r21442
16 May 2018
Another Thompson / ic update A robust trading update from Arbuthnot Banking Group (ARBB:1,530p), a constituent of my 2015 Bargain Shares portfolio, has sent the shares up to my long-term target price of 1,533p, justifying my last buy advice at 1,280p (‘Bargain Shares: Beating the market’, 12 March 2018). Longer-term holders are also doing well as Arbuthnot has paid out dividends per share of 416p in the past three years, reducing the break-even point to 1,043p. The ongoing re-rating is warranted.Having increased its loan book by £300m to £1.05bn in 2017, of which half the growth came from a doubling of the commercial loan book to £300m, customer loans and deposits at the end of April have increased by 18 per cent and 37 per cent, respectively, year on year. Arbuthnot is well funded to continue to recycle low-cost capital into lending at a favourable net interest margin. The bank earned an average gross yield of 5.27 per cent on its loan portfolio last year, or 10 times its cost of funds. Customer deposits of £1.4bn at the start of 2018 covered the loan book 1.3 times over, and the bank boasts a core tier one capital ratio of 17.3 per cent.Around 61 per cent of lending is on residential property (buy-to-let mortgages account for 30 per cent of the loan book, owner-occupiers 24 per cent and development loans 7 per cent), and a further 17 per cent is on commercial property. It’s very secure as the average loan-to-value ratio is only 53 per cent and borrowers offer personal guarantees, so impairments are incredibly low; just £51,000 was impaired in the second half of 2017. That’s reassuring given that 48 per cent of the loan book is secured on London property, a market that has been under pressure.Based on a £1.3bn year-end loan book, analyst Mark Thomas at equity research firm Hardman & Co believes that Arbuthnot should be able to increase pre-tax profits by 17 per cent to £8.9m this year and lift EPS at a similar rate to 56.3p. That looks achievable, as do expectations that pre-tax profits and EPS can ratchet up to £15.4m and 94p, respectively, in 2019 based on a closing £1.5bn loan book. A 18.6 per cent stake in challenger bank Secure Trust Bank (STB:2,000p) backs up £69m of Arbuthnot’s £228m market value too.A return to the April 2017 share price high of 1,600p looks on the cards, and perhaps higher still. Run profits.
lawdoc
08 Apr 2018
Re: ARBB a growth story A good point. The spread was near 5%, albeit more recently it's been around 3%. I guess it's because of liquidity with the CEO holding >50% of shares. Actually, with the chief holding such a high stake it reduces our risk. The money is in safe hands.
Thorndon33
04 Apr 2018
Re: ARBB a growth story In my opinion, the big spread between the buying and selling price of this share deters potential investorsI topped up my holding last year and believe that the fact that Arbuthnot Banking has recruited many additional experienced bankers and has the fund for loans offers very good prospects
Thorndon33
04 Apr 2018
Re: ARBB a growth story In my opinion, the big spread between the buying and selling price of this share deters potential investorsI topped up my holding last year and believe that the fact that Arbuthnot Banking has recruited many additional experienced bankers and has the funders for loans offers very good prospects
lawdoc
03 Apr 2018
ARBB a growth story Let me first disclose that my wife and I have holdings in ARBB so I am probably biased.ARBB has declared a 91% increase in underlying profit. It has a PEG of 0.2 for 2018 and 2019 and gives a reasonable Dividend. Moreover, it has no debt, has cash on the Balance sheet, and further asset backing with a 18% holding in Secure Trust Bank. In addition, being an AIM share, Investors are not liable for IHT.Half of the shares are held by the CEO so there is skin in the game. So why are investors reluctant to take advantage of this growth story?
r21442
12 Mar 2018
Re: IC / Thompson update Latest update below from today....Arbuthnot Banking (ARBB:1,280p), a constituent of my 2015 Bargain Shares Portfolio, has confirmed trading has been bang in line with robust market forecasts that point towards pre-tax profit almost doubling from £4m to £7.7m in 2017 based on a 29 per cent rise in operating income to £53.6m, according to analyst Mark Thomas at equity research firm Hardman & Co.I had expected as much given that the company’s private banking arm, Arbuthnot Latham, increased its underlying pre-tax profit by three-quarters to £4.9m in the first half, with loans rising by a third to £879m, a positive trend that I had anticipated would be maintained for the rest of the year.I am reassured that the bank refuses to chase volume at the expense of relaxing its lending criteria, a point highlighted by a low level of impairments and a comfortable loan-to-value ratio on its residential and commercial property loan book. Moreover, Arbuthnot is well funded as customer deposits exceed its loan book by around 40 per cent, thus providing ample low-cost capital to recycle into future lending at an economic net interest margin. I see no reason why this sensible approach to lending should not continue to be productive, and so to do analysts who predict another step-change in Arbuthnot’s pre-tax profit to £14.3m this year based on operating income of £67.5m. On that basis, expect adjusted EPS to almost treble to 48.8p in 2017, rising to 86.7p in 2018.The loan book aside, Arbuthnot also offers solid asset backing in an 18.6 per cent stake in challenger bank Secure Trust Bank (STB:1,550p), which alone backs up £52m of Arbuthnot’s £280m market capitalisation, and a prime London office property that’s worth £53m and contributed £1.8m rent.Priced on a 17 per cent share price discount to book value of 1,533p, on a prospective PE ratio of 15 for 2018 and offering a 2.4 per cent dividend yield, I feel the rating does not reflect the stellar EPS growth that’s forecast for this year and beyond, a point I made last autumn (‘A trio of small-cap buys’, 31 Oct 2017). So, ahead of the full-year results on Wednesday 28 March, I rate Arbuthnot’s shares a buy.
r21442
31 Oct 2017
IC / Thompson update Shares in Arbuthnot Banking Group (ARBB:1,315p) have edged up slightly since I rated them a buy at 1,252p during the summer, placing a target price of 1,533p on the equity at the time ('Value opportunities', 19 Jul 2017). The company paid an interim dividend of 14p a share at the end of last month to take the running total to 397p since I included the shares, at 1,459p, in my 2015 Bargain Shares portfolio. A third-quarter trading statement is certainly supportive of my 1,533p target price.The company’s private banking arm, Arbuthnot Latham, increased its underlying pre-tax profit by 75 per cent to £4.9m in the first half with loans rising by a third to £880m. In a third-quarter trading statement, the bank confirmed that the loan portfolio is maintaining that heady growth rate, and the lending pipeline remains robust. Reassuringly, the bank refuses to chase volume at the expense of relaxing its lending criteria, a point highlighted by a low level of impairments and a comfortable loan-to-value ratio on its residential and commercial property loan book.Importantly, Arbuthnot is well funded with customer deposits covering the loan book almost 1.4 times over and providing ample funding for further lending. Also, net interest margins are benefiting from lower funding costs with the blended cost of funds falling by almost a third to 0.49 per cent on the same period in 2016, underlining the positive impact on profits of recycling customer deposits into lending at an economic net interest margin.This helps explain why analysts at Hardman & Co expect Arbuthnot's pre-tax profits to more than double this year from £4m to £8.3m based on a 29 per cent rise in operating income to £53.6m, increasing to £14.3m and £67.5m, respectively, in 2018. On this basis, expect adjusted EPS to treble to 52.2p this year, rising sharply again to 86.7p in 2018. The point being that if Arbuthnot delivers anything like the growth predicted, and maintain credit quality, then a share price in-line with book value of 1,533p is in order.There is rock solid asset backing as 30 per cent of Arbuthnot’s market value of £200m is backed up by a 18.6 per cent retained stake in challenger bank Secure Trust Bank (STB:1,895p); the company used £53m of the cash windfall from selling down that stake to acquire a prime property in London that’s bringing in £1.8m rent; and purchased a private banking loan portfolio, worth £44.9m, from banking group Duncan Lawrie that is secured on property of £104m, and yields 5.2 per cent. Buy.
lawdoc
25 Aug 2017
Good decision? Topped up my holding with 400 shares which indicates as two sell trades today. Motivated by the Hardman report suggesting base case valuation is over £18- and by the comparative peer group ratings although I do accept it's hard to value banks. What clinched it for me is the forecast PEG=0.2 for 2018. Goes ex-div next week, 31/8.GLA.
Thorndon33
19 Jul 2017
Half yearly results Very encouraging half yearly results with an increased dividendI think the uncertainty over brexit is holding back the share price
Dot Waudby
30 May 2017
Price I apologise if I am ignorant, but does the price above mean that each share is one thousand five hundred and no pence. surely I am getting it wrong!, doe!
Thorndon33
15 Apr 2017
Henry Angest buy According to the FT today Henry Angest has purchased another 150,500 shares at 1433.2p to increase his stake to 56% from 55%This must surely suggest that the plan to expand the banking arm is going wellHis record over the past few years has been excellent and I am optimistic that his timing to expand the banking business is correctThis has been one of my best performing investments over the past few years and I may top up again having taken some profits over the past year or two
casper72
11 Apr 2017
Re: Man, this is a quiet board! When you add in dividends of £4.09/share paid in the same period, the return is a little under 17% pa.which is boring, but effective.
r21442
06 Apr 2017
Re: Man, this is a quiet board! Boringly effective?Boringly flat sp these last 2 years more like.
TX2
06 Apr 2017
Re: Man, this is a quiet board! It will be interesting to see how the company grows a new income stream now the larger part of the Secure Trust holding has been sold.
casper72
06 Apr 2017
Re: Man, this is a quiet board! Indeed, this is one of my favourite companies for exactly that reason. Good management, conservative accounts, clear plan,Long track record of delivery. Boringly effective.
