Shares in STM Group (LON:STM) fell 30% in early trade as the pensions administrator issued a profit warning, blaming acquisition issues and a slowdown in the pensions market for a fall in revenues and profits. The share price reaction was sharp and has not recovered since:
Such share price movements will not come as a surprise to longer-term holders as the share price has often been volatile. There have been several profit warnings in recent years, although there also has been a decent return for those who bought in earlier: the share price was under 20p going into 2015 and over trebled in the next year alone. Todays fall still puts us at well above the lows seen a few years earlier.
STM specialise in the provision of pensions but also earn revenues from life assurance products and corporate trustee services. These provide recurring revenues in the form of fees, as STM administer the investments as opposed to purchase them themselves. Their niche appears to be in the provision of QROPS, (Qualified Recognised Overseas Person Scheme), appropriate for UK citizens who retire abroad. In recent years, growth has come about through acquisitions, the latest being Carey Pensions.
What’s gone wrong at STM?
The bad news comes in a trading update released to the market today. The first relates to their acquisition of Carey:
The acquisition of the Carey Group in February 2019 is one such investment. Whilst integration is well advanced, two factors have affected new business levels at Carey; the rebranding has taken longer than expected and this has caused delays to the relaunch of products; and the successful application of the Carey Master Trust to The Pensions Regulator was more lengthy and time-consuming than anticipated, delaying new business flows and incurring an increase in one-off professional costs.
This does not seem unexpected: at the time of the takeover it was reported that Carey themselves were in legal trouble, and lucky to find a buyer. Perhaps this was demonstrated by STM booking a £2.7m profit, as goodwill went into reverse and the price of the assets acquired was less than the purchase price.
The second factor appears to be bad news all around for the rest of their operating segments:
In addition, partly as a result of some uncertainties and concerns in the general UK pension sector, levels of new business applications within the Pensions divisions are lower than originally budgeted and whilst new business applications have increased during the second half of the year, the increase is not expected to make up for the lower rate earlier in the year. The pipeline of new business following the relaunch of the UK flexible annuity in June this year continues to grow within the life assurance companies but is materialising slower than originally expected. Our non-core Companies and Trust Services business has also seen
Helpfully, this is quantified in terms of revenues:
As a result of the above, the Board now expects 2019 Revenue to be approximately £23.0m, reported PBT is expected to be approximately £3.8m, with Underlying PBT* of approximately £2.5m. As noted above, our outlook for 2020 will also be impacted by the slower new product revenue and the additional ongoing costs detailed above.
This does not appear a massive miss looking at Stockopedia figures. But a broker note today (available on Research Tree) confirms this is a 5% hit on revenues and a 14% profit miss this year. The bad news is for the 2020 figures which estimate a 34% miss.
STM Group: Uncertainty amongst growing pains
Historic results perhaps underly the trading update. STM have been trading profitably for some time, but top-line growth has stalled in recent years:
It’s previous profit figure was heavily influenced by the one-time mark-up of Carey’s assets. Acquisitions tend to be on the smaller size and bolt-on rather than transformational. The cash pile is significant here. The last year showed that STM were able to repay a bank loan, pay out dividends totalling £1.129m, and pay out £800k for another acquisition (Harbour), and cash balances went down by just £1m (approximately equal to working capital movements).
At c.£17.2m at the time of the last annual report, this brings into play whether there may be further acquisitions, and the company confirmed it was on the lookout for more. This cash balance also means that there are no immediate liquidity issues, and the cash balance covers all current liabilities and then some.
There is also a high level of cashflow relative to profits, and a very low level of capex. This feels like a lightweight business which earns its profits based on real fees (as opposed to increases of values of assets) and can be quite nimble.
So it may feel that there is something wrong with the price. Google gives us a market cap of approximately £20m, of which the majority is held in cash. This perhaps should be treated a little differently from other businesses as some will be encumbered to meet liquidity requirements.
A quick Google reveals that the current CEO, Alan Kentish was arrested two years ago in Gibraltar over a failure to disclose information. Although the investigation ended with no charges being made, this type of detail may be a red flag to many investors. The recent court action involving Carey Pensions may not have brought any more clarity, with the firm being accused of ‘being in bed with scammers‘.
On a quantitative note there is a lot to like about the business: it is profitable at a decent margin, it holds plenty of cash, it is on the lookout for acquisitions. Pensions themselves may be highly reliant on the relevant laws governing them at the time and may change a lot over the years however, the underlying product remains essential for most people. People retiring abroad will undoubtedly continue, and in perhaps higher numbers in future.
Going against this is that there was despite the upbeat tone of the CEO there was no real good news in the trading update as all its divisions had been affected. The profit warning was also a larger one than usual, and affects next year more sharply than this year. Any growth that people had paid up front for has disappeared, at least for now.
On balance I feel quite confident that the business will survive in the short-term, although the (admittedly) quick reading I have does not inspire much confidence. The rating is very cheap if you believe that the business can bounce back, so worthy of more investigation if you are planning a purchase. For me I would be happy to sit on the fence on this one. 3/5.