History is repeating itself

Arbuthnot’s strategy, and largely the same management team, have delivered total shareholder returns of 418% 2008-2017 and 930% 1997-2017 respectively. 2016 saw a new phase in the execution of the strategy with the further partial sale of Secure Trust shares releasing capital to be deployed in other businesses. The initial stages of this deployment began (property acquisition, loan book purchase, accelerated team hires, asset finance deal, plus a 325p special dividend) but the full deployment of capital will take some years. 2016 results were a little ahead of our estimates but 2017 accelerated investment leaves forecasts largely unchanged.

• 2016 results: Statutory profits (£228m) were dominated by the disposal gains (£228m), and investments. Revenue grew from £35m to £42m, other income and associate contribution was £5m (nil) while costs rose from £36m to £46m. Impairments dropped by two thirds. Underlying profits rose by a third to £4m.
• 2017 outlook: 2016 hires should deliver accelerated loan growth in 2017. The targeted c60% increase in commercial banking headcount in 2017, is more than we had expected. The Renaissance acquisition should complete shortly. We have raised loan, revenue, and cost forecasts leaving the profits unchanged.
• Valuation: The average of our base case valuations is £18.49 (with the highest valuation being the Gordon’s Growth model (£23.01) which we believe best captures profitability and growth). The average is up from the previous valuation (£16.31) as we have moved to 2018 estimates. The end 2016 NAV was 1534p
• Risks: As with any bank the key risk is credit. AL’s existing business should see below market volatility and so the main risk lies in new lending. We believe management is cognisant of the risk and has historically been very conservative. Other risks include reputation, regulation and compliance.
• Investment summary: ABG offers strong franchise and continuing-business (normalised) profit growth. Its balance sheet strength (both capital and funding) gives it wide ranging options to develop organic and inorganic opportunities. The latter are likely to increase in uncertain times. Management has been both innovative but also very conservative in managing risk. Our base case valuation has 27% upside, or 56% on the full deployment of capital.