Sunday share tips: Tatton Asset Management, Shanta Gold

In her ‘Inside the City’ column for the Sunday Times, Sabah Meddings looked at recent changes to how financial advisers earn their commission had led to a change in the service provided by many, leading to a number of providers to outsource their stock-picking on online platforms, and stick to providing retirement planning and “actual advice”.

That, she wrote, had led to a surge in the value of assets under management on investment platforms, which had doubled to £500bn from £250bn in the last five years, with around £48bn of that sitting in so-called ‘model’ portfolios, which offer a more diverse range of stocks at a predetermined level of risk.

That “sweet spot” is where Tatton Asset Management sits - a firm founded in 2007 by IFA support veteran Paul Hogarth, which charges a rather competitive 0.15% annual fee, compared to 0.18% at AJ Bell, and 0.36% at Charles Stanley, Liontrust and Tilney Investment Management.

Tatton’s revenue was up 15% at £9.7m in the six months ended 30 September, while its pre-tax profits were 20% firmer at £3.6m, and the company’s dividend grew 75% over the last two years, to 8.4p.

The firm listen on AIM in 2017 at 156p, raising £10m at the time at a valuation of £87.2m, and since then, its shares had risen more than 51% and last closed at 236p, valuing it at £134.7m.

And Hogarth was incentivised to keep his shareholders’ interests close to heart, maintaining an 18.7% stake, with BlackRock, Liontrust and Legal & General among the other investors.

Tatton’s model was based on signing up advisers who would then discuss risk levels with clients, with Meddings noting that around 10% of the 5,500 directly-authorised advisory firms use the company, as its assets under management grew 22.8% year-on-year to £7bn.

And while the company was still adding more advisers, it was also looking to sell more services to the ones it already had on its books.

In June, Tatton won a three-year mandate to provide managed portfolio services through adviser support company Tenet Group, which gave it access to another 474 firms.

It also bought Tenet’s Sinfonia Asset Management subsidiary for £2.7m, adding another £135m to its assets under management.

Sabah Meddings noted that investing in Tatton was not without its risks, explaining that while revenues were expected to grow over the next five years, reaching an expected £30m a year by 2024, it had not yet needed to deal with a downturn.

“However, Hogarth plans to embark on the acquisition trail, and if the trend towards these platforms continues, there could be further rewards ahead. Buy.”

Over in the Mail on Sunday, Joanne Hart wrote that “gold is on a roll” for her ‘Midas’ column, noting that the metal’s price had risen 20% in the last year to $1,478 per troy ounce, with a fair outlook.

At the same time, the mining market was becoming more consolidated, boosting a number of gold miners, but leaving some - such as Tanzania-based Shanta Gold - “stubbornly undervalued”.

Tanzania has been a place for gold miners for more than a century, and was thought to be a relatively stable place to do business until a 2017 dispute between the government and Acacia Mining.

The dispute saw Acacia’s share price plunge and cost the company its independence, as Barrick Gold bought the company in September and quickly settling the fracas with the government.

Shanta Gold, however, was “caught in the crossfire”, seeing its shares plummet as Acacia’s situation became public, and while recent performance had been stronger, there was still plenty of room to move northwards given the shares were at 8.25p.

Over the past two years, the company has been focusing on reducing its costs, cutting its debt, extending the life of its mine site and ensuring shareholder returns were maintained.

That strategy, Hart said, was primarily down to chief executive Eric Zurrin - an ex-investment banker who has now spent a number of years in the mining industry, having been parachuted into Shanta to assist with various issues previously before being offered the corner office in 2017.

Under his leadership, the focus had been on efficiency, with workforce being cut by 35%, a number of expensive expats being replaced by local workers, and things as benign as the amount of money spent on meals for the miners being reduced by 40%, with all of that lowering the company’s production costs and boosting cash flow in the long run.

The firm’s flagship New Luika mine has been producing for seven years, and was expected to deliver around 80,000 ounces of gold in the current year, with Shanta’s licences covering an around about the size of Greater London, it was actively seeking new sources of gold.

Annual production remained relatively stable, Hart said, but she noted that the more gold discovered, the longer the mine could operate.

Results from exploration activity had been “extremely encouraging” so far, with more discoveries likely to be revealed in the short-to-medium term.

And as its cash flow improved, Shanta’s debts were narrowing, with previous management having borrowed heavily, but under Zurrin’s stewardship they were down to $21m, with the boss expecting to be able to pay off creditors entirely by next year.

At that point, with nil debt and cash in the bank, Shanta would probably be looking to buy assets from some of its larger peers - mines in Africa that the big players deemed too small for the big boys to operate in, with Hart writing that talks were ongoing over a number of potential opportunities.

Dividends were on the horizon as well, Hart said, although she did note that Shanta was not immune to policies from Tanzania president John Magufuli, including a move to bring down the VAT refunds owed to a number of companies across the country.

Shanta was owned around $28m in refunds, although City analysts had mostly written off that cash - although the situation was appearing to turn around, with the company receiving $1.4m in November, with the rest expected in coming months.

Hart said Zurrin was in regular contact with the country’s policymakers, describing relations as “good”, with the company paying its taxes in full and on time, with it also emphasising community engagement, employing local works and using local suppliers as much as possible.

The firm was also mindful of environmental considerations, she said, with the Luika mine being in the middle of a forest reserve and surrounded by local wildlife, and the company “swiftly addressing” any damage to land.

“Shanta shares have suffered from the Acacia effect, fears about local political risk and concerns about its debt pile,” Hart wrote.

“These worries have been overdone and the shares, at 8.25p, should see a material uplift in the months to come.

“Gold’s prospects are good, Zurrin is doing all the right things to drive production and reduce costs and there is always the chance of some bid action. Buy.”