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European Wealth’s bolt-on strategy reaping rewards

European Wealth's plan to grow through targeted acquisitions and to consolidate in the investment industry in the wake of regulatory changes is rolling on apace as underlined by its purchase of ISM, completed last week...
European Wealth’s bolt-on strategy reaping rewards
The group's London office is near Tower Bridge..

European Wealth's (LON:EWG) plan to grow through targeted acquisitions and to consolidate in the investment industry in the wake of regulatory changes is rolling on apace as underlined by its purchase of ISM, completed last week.

ISM is a City based independent financial adviser, or 'IFA' as they are known in the trade, and had sales last year of £1.1mln and will further strengthen European's financial planning business (the other arm of the group is investment management).

City broker Panmure, which rates European's shares a 'buy', expects the purchase to add £1.2mln to the group's future revenues on an annualised basis and would be "materially accretive" to earnings per share (EPS), which it expects will grow to 0.8p in 2015 full year results.

The broker applauds EWG, which it says, has built a "scalable platform", has good organic growth and scope for further acquisitions in the UK and overseas wealth management market, which is "ripe for consolidation" following the RDR reforms.

By 'RDR', Panmure is referring to the retail distribution review three years ago, which introduced new rules aiming to improve standards of financial advice and consumers' understanding of the costs involved.

John Morton, EWG's chairman, explained how this had created acquisition opportunities for the newly incarnated EWG, which listed on AIM in 2014 after a reverse takeover, as it had been established with the "post RDR world in mind".

Most of the rule changes have been in the financial planning side, he said, where the payment structure has shifted from commission to a more professional on-going fee charging model, he said.

This has meant a number of smaller IFAs and sole practitioners have been driven out of business, unable to sustain margins and that's where EWG stepped in.

"Clearly there is becoming a need for there to be size (scale) to be able to make a good return on the investment of being in the industry," said Morton. "That gives us an opportunity to look at a number of acquisitions."

A notable acquisition by the group, said Morton, was Worcester-based financial planning outfit Bradley Stewart in 2012.

It meant EWG instantly took on a number of pension management schemes, complementing its financial planning side but also offered customers’ another service. A lot of Bradley's clients were also retained as they were moved from the commission world to fee-paying, said Morton.

"It really gave us the backbone to then be able to acquire a company called Compass, which had the effect of really bulking up the volume going through the business and therefore giving us the sort of economies of scale we were looking for."

Surrey-based Compass, which was bought last summer, had £31 million in funds under influence and in 2013 posted turnover of £434,230, of which around 76% was recurring income. It recorded a pre-tax profit in the year of £154,250.

Meanwhile, in its maiden set of full-year numbers in May, European Wealth clearly showed just how such acquisitions were paying off. Funds under management (FUM) stood at £1.03bn at the end of 2014 - an impressive 59% higher than at the end of 2013.

Revenues increased 16% to £6.7mln from £5.8mln in 2013, while the earnings before interest, tax, depreciation and amortisation narrowed to £203,000 from £368,000 the year before.

Panmure sees revenues rising to £8.2mln in 2015 and £10.2mln in 2016, when adjusted EPS is expected to have reached 6.8p a share.

Last year the firm said it was aiming to get to around £3bn in funds under management in the next three years - an aim which is "on track", said Morton, but added that the group didn't intend to make acquisitions just to attain that number.

"I think it's more important to build a high quality, sustainable business," he said.

The stepping stones to achieving that certainly appear to be in place, not least due to the current government changes in pensions rules and the way people can manage their own investment affairs in a much more hands-on way.

"A good flow" of people are knocking on EWG's door currently, if only out of confusion, said Morton, in the wake of big pension changes - the most notable being the new ease of access and ability to take lump sums.

"The whole pension world is getting turned on its head," said Morton and he reckons it will take at least six months before the "noise dies down".

"It's almost creating a new way of saving and having as much effect as the introduction of ISAs and PEPs did donkey's years ago. One can't underestimate the impact," he said.

All of this augurs well for a business that is unencumbered by any legacy issues and has management experienced in integrating new businesses.

Lets leave Panmure the last word: "EWG has de-risked the business through its centralised investment process incorporating risk based modules that has driven consistent investment outperformance. EWG has been designed to be client centric and compliant."

Panmure has a price target of 140p on the shares - pretty handsome upside considering they are now at 88.5p.

It will be very interesting to see just how much the group grows – investors will hope in the same way its customers' portfolios also attract growth.

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"It will empower us to benefit from increased scale, enhance our product proposition and leverage operational efficiencies to attract more clients, and significantly increase our AUM."

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