Kingswood Holdings – this company could see profits rise eleven-fold next year

The wealth management sector in the UK is fragmented but now undergoing bouts of significant consolidation.  This company could be a serious beneficiary, writes Mark Watson-Mitchell. 

Identifying companies before they push for significant corporate growth is something that I really enjoy.

Selecting Kingswood Holdings (LON:KWG) is just such an example – and I think investors climbing aboard now, taking a view, will enjoy the expansion ride.

The integrated wealth management group is today capitalised at just around £40m, yet it has well over 5,000 active clients and has some £2.5bn of assets under management and administration.

Its clients, which range from private individuals up to some of the UK’s largest universities, are offered a range of specific services, including wealth planning, investment management, institutional services, corporate solutions, cash management and affiliate services.

The company, which has a very experienced and well-connected board, employs around 100 staff, operating from a growing network of offices in the UK, as well as international bases in Johannesburg and in New York.

As far as its employees are concerned, the company, almost proudly, declares that its disciplined, rigorous investment philosophy and process is handled by the most experienced and qualified professionals in its team.

And that must mean a lot to those seeking such services and who are currently somewhat perturbed by the recent shenanigans going on elsewhere within the fund management sectors.

The wealth management sector in the UK is fragmented but now undergoing bouts of significant consolidation, with various groups merging together, just like the now completed bonding of Premier Asset Management and the Miton Group.

That new grouping will have £11.5bn of assets under management – so Kingswood is a comparative tiddler. But not for long.

The company already has a declared mission to become a leading global provider of trusted wealth planning and investment management solutions for its clients.

I do believe that the current £2.5bn AuM figure will be rapidly advanced. The company will be looking to acquire any number of smaller operators in its sector.

With some 2,750 such companies in the UK, operating with between two to 50 advisers, it should have no problem attracting a number of them to join the Kingswood fold. Regulatory change, increasing compliance costs, together with a requirement for sophisticated management systems and processes, builds up frightening operating costs for smaller firms.

As it targets potential acquisitions, Kingswood would understandably be very confident in attaining big AuM growth. Why? For one big reason – because it has the facility to expand, a very big facility of twice its market cap.

Just over two months ago the company pulled off a very encouraging deal. After a substantial due diligence process, Pollen Street Capital, a global alternative asset investment management company that is focused upon the financial and business services sectors, has agreed to put up £80m by way of convertible preference shares, to give Kingswood the ability to go out and buy other managers.

I can see the enlarged group managing some £10bn of funds within a couple of years, if not sooner.

And that would just be in the UK – leaving it with even bigger corporate dreams as it looks over into the US market, which is at least 10 times larger than the UK.

The group has 216,920,719 shares issued, of which the two main founding directors, Jonathan Massing and Gary Wilder, control 66.9% of the equity. Other board holders own 2.6% of the shares.

Significant holders include ETX Capital (4.6%), Julius Baer Private Banking (2.8%), KW Wealth (2.7%), and Michael Mechas (2.6%).

In the year to end December 2018 the group had a revenue of £8.8m, upon which it reported a £3.7m loss.

However, this year there has been a turnaround on the back of an estimated £11.8m of revenue. Brokers to the company, finnCap, are looking for a £300,000 pre-tax profit, worth 0.2p per share in earnings.

The next year could well see, say the brokers, a 52% rise in revenue to £18m, helping to boost pre-tax profits by a very impressive 11 times to £3.4m, worth 2.1p in earnings per share.

For the 2021 year, a near £20m revenue could see profits up to £4.2m, worth 2.6p in earnings.

If these predictions prove correct, and there is no reason to the contrary, the group’s shares, now 20p, could be heading northwards at quite a pace.

I now set a target price of 30p for next year.