Sithembile Bopela
Rathbones - Building scale
Rathbones plc is a provider of personalised investment and wealth management services that includes financial planning, legal advisory, tax management, pension funds, and banking and trust services. The company services private clients, charities, trustees, and professional partners, primarily in the United Kingdom (UK), where most of its sales are generated (>95% of sales), and Jersey. Rathbones holds a market share of ~5% of the UK's wealth sector, which is estimated to reach ~£2.1 trillion by the end of 2024.
The company has two main operating divisions: Wealth Management (~85% of sales), which encompasses Investment Management (IM) and Financial Planning and Advice (FPA), and Asset Management or Funds (~15%). FPA services are facilitated through in-house planners as well as Vision IFP's independent advisor network in the UK. The Funds segment includes Rathbone Asset Management, a UK active fund manager, providing a range of specialist and multi-asset funds sold through intermediaries to the retail sector. These funds are distributed primarily through financial advisers in the UK.
The majority of the group's revenue base is generated by wealth and asset management fees (~73% of total operating income).
The majority of the group's revenue base is generated by wealth and asset management fees (~73% of total operating income).
Financial planning advisory fees also contribute to income, and even more progressively, as the group focuses on expanding its advisor base. This, together with the group's banking licence, provides diversification of its income streams. Overall, revenue margins have remained robust despite macro headwinds, underpinned by strategic acquisitions and the group's high level of service.
Mergers and acquisitions
The group has completed several key acquisitions over the past three years including that of advice-led wealth management business, Saunderson House, for €150 million in 2021. Saunderson House focuses on professional services for clients in London and Southeast Asia. This deal was an important step towards bolstering Rathbones' financial planning capability - increasing the number of in-house financial planners from 25 to 80, while contributing ~€4.6 billion to funds under management and administration (FUMA [FY21]).
In 2023, the group completed its merger with Investec Wealth & Investment UK (IW&I) under the Rathbones brand in an all-equity transaction valued at ~£19 billion. This was a transformational deal which served to create a wealth manager with about £100 billion FUMA, with IW&I adding ~40% to group FUMA (FY23).
Additionally, the deal with IW&I will deliver ~£60 million in annual cost and income synergies. Management anticipates the transaction will be earnings accretive within the first year, and >90% of the synergy gains are expected to be realised by FY26, with low-teens underlying EPS accretion targeted in the same year. Following the combination, Investec now holds an economic interest of 41.25% of Rathbones.
The transaction underscores the prevailing trend of consolidation across the industry, as changing consumer dynamics, competitive and regulatory pressures, as well as rising technology and operational costs continue to spur firms to merge. In this light, the rationale for the Rathbones/IW&I combination makes sense - to increase scale. However, particularly with the Saunderson integration still in play three years later, it does bring integration risk and forecast risk, at least in the near term as the two groups consolidate.
Management remains confident that the integration of IW&I into the larger entity remains on track.
Latest financial performance
Recent results for the first quarter showed a positive start to the year, with strong income growth mainly driven by the contribution from the recently consolidated IW&I business.
Overall, the group's performance was robust, with positive fee income the biggest driver of revenue, as well as higher commission and advisory income also adding strongly to the results.
Positive discretionary and managed FUM (Rathbones) were offset by continued net outflows from IW&I. The elevated outflows remain a sector-wide experience, largely ensuing from prevailing pressure on consumers due to the cost-of-living crisis in the UK.
While the margin guidance was in line with consensus expectations (Bloomberg: 25.1%), it does represent a downward revision of management's previous target (previously high-20%). This was due to further business investments as well as slower synergy realisation from the Saunderson acquisition, with the integration process taking longer than planned (as highlighted above).
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