Numis continues to favour Rathbones, reiterates 'buy' rating

Investment and wealth manager Rathbone Brothers remains the quality play in the sector and justifies a premium rating relative to peers, Numis said on Monday.

Numis reiterated a ‘buy’ rating and target price of 2,350p on the stock after the company last week announced plans to raise about £38m via a share placing with institutional investors. The capital raise will fund the expected near-term requirements associated with changes the firm is making to its defined benefit (DB) pension scheme.

“We believe the decision to raise additional capital is prudent and provides the group with additional financial flexibility; something not to be begrudged in our view given the current uncertain market environment and the potential for further mergers and acquisitions,” Numis said.

“We continue to favour Rathbones as we believe its conservative operating model combined with the industry's numerous structural growth drivers will generate earnings growth of at least 10% pa over the medium to long term.”

Rathbones last Thursday posted a trading update for the three months to 30 September on Thursday, with total funds under management (FUM) sitting at £33.2bn at period end - up 8.5% from £30.6bn on 30 June.

The FTSE 250 firm compared it to an increase of 6.1% in the FTSE 100 Index and 5.2% in the FTSE WMA Balanced Index in the three month period.

Net operating income was £65.9m for the period, up 18.5% from £55.6m in the third quarter of 2015.

The group has also decided to close its DB pension scheme as the recent collapse in bond yields resulted in a sharp increase in the deficit to £58m from £32m in the first half.

Numis noted that while the decision to close this scheme is expected to generate higher regulatory capital requirements of around £20m in the near-term, the board believes it will be outweighed by longer-term benefits including reduced ongoing contributions and lower capital requirements.

“We favour Rathbones as we believe its reputable brand, steady investment performance and established network helps it generate one of the most consistent organic FUM growth rates across the industry,” the broker added.

“This has then been combined with additional team hires, bolt-on acquisitions and stable margins to drive consistent double digit annual EPS growth over the last six years.”

Shares rose 2.05% to 1,842p at 0916 BST.