- Shares are down 12.8% year-to-date
- Shore Capital sees Rathbones as a bid target
- Valuation of 11 times earnings for 2024 is appealing
Shares in FTSE 250 asset management firm Rathbones (RAT) have fallen by 6% over the last month and 12.8% since the start of the year.
Analysts at Shore Capital believes this weakness is unwarranted given the potential bid interest surrounding the wealth management sector.
INCREASED INVESTMENT HITS EARNINGS
According to Shore Capital, Rathbones is going through a two year period of ‘elevated investment in systems’.
The analysts don't pull their punches when they say ‘the earnings revisions look horrendous, it has much beta, and earnings will indeed fall this year’.
A 16% jump in operating expenditure combined with the market falls of the first two quarters means profit before tax is likely to decline 19% this year, according to their forecasts.
However, looking further forward they point out that Rathbones trades on a price earnings multiple of 11 times for the year after next, and when the £40m investment is completed it will be in a great place.
In the meantime, investors receive almost a 5% dividend yield.
CONSOLIDATING MARKET
Royal Bank of Canada’s £1.6 billion bid for rival asset manager Brewin Dolphin (BRW) at a 62% share price premium has highlighted what a scarce and valuable asset Rathbones is on the stock market.
Rathbones is arguably a more attractive business than Brewin Dolphin because around 20% of its assets under management and pre-tax profit are generated from its funds business, which generates higher margins than pure investment management.
On a pre-synergy basis, RBC is paying 21 times this year’s earnings for Brewin Dolphin as it looks to expand in UK wealth management.
A bid for Rathbones at a similar multiple would imply a price of more than £30 a share.
According to Shore Capital analyst Ben Williams: ‘We think the investment falls of the last two quarters have caused an excessive derating, and that buyers now can take advantage of others’ understandable disinterest.
‘RBC will not be the only bank who thinks they could take costs out of a newly-invested £59bn assets under management wealth manager’, adds Williams.
