Strong, profitable, growth not shown in share price

H117 saw Arbuthnot delivering on its promises with strong franchise, revenue and underlying profit growth. H217/2018 promises more of the same with the full benefit of franchise growth seen over the past twelve months (loans +34% to £879m, deposits +31% to £1,229m and assets undermanagement +26% to £1,001m). ABG has surplus liquidity and capital (c£90m) giving it flexibility to exploit opportunities in uncertain economic times. Management risk appetite remains conservative. From a small base, it can grow strongly and with good credit quality. The shares trade at 0.9x NAV despite the long track record of adding value – with this history, we would expect them to trade at a premium to NAV.

• H117 Results: Underling profit before tax grew to £2.7m from H116 £2.0m. The statutory profit was £2.5m against a loss of £2.4m in H116. Notable features included a 31% drop in interest expense despite the growth in deposits, and continued low levels of credit impairments. Heavy investment continues.
• Outlook: Our strong growth forecast remains unchanged. We expect underlying profit before tax in H217 of c£4.5m reflecting the full benefit of the H1 franchise growth and further increases in business flagged by management (guidance loan growth in H2 of at least 14%). In FY18 we forecast pbt to grow to c£14.3m.
• Valuation: We outlined a range of valuation approaches and scenarios in our initiation piece (Tripedalism-three-legs-are-better-than-two) and last note (History-is-repeating-itself). The range, assuming capital is fully deployed, is £15.36 to £26.64. The end H117 NAV was 1533p, 12% above today’s share price.
• 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 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. Having a profitable, well-funded and capitalised, strongly growing, bank priced below book value is an anomaly.