FY18 revenues were held back by the impact on client demand of the Q4 equity market correction and a levelling off in pension transfer activity. Nevertheless, revenue generated from affinity relationships continued to grow. Recurring revenue was up 10% and now accounts for more than 50% of customer revenue. The opportunity for the group to generate good long-term growth by meeting the need for financial advice, particularly within its affinity relationships, remains attractive.
Group revenues were 1% down, affected by the softening in customer demand highlighted above. Segmentally, only the legacy Communities area recorded a reduction, reflecting both the weaker demand background and a small contraction in the number of advisers. Overall revenue per adviser was maintained, control over costs allowed underlying EBITDA to increase by 7.2% and diluted underlying EPS increased by 3.4%. The group has no debt and cash of £9.5m is therefore well placed both to follow a progressive dividend policy (+67% for 2018) and pursue investment where appropriate.
The growth opportunity for Lighthouse and other financial advice providers in the UK appears attractive, with a combination of an ageing population, greater longevity, the switch to defined contribution pensions, increased pension freedom and tax complexity all pointing towards increased demand. Many may be unwilling to pay an economic price for advice, but even so the potential market is large and growing. For Lighthouse, the market segment it addresses is the mass affluent, or Middle Britain. It is differentiated by its strength in affinity relationships, mainly with unions, which give it access to a potential audience of more than six million individuals. Management is considering investing in additional advisers and associated support resources to accelerate growth in the next five years, which could temporarily affect results, but this should be more than offset if successfully executed.
Our DCF-based valuation is lower than previously at 41p, versus 44p, following reductions in our FY19 and FY20 EPS estimates (3% and 1% respectively). However, it is perhaps more realistic to reference peer P/Es in the near term, which average 19x and 16x for FY18 and FY19. Based on these multiples, Lighthouse would be valued at c 30p, still 20% above the current price.