Good morning!

Welcome back after the long weekend. The political noise in the background is very loud, but we will crack on with a look at companies:

AFH Financial (OFEX:AFHP)

  • Share price: 335.3p (+8%)
  • No. of shares: 42.6 million
  • Market cap: £143 million

Half-year report

This is an ambitious financial stock, looking to achieve funds under management (FuM) of £10 billion within a 3-5 year timeframe. FuM are currently £5.4 billion.

It has several hundred IFAs working for it, and describes itself as:

"an IFA business acting as gate keeper to the wealth management sector through its primary position in the client relationship"

Most of the gain in FuM in H1 was from acquisitions, with only about 20% representing organic inflows.

The main theme with this share seems to be consolidation in the IFA sector. AFH's strategy is to use its size to reduce platform and fund management charges, boosting margins (the target underlying EBITDA margin is 25%). Acquisition opportunities are found, for example, with retiring IFAs who are looking for an exit.

Balance sheet

Reading some of the small print, I note that AFH's receivables book has grown from £13.6 million to £22.1 million in six months. Its intangibles, naturally, have increased too, during the acquisition spree.

The company's financial KPIs are all about top-line growth and margins, which can sometimes be achieved at the expense of optimising the balance sheet. Just something to keep an eye on. This share's Quality metrics, according to Stocko, are just average (e.g. Return on Capital 9%).

The company has negative tangible equity (negative to the tune of almost £20 million). This isn't necessarily a problem. For AFH, most of the liabilities are contingent consideration, so I guess they can be paid out of future profits. While there is likely to be an element of financial risk, my initial…

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