities are differentiated into three broad phases: Origination and underwriting, Asset management and Repayment-hybrid collections mode.

Trading Update (for the three months ended 31 March 2019)


(Source: Trading Results, Company Website)

The company’s organic portfolio purchases decreased from £79.9 million in Q1 FY18 to £56.4 million in Q1 FY19. Core collections surged by 22.7 per cent to £105.5 million against the £86 million in Q1 FY18. Total income stood at £86.6 million, an increase of 12.3 per cent from the previous year same period data. Third-party AMS income rose to 21.7 per cent to £23 million. Underlying profit before tax climbed by 14.1 per cent to £16.2 million as compared to £14.2 million in Q1 FY18. Basic earnings per share (EPS) stood at 6.1 pence in Q1 FY19.
Free cash flow increased by 32 per cent to £57.8 million against the £43.8 million in Q1 FY18. The company was a huge cash generative business, and this is apparent when purchases were scaled back, due to the three-point drop in leverage from 3.7x at the full year 2018 to 3.4x at the end of Q1 FY19. 84-month ERC and 120-month ERC increased by 2.6 per cent and 4.5 per cent to £1,602.8 million and £1,935.4 million. Underlying LTM ROE stood at 34.5 per cent.

Share Price Performance

Daily Chart as at June-12-19, before the market closed (Source: Thomson Reuters)

On 12^th June 2019, at the time of writing (before the market close, GMT 12:05 PM), ARW shares were trading at GBX 210.7, up by 0.91 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 289.50/GBX 166.20. The company’s stock beta was 0.88, reflecting lower volatility as compared to the benchmark index.

Valuation Methodology


Conclusion
Last year Arrow revised its strategy, targeting lower leverage while continuing to grow the group’s balance sheet intensive Debt Purchase business and having a more significant share of the group’s revenues and profit derived from the non-balance sheet intensive Asset Management business. In Q1, Arrow reported that the leverage ratio had fallen to 3.4x from 4.0x in Q1 last year and 3.7x as of the December 2018 year. This is in line with the new group target of 3.0-3.5x.

The guidance on the expected level of purchases for the year is unchanged at £250 million, but Arrow believe the pricing environment, and therefore, the returns profile will continue to improve. The company has shown that with a lower growth rate, its net debt falls.
Importantly this diversifies the funding base and yet again confirms the group’s access to comparatively cheap finance. Arrow has announced the small acquisition of Drydens which is, in effect a legal insourcing as the group has been a panel provider to Arrow. Arrow also plans to undertake a full cost review of their portfolio of businesses at the year-end to achieve improved operating efficiency.

Based on the above rationale and valuation done using the above methodology, we have given a “Speculative Buy” recommendation on the stock at the closing price of GBX 208.80 (as on June 11, 2019) with lower double-digit upside potential, based on the 6.0x NTM Industry Average Price/Earnings Multiple (approx.) on the FY19E earnings per share (approx.).

 
Jupiter Fund Management PLC 

Jupiter Fund Management Plc (JUP) is a financial service provider that offers management of medium- and long-term investments. The company provides management of equity investments for retail, institutional and private client investors.

Recent News
On 14^th May 2019, Jupiter has announced that they have appointed Wayne Mepham as the new CFO (replacing Charlotte Jones who had previously announced that she was stepping down to join RSA Insurance Group Plc).

Trading Update (as on 30^th April 2019)
In Q1 FY19, Net Outflows was £0.5 billion. AUM (Asset Under Management) at 31 March 2019 was £44.1 billion, a surge of £1.4 billion in the quarter.

Financial Highlights (FY2018, £ million)
 

(Source: Annual Report, Company Website)

Net management fees surged by 1 per cent to £395.7 million, driven by the higher average AUM across the year. Underlying earnings per share (EPS) were decreased by 7 per cent, due to the cessation of box profits and a surge in operating expenses, partially offset by higher performance fee receipts. Profit before tax and basic EPS were similarly declined by 7 per cent and 8 per cent respectively, to £179.2 million and 31.8 pence respectively.

Net revenue increased from £409.5 million in FY17 to £412.7 million in FY18. The Group generated positive operating cash flows after tax in 2018 of £170.5 million, representing 119 per cent of profit after tax. The company’s cash position at the year-end date stood at £201.7 million, as trading profits were offset by dividend payments to shareholders and a surge in the seeding of funds.

The Board has declared a full-year ordinary dividend per share for the year of 9.2 pence. This results in a total ordinary dividend per share for the year of 17.1 pence. Driven by the current high level of regulatory and political uncertainty, the company’s Board has decided to retain 10 per cent of earnings, declaring a special dividend per share of 11.4 pence.

Share Price Performance

Daily Chart as at June-12-19, before the market closed (Source: Thomson Reuters)

On 12^th June 2019, at the time of writing (before the market close, GMT 1:42 PM), JUP shares were trading at GBX 372.5, down by 1.84 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 457.85/GBX 265.54. The company’s stock beta was 1.32, reflecting higher volatility as compared to the benchmark index.

Valuation Methodology


Key Risks
Failure to deliver strategy; Ability to attract and retain critical staff; Ineffective product, client and geographic diversification; Sustained market decline; Challenges presented by Brexit; Operational control environment; Failure of a critical outsource partner; and Cybercrime.

Conclusion
Mutual funds saw £1 billion of outflows, including £0.5 billion from one mandate which switched to a segregated mandate.  The other £0.5 billion of outflow was an improvement and was concentrated in the European Opportunities Fund and Fund of Funds. Flows in Dynamic and Segregated Bond funds appear to have been flat-to-positive after several quarters of outflow.

Although the company’s profitability margins decreased slightly in the latest reporting period, the business environment does not augur well for its performance. The geopolitical and economic uncertainties in the United Kingdom as well as abroad has caused significant volatility in the market. The Brexit implication, stiff competition, and operational risks may affect the growth of the company.

On the basis of above valuation, we recommend investors to keep a cautious “Watch” on the stock at the closing price of GBX 379.50 (as on 11th June 2019), while any correction with support from few catalysts needs to be evaluated at a later stage.
 
*All forecasted figures have been taken from the Thomson Reuters.
*The “Buy or Speculative Buy” recommendation is valid for the current price as covered in the report as on (12th June 2019).
 

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