Uncertainty surrounding the EU referendum and the accompanying reduction in base rate has resulted in lower earnings estimates for IFG, although the longer-term outlook for its two businesses remains promising. Both the retirement wealth platform and financial adviser stand to benefit from an ageing population and pension freedoms. Meanwhile, IFG continues to invest to address these opportunities and has sufficient capital and net cash to support growth while maintaining a progressive dividend policy.
IFG’s first half saw strong revenue and adjusted operating profit growth of 16% and 31% respectively compared with H115. Adjusted EPS were 41% ahead and the dividend was increased by 11%. At James Hay Partnership (JHP), EU referendum uncertainty and a focus on larger advisers left the number of SIPP accounts flat compared with the year end. New client growth slowed at Saunderson House (SH) as demand for financial advice surged around the time of the referendum which, combined with a fee increase, contributed to strong revenue growth.
For JHP two headwinds present a near-term revenue challenge. The company estimates that the recent 25bp reduction in base rate will reduce revenues by £1.2m in the second half and more in 2017. Secondly, the lower than expected rate of SIPP account growth flows through into near-term revenue expectations. Positively, however, JHP is considering price changes to offset reduced interest income, while a relatively calm equity market background may help rekindle account growth. Acquisition opportunities may increase as additional capital requirements are implemented, potentially putting further pressure on smaller players. As demand for advice from existing clients normalises, SH will be able to devote more time to client acquisition, a task that should be eased by continued solid investment performance (see page 4).
We have updated our DCF valuation, which now points to a central value of around 180p (formally 181p versus 186p previously). The limited reduction, despite lower near-term estimates, reflects an assumed resumption of SIPP account growth feeding through to revenues in 2017/18 and a neutralisation of the interest income drag through pricing/rate increase. Following post-results weakness, on our estimates, the share price discounts subdued intermediate and long-term growth, suggesting significant upside in due course.