Ageing Demographics And Wealth Transfers Will Drive Strong Long Term Demand For Advice

Catalysts

About Brooks Macdonald Group

Brooks Macdonald Group is a U.K. focused wealth manager combining investment management and financial planning to serve clients throughout their lives.

What are the underlying business or industry changes driving this perspective?

• Integration of three higher-margin financial planning acquisitions and the scaling of Brooks Financial, with 9,300 clients and GBP 5.3 billion of assets, should drive faster growth in advice fees and integrated investment revenues, supporting higher total revenue and earnings.
• Rapid expansion of Platform MPS, now 36 percent of funds under management with 14 percent annualized net flow growth, positions the group to capture growing adviser demand for scalable, centrally managed solutions, which should lift recurring revenues and operating leverage.
• Ageing demographics, intergenerational wealth transfers and the rising share of wealth held by women are increasing demand for independent financial advice and retirement solutions, which should translate into sustained growth in FUMA, advice income and long term revenue visibility.
• Ongoing investment in digital onboarding, client portals, mobile apps and AI enabled efficiency, combined with disciplined cost control and targeted savings, is expected to enhance scalability and keep BAU cost growth below 5 percent, supporting margin expansion and earnings growth.
• Consistent outperformance from the centralized investment proposition across 1, 3, 5 and 10 years, alongside innovative retirement strategies tailored to growing income drawdown needs, should strengthen client retention and attract new inflows, underpinning higher FUMA, fee revenue and net margins.

Assumptions

This narrative explores a more optimistic perspective on Brooks Macdonald Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Brooks Macdonald Group's revenue will grow by 7.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 10.4% today to 17.6% in 3 years time.
• The bullish analysts expect earnings to reach £24.3 million (and earnings per share of £1.46) by about December 2028, up from £11.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 18.7x on those 2028 earnings, down from 21.4x today. This future PE is greater than the current PE for the GB Capital Markets industry at 12.6x.
• The bullish analysts expect the number of shares outstanding to decline by 3.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.49%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Despite record FUMA, the group is still experiencing net outflows, including GBP 0.7 billion of outflows from the higher yielding bespoke portfolio service. If these persist as the U.K. advice market consolidates and competition for high net worth clients intensifies, revenue growth from fees could stagnate or decline and pressure earnings.
• The strategy relies heavily on higher margin financial planning acquisitions and continued demand for independent advice. However, long-term trends toward digital self-service, robo advice and fee transparency could compress pricing power and reduce financial planning yields, weighing on revenue and net margins.
• Platform MPS growth is strong, but its combined yield has already fallen from 26.4 basis points to 24 basis points as mix shifts toward lower fee solutions. If this structural fee compression accelerates with scale and regulatory pressure on advice costs, overall fee income and profit margins could underperform bullish expectations.
• The business is in a period of elevated investment in technology, AI, data and office relocations, with annualized underlying costs already around GBP 90 million. If planned efficiency gains and synergy benefits are delayed or fail to materialize in a tougher macro or regulatory environment, operating leverage could deteriorate and reduce net margins and earnings growth.
• Brooks Macdonald has refocused on the U.K. and exited its international business, increasing dependence on a single market where future tax, pension and regulatory reforms might dampen wealth creation and advice demand. This could lead to weaker long-term FUMA growth, lower fee revenue and slower expansion in earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Brooks Macdonald Group is £25.0, which represents up to two standard deviations above the consensus price target of £21.69. This valuation is based on what can be assumed as the expectations of Brooks Macdonald Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £25.0, and the most bearish reporting a price target of just £18.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be £137.6 million, earnings will come to £24.3 million, and it would be trading on a PE ratio of 18.7x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of £16.1, the analyst price target of £25.0 is 35.6% 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.