In a note on the diversified financial services sector, Numis described Quilter as ‘a Jack of all trades, master of none’, feeling that the firm's lack of integration could hold it back.
Numis, which has a ‘hold’ rating on Quilter, with a 118p price target, believes its discount to its wealth rivals is fair. Shares closed at 119p last night, 17% beneath the 145p it was priced at for its stockmarket float last June.
‘In trying to be all things to all people in the wealth management industry, Quilter lacks focus in our view,' the Numis financials team, led by David McCann, said in its note.
‘As a result, we think that it will struggle to become a market-leading vertically integrated player, like St James's Place. This does not necessarily make Quilter a bad business, just a less valuable one compared to some, in our opinion.’
Numis feels the firm will struggle to hit its 30% operating margin target set for 2020. ‘[This is because] Quilter's highest operating margin business (life assurance) is in run-off and the group is also guiding to significantly higher head office costs post-IPO [initial public offering].’
Quilter questioned Numis' assessment. A spokesperson for the firm told Wealth Manager: 'Five years ago most of our profit came from nine subscale European life assurance operations and our UK heritage business, which were predominantly closed to new business.
'[Since then] the business has transformed from an old model retail financial services business to a focused, modern and transparent wealth management company, offering advice, platforms and investment solutions. We hold each area up to market discipline and offer customers and advisers choice across all of them.'
Platform execution risk
In May 2017, Quilter (then Old Mutual Wealth) announced a tech migration for its £55 billion platform from IFDs to FNZ. The firm had spent around £330 million on the former, which had already started building a platform for the business.
In an interview with Citywire last year, Quilter boss Paul Feeney (pictured) admitted this proved to be a painful lesson for both staff and shareholders.
He added that the new platform being built by FNZ should be ready for a soft launch at the start of this year and insisted the division would be 'highly profitable'.
Quilter's spokesperson reaffirmed the timeframe for the launch. 'We said last year that we were planning for a soft launch of our Platform Transformation Programme at the end of 2018 or early in 2019, and we remain on track and on time.'
Numis sees a number of execution risks associated with the migration, drawing attention to FNZ's 'poor track record' and the wider industry's struggle over platform delivery and implementation.
'We think there are a number of risks relating to this and we are not prepared to give the company the benefit of the doubt,' Numis said.
As a consequence, Numis advises shareholders should factor in margin of safety in their valuation.
'Management has repeatedly committed that the platform will be fully implemented by the end of 2019 or shortly thereafter,' Numis said.
'[We note] that as of the end of 2018 to our knowledge the platform is not yet live, even to the first phase of participants. We believe one year is a very short roll-out period, thus amplifying the inherent execution risks.'
Overall, Numis likes wealth management as a ‘structural growth industry’ and sees SJP as a better investment prospect than Quilter.
This is especially so after the stock's recent de-rating, which has left it sitting at an all-time high historical yield of around 4.9%. ‘We are not really favourable on SJP because of the yield, but regard it as the cherry on top for growth investors,' the broker said.
Numis put the recent de-rating down to international investors looking to reduce UK large cap exposure ahead of Brexit.
However, it notes that the UK’s exit from the EU should have no bearing on SJP's prospects. ‘Historically, economic weakness has not diminished organic growth rate as people continue to save into long-term savings plans.’
It also highlights that SJP is not the pure UK domestic play that most people think. ‘Whilst clients are [almost entirely] from the UK, assets are invested globally, fundamentally people still need to save for the future/pensions regardless of economic outlook/Brexit, current figures are not pointing to a slowdown in demand for their services.’
To emphasis its conviction in SJP, Numis has a buy rating on the stock with a £14.50 price target, an almost 50% premium to the 970.6p it closed on last night.
Describing SJP as ‘proven, not broken’, Numis said the firm is capable of meeting its target gross flow of 15-20% per annum, which should translate to 10-15% of net organic growth annually.
‘We continue to hold SJP in very high regard and believe it should continue to be a core long-term sector holding for many investors,' Numis added.
‘We believe that the business will continue to demonstrate that it is one of the most consistent and resilient asset gatherers (and retainers), regardless of the economic conditions.’