23rd Jan 2023 20:36
(Alliance News) - Shore Capital dubbed Close Brothers' trading update on Friday "disappointing" as the merchant bank flagged further material provision in respect of Novitas, alongside a continued weak trading performance at Winterflood.
Close Brothers said on Friday it delivered a "resilient" interim performance, noting good demand and strong margins for the five months of its first half ending January 31.
However, the London-based firm said that trading activity was subdued at stock broker Winterflood. Additionally, Close Brothers said Winterflood's performance has been "adversely impacted by the continued market-wide slowdown in trading activity in higher margin sectors".
As a result, operating profit in the period was GBP1.7 million.
Winterflood provides outsourced dealing and custody services for asset managers and platforms.
Amid these challenging conditions for the Winterflood division, analysts at Shore Capital downgraded their financial 2023 operating forecast for the division by 46% to GBP11.9 million.
The analysts added that this recent downgrade still implies an improvement to a more normalised level of performance over the remainder of the year which, it warned, "may still prove to be optimistic."
For Shore Capital, Close Brothers' issues with litigation finance business Novitas remained the firm's real headache.
Close Brother said on Friday that it expects to recognise an additional provision in its interim financial statements against the Novitas loan book of up to GBP90 million.
Chief Executive Officer Adrian Sainsbury said the increased provision will "adequately cover" the remaining risk of credit losses.
Novitas was acquired by Close Brothers for around GBP31 million in 2017. In 2021, Close Brothers decided to permanently cease the approval of lending to new customers across all the products offered by Novitas and withdraw from the legal services financing market.
The additional GBP90 million set aside on Friday would increase the total provision against the loan book to GBP183 million, Shore Capital explained. implying coverage of 75%.
"The residual net loan book exposure would therefore be GBP60 million... We view this as a "kitchen sinking" exercise as management attempts to draw a line under this matter once and for all," the analysts said.
Nonetheless, Shore Capital downgraded its adjusted earnings per share outlook for Close Brother for the next three financial years. It downgraded its financial 2023, financial 2024, and financial 2025 by 54%, 10% and 8% to 57.4 pence, 121.4p and 128.3p, respectively.
In addition, Shore Capital lowered its fair value for Close Brothers to 1,170p from 1,285p.
"With 25% upside, we retain our BUY recommendation, albeit we continue to see better value almost everywhere else in the sector," Shore Capital concluded.
Shares in Close Brothers closed up 2.4% at 959.56 pence on Monday in London. Over the past 12-months, the stock is down by just under 23%.
Close Brothers will release its results for the six months ending January 31 on March 14.
By Heather Rydings, Alliance News senior economics reporter
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