Mattioli Woods: Climbing the value chain

Mattioli Woods is an expanding wealth management, pensions and employee benefits group with an excellent brand and culture. With its small current market share, there is considerable upside potential for earnings both organically and via acquisitions. We expect further acquisitions in line with the existing strategy but have not included any in our forecasts. While the shares are fully rated, we see this as justified by the high level of earnings quality combined with good growth prospects. We initiate coverage with a BUY recommendation and a target price of 770p.
Organic growth plus continued accretive acquisitions
The vertically integrated advice led offering enables Mattioli Woods to improve the value proposition to clients as well as the ability to rise up the value chain and further enhance earnings quality. Equally there remains considerable scope to use its plentiful cash resources to accrete earnings through the existing acquisition strategy and consolidate the market by exploiting Mattioli Wood’s favoured buyer status. It has created a virtuous circle where it is able to acquire target businesses that fulfil its criteria which contribute to its growth and profits, thereby increasing the group’s market valuation as well as the attractiveness of its shares as an acquisition currency.
Expanding wealth management and product provision
The growth drivers include expanding discretionary wealth management, launching new higher margin funds such as structured products following the success of Custodian REIT, and further scaling up the SIPP business. We forecast revenue growth of 12% in FY17 versus 25% in FY16 which benefited from acquisitions which also flow through into FY17. FY17 adjusted Ebitda is estimated at £10.5m (£9.3m) which is an increase of 13%. implying an Ebitda margin of 22%. with EPS of 33.4p (+8%), and DPS of 14.0p (+12%) on a 42% payout (40% in FY16).
Earnings quality and growth prospects justify premium valuation
For valuation, we have used a PE of 20x (in line with the recent level), justified by superior earnings quality reflected in excellent client retention, the recurrent nature of earnings which benefit from anti-cyclical time based fees which counter-act the negative impact of adverse markets on AUM I AUA related revenues. We expect organic earnings growth to be enhanced by further accretive acquisitions, although we have not incorporated any new ones into forecasts. We derive a 1 year forward target price of 770p, implying total shareholder return of 16%. As we expect further acquisitions, we see further upside above our target price.