Brewin Dolphin is putting in place a new dividend policy which targets a 60% payout ratio from end 2014 onwards, which RBC Capital Markets said was a key driver behind its ‘outperform’ rating, ahead of the group’s full year results on 4 December.
An RBC analyst note indicated that assuming market neutral performance yielded a 20% dividend compound annual growth rate (CAGR) from 2013 to 2016, the dividend yield was forecasted to almost double, from 2.6% to 5%.
In terms of price target, RBC has increased it by 9% to 310p, a result of changing its valuation approach and the higher forecasts.
“We now value Brewin solely by applying a 14x p/e multiple to FY15E earnings per share since we now believe earnings the most relevant driver of value for the company. We previously valued Brewin as the rounded average of applying a 12x p/e multiple to FY15E EPS and a percentage of funds under management.”
The broker praised the discretionary fund manager’s stable cash flows, high proportion of recurring revenue and margin uplift potential.
Meanwhile Numis Securities has kept its forecasts at mark-to-market for the group’s well-defined operating margin targets – of more than 20% by end 2015 and more than 25% by end 2016 – which it said should incentivise the management team.
It said Brewin showed strong long-term potential in spite of the operational risks involved, such as changing the back office systems handling client investments.
Numis analyst David McCann said as Rathbones and Investec Wealth had achieved 30% margins, he saw no reason why Brewin could not deliver in line with that.
McCann’s note said: “With a margin assumption of 25% in FY16, we expect FY13-16 EPS growth of 20% pa, comparing to revenue growth assumed of 10% pa, highlighting the shareholder benefit of the margin improvement.”
