STM Group – Looking very cheap indeed

£700m assets under management, £17m cash in the bank, £2.5m profits, 85% annual recurring revenue, 9 times earnings, 5% yield and only valued at £19.6m – looking very cheap indeed. 

Yesterday’s interim results announcement by this financial services group looked disappointing, but that was just the ‘on the face of it’ view.

I spoke to the CEO and finance director of the £19.6m capitalised STM Group (LON:STM) and I repeat my opinion of the company set out in my late May profile – that the shares are massively undervalued.

The AIM-quoted company has operations in the UK, Gibraltar, Spain, Jersey and Malta. It employs some 260 people and has over 160,000 customers across 126 countries.

Its basic business is the delivery of specific financial service products to professional intermediaries, together with the administration of assets for its international clients with a view to help wealth structure for retirement, estate and succession planning.

The half-timers to end-June this year reported revenue down £0.1m at £11.8m and pre-tax profits of £1m (£1.1m). The fall back was due to a mix of Covid-19 impact and increased costs, together with heavy IT spend.

The staggering point that the market seems to have missed is that it has a magnificent annual recurring revenue running at 85% of the total. Just think of the stability that offers any finance director, or banker, in assessing ongoing commitments.

Although the group has a £5.5m acquisition facility with RBS, it is actually carrying a very healthy £17m cash at bank.

The group is actively seeking out fresh acquisitions but is mean on its purchase criteria. It is operating an ongoing ‘buy to build’ strategy and has been very successful in doing so.

It looks for other companies in its own marketplace operating with revenues of £2m to £3m for which it is prepared to pay 2x revenue. Larger companies elsewhere in the sector are paying 5x to 7x for books of larger revenues. The key factor, though, is the longevity of the pension books that STM acquires.

On the new business side, the company has seen a bit of a slowdown in the first half. There is a lot of enquiry and quoting given but decisions have been slowed down by the lack of person-to-person marketing because of the virus. But that will soon start to pick up again.

Two thirds of total revenues come from its pensions business, a sixth from life assurance, and similar between corporate trustee and other services. As a matter of interest, it has about £700m of assets under management.

The group has some 59.4m shares in issue. Large holders include Premier Miton (16.99%), Clifton Participations Inc and Alan Kentish (CEO) (11.31%), Septer Limited (10.85%), River and Mercantile Asset Management (5.64%), Kestrel Partners (3.69%), and Aeternitas Imperium Privatstiftung (3.59%).

The company’s broker, finnCap, is looking for a full-year turnout of £24.1m revenue and £2.5m pre-tax profits, worth 3.5p in earnings and double covering the 1.7p estimated years dividend per share. That is on 9 times earnings and a 5% yield.

So, with the 2020 financial year close to ending we look forward to predictions for the 2021 and subsequent year.

£28.4m in revenue next year could almost double pre-tax profits to £4.5m, giving 6.2p of earnings and treble covering a 1.8p dividend per share. That would put the shares out on 5.2 times prospective earnings.

Then the 2022 year might see £30.2m revenues and £5.9m of profits, with 8.2p of earnings and a four-times covered 2p dividend per share. Well, a 3.9 p/e – what more can I say?

If you haven’t already got the message, then surely those estimates will convince you that this group is on an excellent recovery track and that its shares are substantially undervalued. The shares closed last night at 32.5p after a dealing volume of some three and a half times the daily average.

My short-term target price seems easily attainable and could give an upside of over 50% from now.

(Profile 27.05.20 @ 33.7p set a Target Price of 50p.)

 SPECIAL NOTE: Investor Presentation: 4pm on Thursday 10 September 2020

The Directors of the STM Group will hold a presentation to introduce the company to investors and cover the Interim Results and prospects at 4.00 p.m. on Thursday 10 September 2020.

The presentation will be hosted through the digital platform Investor Meet Company. Investors can sign up to Investor Meet Company and add to meet STM Group Plc via the following link  https://www.investormeetcompany.com/stm-group-plc/register-investor .

Questions can be submitted pre-event to STM@walbrookpr.com or in real time during the presentation via the “Ask a Question” function.