STM Group – a near 50% upside and a healthy 4.7% yield to boot

‘Hindsight is a wonderful thing’.

‘If only’ – is another phrase that is so often used.

Both came to mind when I looked again at the price action in the last sixteen months of the shares of the STM Group (LON:STM).

I profiled the multi-jurisdictional financial services group in late May last year.

That was after speaking to the group’s Chief Executive and its Financial Director. I came away feeling very bullish about the company’s prospects.

I then put out a price objective of 50p on the shares, which were then just 33.7p.

If only I had waited!

Egg on my face

They touched 42p at one stage, before falling back to 25p in late October last year.

That was directly after the Trading Update that stated that new business had been difficult to secure, due to so many individuals and businesses deferring significant financial decisions.

Of course, that was totally understandable as globally Covid-19 was still creating massive trading hiccups, with so much international travel being terminated and countries, like the UK, still in severe lockdown periods.

But the effect on the shares was not good, in fact, it was somewhat depressing as they fell away to a 26p low.

What does it do

Just to remind readers of what the company does as its main business.

With operations in the UK, Gibraltar, Malta and Spain, the STM Group specialises in the administration of client assets in relation to retirement, estate and succession planning and wealth structuring.

The group has developed a range of pension products for UK nationals and internationally domiciled clients.

It has two life assurance companies based in Gibraltar, which provide life insurance bonds. Through those bonds, which are called ‘wrappers’, they offer the ability to hold a variety of investments, including investment funds.

Only valued at £20m

The group is capitalised at £20m, with some 59.4m shares in issue.

The larger holders include Premier Fund Managers (17.0%), Clifton Participations (11.3%), Septer Ltd (10.9%), Miton Asset Management (10.8%), Peter Gyllenhammar AB (5.01%), River & Mercantile Asset Management (4.91%), Eastmount Capital Partners (4.71%), Aeternitas Imperium Privatstiflung (3.59%), and Kestrel Partners (2.70%).

Growth both organic and through acquisition

In August last year it made a useful acquisition, Berkeley Burke, another operator in the pensions consultancy and administration sector, which specialises in self-administered pensions.

That is now integrated into the STM fold and is ready to show through its expected profitable returns.

In the last few months, the group has made two sensible disposals, it is now out of the Trust and Corporate Services sector.

It has also been completing a number of IT projects to bulk up its administration platforms, for its private pensions and life businesses, as well as for its workplace and occupational pensions side.

The aim of these improvements is to gear up its operating margins and make it even more competitive in its marketplace.

Recent interims

The interim results to end June, announced a couple of weeks ago, showed revenues of £11.4m (£11.8m) while underlying pre-tax profits were £0.8m (£0.9m).

At the period end the group’s net cash position was a healthy £16.5m, which was only down £1.2m on the previous period.

That will help the company to make a number of strategic buys in its sector.

Broker’s View

Analyst Nik Lysiuk, at the group’s brokers finnCap, is looking forward to the business enjoying a period of growth and a re-rating of its shares to come in line with its peers.

With a price objective is 42p, he is going for £2.5m of adjusted pre-tax profits for the full year to end December (£2.4m) on the back of a slightly lower revenue of £22.1m (£24.0m). He looks for 3.5p of earnings (3.4p) easily covering a 1.6p dividend (1.4p) per share.

Next year his estimates are for £23.9m of revenues, £3.5m of profits, 4.7p earnings and a 1.8p dividend per share.

My View

Those estimates convince me that the tide is on the turn for STM and that a re-evaluation for the group’s shares is inevitable.

Looking at the shares today, now just 33.5p, would I still look for 50p?

Without doubt I can foresee the STM Group shares hitting 50p in the next year or so.

My price objective remains very firm. The shares not only offer a very attractive upside but also a very handsome 4.7% yield.

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