New position Walker Cripps Group

Just added a new position in Walker Cripps Group.

I believe it is materially undervalued and it will likely be taken out via an acquisition. At the current share price the assets under management (AUM) – and the business are practically free.

The disadvantage to investing at this price is its illiquidity and the stocks small market cap and lack of coverage – only £16m. This is very similar to the thesis underlying my investments in Man Group (a roaring success) and London Capital Group (a failure).

The latest balance sheet shows available for sale investments of £2.4m, receivables of £29.5m, Trading investments £2.0m cash £7.8m – liabilities of £25.8m.

This gives net assets of £15.9 – so in essence the business is free.

Now not all these assets are distributable – according to the pillar 3 disclosures the firm’s tier 1 capital is worth £17.2m. The firm needs a total of £4.4m.

Now not all of this needs to be financed by cash or liquid investments – some can be financed by shareholders equity.

If we are very conservative and say the firm needs £6m cash to operate c£11m could be comfortably distributed – c67% of the market cap.

This leads us on to valuing the underlying business – what cashflows can it produce ?

Looking at the half year results
Operating free cashflow ex purchases and sales of investments held for trading was £821k – EPS shows £205k or £0.55p .

If we double this up we get to a figure of 10X free cash flow or a PE of about 40.

I dont think this is the right way to look at the earnings of this stock. Management are bullish and say they have hired investment managers who will earn more in the second half once assets are transferred across. EBIT fell 51% from the prior 6 month period so there is evidence for this.

Looking at 2014 FY – EPS was negligible – ex gains from sales of investments – c £200k. The year before it was worse – a loss of £2m (ex disposals). Broadly speaking walker Cripps is not earning much if one excepts gains from investments disposed.

I think the best way to look at this is to think about what an aquirer with more economies of scale would pay – I guess about 90p per share – again this would undervalue the company but is a very nice premium on the current share price. An aquirer such as Brewin Dolphin (BRW) or Rathbones (RATS) could take cost out of the business and earn more from the same assets with their greater economies of scale.

Another possibility is that WCG could improve its performance – if one looks at the EBIT / AUM percentage of RAT and BRW one gets 0.20 and 0.185 respectively.

If we assume WCG can achieve 0.15 we get EBIT of £4.63m or EPS of 9 per share. This puts us on a PE of 5! (not forgetting all the assets on the balance sheet).

Multiplying EPS of 9 by a PE of 10 and assuming assets stay constant we get a price of £1.37

I recon a probability weighted price (over the next 2 years) would look something like this

20% – market falls / no improvement in EPS, no takeover -25p price
40% – takeover 90p per share
40% – EPS improves, more sensibly valued

This gives me a price target of 95p.

If you are interested in buying this one there is very little stock about – you are better off putting in multiple small orders than one at a higher price. I saved money by acquiring my shares this way.


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