SIF Folio: Is Wilmington A Quality Growth Stock?

16th Mar '22 by Roland Head

2 comments 1407 reads

In December 2019 I bought Wilmington (LON:WIL) shares for SIF at what turned out to be a five-year high of 272p. I then sold the stock in October 2020 for a painful 55% loss.

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This is one of those cases where I’d have done better in a discretionary portfolio, where I might have continued to hold the stock. The rules-based approach I use to run SIF does not allow this level of discretion. However, Wilmington has recently reappeared in my screening results, so I’m back for another look.

Wilmington (LON:WIL)

Wilmington is a training and data provider specialising in the governance, risk and compliance markets. Client market sectors include healthcare and financial services. The group operates globally and segments its results into two divisions, Information & Data and Training & Education.

Jack recently published an excellent and in-depth review of Wilmington. Rather than repeating this material here, I’d recommend taking a look at Jack’s piece if you’re not already familiar with this business.

I’m encouraged by the recent management narrative, which suggests that after 20 years of acquisitions and evolution (see Jack’s piece) Wilmington’s newly-restructured operations may finally be in a position to deliver consistent, high-quality growth.

Stockopedia’s algorithms also have a favourable impression of the shares, although the High Flyer status is perhaps a warning of downside risk if performance disappoints.

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I’m certainly wary of the risk that history will repeat itself. Although there’s been no significant dilution to shareholders in the last decade, Wilmington’s share price first reached its current level back in 2007. Arguably, it’s been a lost 15 years for shareholders:

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In the remainder of this piece, I’m going to look at Wilmington’s financials and QVM factor scores in more detail. Given the uncertain outlook for markets and the economy at the moment, I hope to try and identify any potential risks, as well as potential upside.

Value: borderline

ValueRank: 41/100

Wilmington’s trailing 12-month value metrics are not especially inspiring. The stock trades on 28 times TTM earnings and does not score especially well elsewhere:

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However, I think the factors behind the company’s recent profits merit a closer look. According to Stockopedia, Wilmington’s trailing 12-month earnings yield (EBIT/EV)…

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Doug2b

16th Mar '22

Roland, previous comment below. Ultimately, after all those acquisitions earlier in the past decade, there needs to be more evidence of growing tangible wealth creation from Wilmington. The evidence for this has not yet materialised. Compare this with say, ScS. Their post 2020 looks like it will result in a combined tangible wealth creation for 2021 and 2022, which is c50% of SCS's current MCap - next weeks H1 results will likely confirm this as we pass the 3/4 mark for that 2 year return. That is what I mean by evidence of wealth creation, Wilmington has produced no such evidence at this point - why speculate when the current market allows you to effectively back horses that have already passed the winning post!

Some positives. The number of acquisitions over the years would generally lead me to expect a lot of share issuing, but there has been no net share issuing since 2014, which is as far back as my records show, so this is a positive as mentioned above.

A business like Wilmington does not need to run with a high tangible asset base, very few tangible assets required at all in fact and this is true for its acquisitions as well of course, meaning that nearly all the purchase costs of the various acquisitions will be listed as intangibles - broadly speaking, purchase cost less the tangible assets purchased gives the value of the intangibles to go on the balance sheet following the acquisition. This is not a negative consideration, it is correct accounting for the acquisition of the type of businesses which have small tangible asset bases. Wilmington writes down its intangible assets pretty quickly, certainly more quickly than they are required to do - these days accounting rules mean that businesses are barely required to write down their intangibles at all, subject to a 'review' process. So the rapid write down of its intangibles is another positive for Wilmington.

But, while I applaud Wimington's lack of share issuing and the consistent write down of acquisition intangibles, it is the role of a business to create tangible wealth for its shareholders. This is the tangible surplus generated by the business - the sum of the average annual net gain in tangible assets added to the forward dividend, the sum then expressed as a % of the current MCap. Adjustments must also be made for share issuing or share buy backs - not applicable to Wilmington.

Over a 4 year period (i.e. 5 years of data) the average annual tangible equity growth is 1.7% of the current MCap and over a 9 year period it is 0.6% of the current MCap. Focusing on the past 4 years, the sum of the average annual equity growth as a % of MCap and the dividend is c4.7% of the MCap. No bargain at this price, slightly above a fair price in my view. The real PE is in the early 20s when you asses it in terms of the all important tangible wealth creation. The earnings growth is not the 35% that the screening shows, looking at the earnings over 5 and 10 year periods, they are all over the place, constantly falling and bouncing back, this is not earnings growth, growth is when you can look at earnings over several years and see a growth pattern or a trend showing earnings growth. Based on its current MCap and turnover, to be of interest, Wilmington would need to have generated far more tangible wealth, i.e. generated far more cash within its balance sheet.

BnB

Or to put Doug's point without reference to his magic formula, how can a business with 5 year CAGR of 0% for both revenues and earnings be a "quality growth" company. Hopefully the stock will be a winner for the SIF portfolio but it looks far from a winning company.

SIF Folio: Is Wilmington a quality growth stock?

Wilmington (LON:WIL)

Value: borderline

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Roland Head

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