STM Group – shares on the turn despite a possible 30% drop in profits this year

Shares in this cross-border financial services group look to be very undervalued, trading on just 9.1 times current-year and a mere 5.4 times prospective earnings, writes Mark Watson-Mitchell. 

In just over three weeks this cross-border financial services group will be holding its AGM to agree and approve its results for the year to end-December 2019.

They were unspectacular, showing turnover up £2m at £23.3m, while reported pre-tax profits were little changed at £3.92m, off just £0.1m. Earnings came out at 5.73p against 6.20p previously. Even the dividend was 25% lower at just 1.5p per share for the year.

The Isle-of-Man based STM Group (LON:STM) has already stated that the impact of Covid-19 in the current year will see it not fare so well either. Despite an estimated rise in revenues to £24.3m, the group may only make about £2.7m pre-tax. But that would be producing earnings of 3.7p per share.

So exactly how does STM make its money?

It specialises in the administration of client assets in relation to retirement, estate and succession planning and wealth structuring.

STM Group has four reportable segments: Pensions (60.5% of revenues), Life Assurance (20.5%), Corporate Trustee Services (15.7%) and Other Services (3.7%). Each segment is defined as a set of business activities generating a revenue stream and offering different services to other operating segments.

The group enjoys an interesting spread of operational locations: the UK (17.1% of group revenues), Jersey (8.2%), Spain (2.1%), Malta (32.5%) and Gibraltar (40.1%).

For its UK national clients and for those that are internationally domiciled it has developed a range of pension products, and it has two Gibraltar Life Assurance companies which provide life insurance bonds.

The pension administration businesses are the life blood of the group, and its profitability.

Recently it has successfully moved from offering solely pension solutions to expatriates, through to offering SIPP and other solutions to UK residents as well.

The virus has made it difficult to assess the long-term financial impact on the business community generally, however the group’s business model of fixed annual fees should mean that its existing recurring annual revenue stream is largely protected from any significant downturn.

The company estimates that some £0.4m of its existing £18m of 2020 recurring revenue is at risk, with a similar consequential risk to profitability.

For the current year there is a strong focus on new business revenues to complement its very solid recurring revenue streams.

As the group proudly declares, it “strives to be the provider of choice for cross-border investors, entrepreneurs and expatriates by offering clear, innovative and impartial financial and commercial solutions which help clients protect and grow their investments.”

On looking at the company and its activities I am not so worried about a fall-back in this current year, but I do see a rebound next year, to £27m of estimated revenues and a record £4.5m pre-tax profit, worth a massive 6.25p per share in earnings.

So, the £20m capitalised group’s shares at 33.7p look to be very undervalued, trading on just 9.1 times current-year and a mere 5.4 times prospective earnings.

I now set an easily achievable 18-month target price of 50p.