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European Wealth Group Ltd: THE INVESTMENT CASE

European Wealth switching short-term focus to accelerating organic growth

EWG is still very much an industry consolidator, but with its own businesses performing strongly, the focus has switched to accelerating organic growth
Rising money piles
Organic growth

To slightly misquote the Beach Boys, it’s was all about “FUM, FUM, FUM” for wealth management firm European Wealth Group Ltd (LON:EWG) in 2016.

FUM is the asset management industry’s short-hand for funds under management, and it is safe to say that “more” is regarded as “better” in this line of work, so it is just as well European Wealth Group’s (EWG) FUM is/are heading north.

EWG saw funds under management (FUM) rise to £1.5bn by the end of 2016; that’s 22% higher than the £1.2bn it had at the end of 2015. Over the same period, the FTSE All Share could only muster growth of a little over 12%.

Furthermore, the end-2016 number does not include the £110mln of funds coming into the group from its purchase of the Towry book of business last October.

As a result of the strong organic growth coupled with the addition of CIMCO, which it bought in September 2016, EWG expects revenues for the year to be “significantly higher” than 2015 at somewhere north of £9.3mln, which would represent an increase of at least 24% on 2015’s £7.6mln.

The Brexit vote, expected to put a spanner in the works if it went the way of the Brexiters – which it did – proved to be a boon rather than a curse.

The second half of 2016 saw EWG maintain the momentum built up in the first half, with a strong performance from the investment management and dealing business in the aftermath of the Brexit vote.

Buy and build

EWG’s stated aim is to grow through targeted acquisitions and to consolidate in the investment industry in the wake of regulatory changes that changed the landscape, particularly for independent financial advisers, or 'IFAs' as they are known in the trade, who were rocked by the Retail Distribution Review (RDR).

The RDR introduced new rules aiming to improve standards of financial advice and consumers' understanding of the costs involved.

John Morton, EWG's chairman, said EWG, which listed on AIM in 2014 after a reverse takeover, had been established with the "post RDR world in mind".

City firm Panmure Gordon is a fan of the company, saying EWG has built a "scalable platform", has good organic growth prospect and scope for further acquisitions in the UK and overseas wealth management market, which is "ripe for consolidation" following the RDR reforms.

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

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."

In its February trading update, Morton said: "European Wealth continues to make selective acquisitions whilst continuing to invest in resources into the organic development of the business."

Regulation, regulation, regulation

If EWG has benefited from changes such as the RDR, it recently acknowledged that MiFiD II – a tighter set of industry regulations that will come into force at the start of 2018 – will create a “challenging environment” over the coming year, but it is confident that it is still well-placed for future growth.

“Continuing changes within the industry, particularly those covered by MiFID II, are likely to throw up an increased number of acquisition opportunities, all of which will be carefully analysed by the board;  however, the noticeable increase in the valuation of investment management and financial planning businesses has resulted in the board's focus shifting towards accelerating organic growth in the shorter term,” the group said.

In an otherwise upbeat update, a slight note of caution was raised with EWG saying an increased need for working capital meant it was keeping a close eye on its cash position ahead of its loan note obligations that are due in June this year.

At the end of March, EWG appeared to lay these concerns to rest by entering into a £720,000 12-month loan facility.

The facility carries an interest rate of 10% over the term of the loan.

The loan will be used to provide adequate working capital for the company in the near term and will ensure that the company can meet its obligations as they fall due.    


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CN Research
February 22 2017

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EWG is still very much an industry consolidator, but with its own businesses performing strongly, the focus has switched to accelerating organic growth

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