Hold Close Brothers Group (CBG) Tight

Hold Close Brothers Group (CBG) Tight

Close Brothers Group (CGB) has just delivered its statement of results for the year to 31st July 2015. They were a gratifying and polite response to my judgement last June that the shares offered decent value, prospects and income.

Overall, group operating profit increased by 16% to £224.9 million and basic earnings per share rose 19% from 101p a share the previous year to 120.5p for the year to 31st July 2015. The annual dividend per share pay out was raised 9% to 53.5p.

This financial services business based in the City is a traditional mix of banking, market making and fund management. The biggest of these is banking, the operating profits of which, at a reported £208.7, represented 83% of the combined operating profit generated by all three businesses; that is to say £208.7 out of a total of £251 million. The excellent group results were driven by the above average performance of the banking business over the period. There, operating profit increased 15%.

The banking business is both niche and conservative in its business model. That is to say, its lending is predominantly short term and secured and spread over a range of industrial sectors. It includes loans to small and medium sized businesses and car finance. The bank’s capital ratio of 13.7% Tier I looks OK but not outstanding against bigger banks as I seem to recall it being a year or so ago.

The asset management operation saw funds under management increase by 11%, a result that seems in part due to an internal organisation which meant that Asset Management operating profitability surged by 80% from £9.9 million to £17.8 million.

The Winterflood market making business saw its operating profit down 8% as a result of challenging conditions in its segment of the equity market. Jobbing shares is obviously easier when prices are trending higher.

It is my conclusion that Close Brothers have had several years of banking progress that was in part founded on the reluctance of the bigger banks to lend as they continued to sort out their balance sheets for regulatory purposes as well as keeping up with the cash and capital outflow prompted by massive fines for dishonest and questionable activities by their staff. That looks much less of an advantage now.

Moreover, there are also new entrants to the UK banking market. In consequence, the story of top line driven progress may be harder to sustain as it has been over the last few years. Because that is likely to be as a result of more competition, I suggest that it may also mean less generous operating margins. The top line increase last year was near 10%, following a rise of 8% the year before and 11% the year before that.

Nevertheless, the market consensus still estimates a near 7% increase in this year’s top line forecast. On the assumption that Close Brothers Group produces the 127p of estimated earnings, then they are selling on a forward estimated price to earnings ratio of near 12 times – that is twice the estimated growth in earnings per share this year at 6%. The estimated market consensus dividend yield is 3.9%.

It is my impression that these shares are still a hold but not ones to chase from this level even if the estimated dividend yield remains very useful at 3.9%.