Caught in a trap? That's how Jefferies headlines its analysis of Rathbones Group PLC (LSE:RAT, OTC:RTBBF).
The note prompted the shares to slip 5% on Thursday after the broker initiated coverage with an 'underperform' rating and a £16.50 price target.
It paints a picture of a business caught between nimbler platforms, adviser-led models and upmarket rivals, with little sign of escaping the squeeze.
Rathbones is, on paper, a fine company: old-school, steady, and a byword for discretion. But in the modern wealth management world, that’s not quite enough.
US outfit Jefferies’ analysts reckon there is “higher growth and operational gearing available elsewhere”, particularly among mass-affluent operators such as AJ Bell, Quilter and Schroders’ Lloyds joint venture.
Those names have been hoovering up inflows while traditional discretionary managers like Rathbones have struggled to keep up, not helped by the disruption of recent acquisitions.
Revenue margins have been sliding for years. Back in 2006, Rathbones earned more than 1% of assets under management in revenue. By 2022, that figure had fallen to around 0.68%.
The trend, Jefferies thinks, will continue: “clients naturally dislike price increases”, and with fee tiers hard to shift, economies of scale are tough to realise.
Indeed, scale hasn’t delivered much. Since 2009, assets under management have risen eightfold, yet profit margins have fallen from the high-20s to the mid-20s. Underlying pre-tax margins have not topped 30% since 2017.
The main problem, according to Jefferies, is that investment professionals effectively take a share of revenues, leaving little leverage for shareholders.
The share price has dropped 15% in the past decade, even as market capitalisation has risen 86%, largely due to new equity issued to fund acquisitions.
Those deals haven’t been cheap. The broker notes that from 2009 to 2024, reported pre-tax profit lagged adjusted profit by £496 million, about one-third of total adjusted profit, reflecting the amortisation of the cash spent buying new clients.
That, Jefferies says, is “very high” for a business that likes to present itself as conservatively managed.
There are still some silver linings. The dividend has risen almost every year since 2006, compounding at 6.5% annually.
But investors can get higher yields, roughly 8%, from life insurers. Rathbones’ £50 million buy-back “is too small to make a difference”, the US bank adds.
Could a bid come to the rescue? Perhaps, but Jefferies isn’t banking on it.
The note hints at speculation that Rathbones might tempt a buyer, given Royal Bank of Canada’s interest in Evelyn Partners, but the broker prefers the exposure of listed platforms and vertically integrated wealth groups such as Quilter or St James’s Place.
At £16.50, Jefferies’ target implies about 10 times 2026 earnings. Solid, yes, but for investors looking for real growth in the wealth sector, this old-school house may feel more like a comfortable armchair than a rocket ship.