Leading DFM MPS Provider Will Capitalize On IFA Outsourcing Trends For Future Success

Key Takeaways

• Strong organic flows and operational efficiency are improving margins and driving revenue growth and earnings.
  
• Strategic initiatives and market positioning aim to significantly expand assets under management and market share by FY '29.
  
• Expiring contracts, market pressures, and economic uncertainties could constrain Tatton Asset Management's revenue, pricing power, and growth strategy, impacting future earnings and margins.

Catalysts

Engages in the provision of discretionary fund management, compliance consultancy, and technical support services to independent financial advisers in the United Kingdom.

• The company has achieved strong organic flows and anticipates continued inflows, guiding a prudent £200 million per month moving forward. This ongoing momentum directly supports revenue growth.
  
• The management's focus on operational efficiency has driven a high adjusted margin of over 50%, and as the business scales, margins are expected to improve further, positively impacting net margins.
  
• Tatton's strategic initiative to reach a target of £30 billion AUM by FY '29, with or without M&A activities, is likely to drive substantial growth in earnings through organic expansion.
  
• The market trend of IFA outsourcing to DFM MPS is expected to persist, with Tatton positioning itself as a leading player in a rapidly expanding market, which could lead to increased revenue and market share.
  
• The introduction and seeding of new passive funds and the operational gearing leading to improved cost efficiency indicate potential for enhanced earnings per share as these funds gain traction and contribute to the business.

Tatton Asset Management Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tatton Asset Management's revenue will grow by 13.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 39.1% today to 37.7% in 3 years time.
• Analysts expect earnings to reach £21.6 million (and earnings per share of £0.33) by about January 2028, up from £15.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.5x on those 2028 earnings, up from 24.9x today. This future PE is greater than the current PE for the GB Capital Markets industry at 11.6x.
• Analysts expect the number of shares outstanding to grow by 3.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.07%, as per the Simply Wall St company report.

Tatton Asset Management Future Earnings Per Share Growth

Risks

• The expiration of a critical contract with the Perspective business in January 2026 poses a risk, as renegotiation may lead to less favorable terms or loss of revenue, impacting future revenue streams after that date.
  
• The subdued mortgage market, although rebounding, still presents uncertainty and could affect the company's ability to maintain revenue and profit levels if the recovery stalls or reverses.
  
• Competitive pressures in the MPS market, with over 200 providers and some already undercutting Tatton’s pricing, could lead to difficulty in maintaining market share and pricing power, potentially squeezing net margins.
  
• There are potential economic and political uncertainties, such as U.S. election outcomes influencing inflation and bond markets, which could affect investment performance and ultimately impact earnings if not managed well.
  
• Adjusted margin improvements rely on continued organic growth without M&A, leaving the company potentially vulnerable to shifts in the broader market environment that might require additional financial strategies not planned for, possibly affecting future margins.

Valuation

• The analysts have a consensus price target of £7.6 for Tatton Asset Management based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £8.5, and the most bearish reporting a price target of just £6.85.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £57.3 million, earnings will come to £21.6 million, and it would be trading on a PE ratio of 28.5x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of £6.4, the analyst's price target of £7.6 is 15.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.