r21442
17 Sep 2015
Tipped again Friday's IC Bull points•Discount to Secure Trust stake•Debt demand growing•Private bank expandingBear points•Profits surcharge•Illiquid sharesArbuthnot Banking (ARBB) presents something of a valuation anomaly. Its market capitalisation is worth significantly less than the £276m market value of its 52 per cent stake in its listed subsidiary, challenger bank Secure Trust (STB). While there are explanations for the discount, we think the blossoming of Arbuthnot's private banking business will soon make the valuation gap very hard to justify.Let's address the initial puzzle of the discount. Analysts at Edison model a 10 per cent discount to the market price of Secure Trust to reflect the illiquidity of such a large stake. That still puts a value of £248m on the stake, which is above Arbuthnot's own market capitalisation. And it's worth noting that the 10 per cent haircut is well above the 3.8 per cent discount to market price that Arbuthnot accepted when selling its last major chunk of shares in June 2014, which reduced its holding from 67 per cent to 53 per cent. This may be academic for the time being as Arbuthnot is not thought to be in any rush to give up having a controlling stake.A further and arguably more significant explanation for the discount lies in the fact that profits from the Secure Trust subsidiary represent more than the total for the group. Indeed, strip out the Secure Trust contribution from last year's accounts and investors are left with a £3.6m pre-tax profit from the group's private banking business, Arbuthnot Latham, which was more than overshadowed by the separately reported £7.5m post-tax loss from central group costs, which includes some spending related to Secure Trust. However, Arbuthnot has funnelled the proceeds from the 2014 Secure Trust share sale back into the private bank, and the business is now achieving rapid growth. Indeed, first-half profit at Arbuthnot Latham more than doubled to £3.7m, which came close to matching group-centre losses of £4m. The share sale has helped fund the hiring of new bankers and an expansion of the private banking business both in the north of England, including opening a new Manchester office, and overseas. A recently opened Dubai office broke even in July, which should boost second-half performance. Furthermore, a three-year transformation plan should deliver a bigger, digital bank, while an expansion into commercial banking promises another revenue stream from entrepreneurial private clients.That means forecasts by research house Edison that private banking profits will outstrip central costs in 2016 (£8.4m versus £6.1m) look very achievable. Meanwhile, Secure Trust continues to go from strength to strength with first-half pre-tax profit growing 40 per cent to £16m, which we think justifies its shares' rating of 18-times forecast earnings. True, the announcement in the Budget of a corporation tax surcharge for lenders was not welcome, nor was news of an increase in the tax take from buy-to-let given Secure Trust's investigation of whether to enter that market. Nevertheless, overall there remains plenty to be optimistic about.As profits from Arbuthnot's private banking business grow, the discount the shares trade on compared with the Secure Trust stake will look increasingly out of touch. We think this will result in a re-rating. The shares are not very liquid, but patiently building up a stake should pay off. Buy.
The OTC-man
05 Aug 2015
Why this riduclously wide spread? Can someone please explain why MMs in ARBB , a quite secure and steady paper, can get away with maintaining this greedy and totally unpalatable 5-8% bid-offer spread? It completely strangles liquidity - quite the opposite of why MMs are supposed to be there at all. A clear proof that MMs are dinosaurs from pre-electronic times (when they indeed were needed). We should now all be allowed to place our limit orders directly in the market in competition with whichever MM choose to remain after abolishing this abusive monopoly.
dandigirl
24 Mar 2015
Re: Investors Chroncle comment r21442: Thanks for the info. I do have some STB - have had for a while. They haven't done spectacularly well but just maybe in the future. OSB is the one that has taken off for me. PCF also treading water but the Chairman has demonstrated confidence with his recent purchases.I purchased just a few ARBB earlier today.
r21442
24 Mar 2015
Re: Investors Chroncle comment The full IC text....Aim-traded private banking group Arbuthnot Banking (ARBB:1,420p) has reported storming set of results and a doubling of net asset value per share to 1,136p. Part of that gain in book value resulted from the disposal of £25m of Aim-traded shares in Secure Trust Bank (STB: 2,925p), an unsecured lender with a market value of £532m, and a company in which Arbuthnot still owns 9.48m shares worth £277m, or 51.8 per cent of the issued share capital. That shareholding alone is worth more than Arbuthnot's own market capitalisation of £211m!But this is not just about a glaring valuation anomaly. That's because the 65 per cent increase in Arbuthnot's underlying pre-tax profits to £30.6m in fiscal 2014 not only reflects the stellar progress at Secure Trust, but a near trebling in the profits at Arbuthnot Latham, its own private banking arm and an operation which has grown customer loans to over £500m for the first time. And analysts expect profits at the private bank to almost double again to £7m this year, buoyed by the acquisition of the residential mortgage book of Dunfermline Building Society from its administrators.Applying a multiple of 10 times to the current year estimate of Arbuthnot Latham's post-tax profits and I reckon that the unit has a value the equivalent of around a quarter of Arbuthnot's own market capitalisation. Moreover, we are getting this business in the price for free since Arbuthnot has a market value almost 25 per cent less than the value of its shareholding in Secure Trust! Add to that the recently declared 27p a share dividend, and I feel that the valuation anomaly is worth exploiting with Arbuthnot shares rated on a forward PE ratio of 12.5 times, representing a four point earnings discount to Secure Trust's own rating despite Arbuthnot's 51 per cent stake in that business. Buy.
Thorndon33
22 Nov 2014
Investors Chroncle comment This week's Investors Chronicle has the following comment about Arbuthnot by Algy Green who writes a Stock Screen commentThe following eight stocks passed this year's screen'Arbuthnot -the group's majority stake in Secure Trust gives it exposure to successful challenger banks'There are also comments on the other sevenI notice from the web site of both Arbuthnot and STB that they are still recruiting staff which looks promising.Containerman
