AFH’s FY15 EPS was up 80% on FY14, driven by a 40% increase in turnover. Management highlights that organic revenue growth was c 20%. The group continues its conservatively executed acquisition strategy and we expect the £6.2m of recent net equity placement proceeds to be deployed in deals relatively quickly. Management confidence is highlighted by the 50% increase in dividend.
The key surprise in FY15 was the rapid organic revenue growth (20% on FY14) despite relatively anaemic organic growth in H115. Management highlights that after the tax year, investors then delayed investment decisions until after the general election. Historic initiatives, which focused on recurring rather than initial income, are now delivering revenue. We also understand that the largest 20 advisers (by funds) outperformed the firm as a whole, helping to pull up average revenue growth. Management comments that 75% of recurring revenue was generated internally (including advisers acquired in previous years but not the current year). Funds under management (FUM) doubled to £1.8bn, with £0.7bn acquired and £0.2bn inflows from existing and new clients. Client retention was around 97%. There was some operational leverage, with administration costs as a percentage of revenue dropping to 40% from 42%. The dividend was raised by 50% to 2.25p and was still covered 2.6x by normalised earnings. Balance sheet group cash reserves were c £8m on the reporting date.
Our forecasts remain highly conservative. We have included the £6.4m of equity recently raised, but give no credit for its deployment in acquisitions until such time as a deal is completed. We would expect further earnings enhancement from this process in H116. Cash on the balance sheet (£8m currently) could, allowing for regulatory requirements and on a half-upfront consideration basis, fund several deals with total consideration of c £10m (nearly a quarter of AFH’s current market capitalisation). After a pause in H215 to integrate H115 deals, we expect the company to be announcing further acquisitions over the next few months.
The average of our approaches implies a value of £2.32, which represents c 35% upside from the current price. This does not provide any benefit for deploying recently raised equity, which we believe could add more than 10% to our value.