A strengthened balance sheet and the growth in funds managed for clients are the foundations for a recovery in WHI’s fortunes after a traumatic period for Small Cap stockbrokers.
It comes as no surprise that WHI reported a loss for 2015/6 as the severe decline in trading, and in money-raising on AIM, ahead of the referendum had reduced first-half revenues by one-quarter, pushing it (and others) into loss and it had announced a major restructuring to improve efficiency and the level of client service with large upfront costs.
The latter is costing (including provisions for identified costs to be incurred later this year) £1.6m and there was another £0.2m of costs relating to a fine paid in respect of inadequacies of the previous management team several years ago. Our confidence that these oversights are ancient history was enhanced by the decision of Victoria Raffe to join WHI as a non-executive director since her distinguished career has included being a divisional Director of the FCA.
The summary of revenue down 18% to £25.4m and a loss before tax of £3.2m looks depressing but a closer look shows that operating losses before exceptionals improved from £1.1m in H1 to £0.15m in H2. So the £0.4m pa savings expected from the restructuring would convert that into profit, even without any recovery on AIM or the growth in fee income in private wealth management. In common with nearly all other private client brokers commission income fell sharply in H1 with a partial recovery in H2.
Mattioli Woods recently paid 5.5% of AUM for a 49.9% stake in Amati which would imply a value of £56m, or 204p/share for WHI’s Discretionary AUM alone, i.e. ignoring its advisory and execution-only AUM, its corporate broking business, and the £11m of cash.
Our usual sum-of-the-parts valuation uses a more conservative 4% for Discretionary AUM, 2% for Advisory and 0.5% for execution-only giving £61.7m (ignoring the rise since 30/11/16) plus the excess of its £11m cash over regulatory requirements, so roughly double the current share price (a little more if you adjust for the rise in AUM since the year-end, a bit less if you don’t). That’s putting no value on its corporate broking division which ranks 3rd among NomAds. The FTSE rise since end-November would add more than 10p/share to a valuation, so trying to quote one to the nearest p would be spurious precision.