JOHANNESBURG – Mid-size asset manager Anchor Group is on the acquisition trail.
Investors who bought into the company at R2 a share have seen their investments grow considerably. The share price closed at R9.01 on Wednesday, up 350.5% from its pre-listing issue price. It has been supported by growth in assets under management, which swelled from R2.8 billion to more than R7 billion between January and November last year.
In a cautionary announcement released earlier this week, Anchor said “the Company is still engaged in negotiations with a number of parties with regards to acquisitions of varying sizes”.
While there was some speculation that it may have its sights on listed financial services firm, Efficient Group, which is also trading under cautionary, Efficient looks set to bolster it own treasure chest. In a Sens announcement released on Tuesday it alerted shareholders to a “possible acquisition of a financial services business”.
The takeover landscape
Keith McLachlan, fund manager at AlphaWealth, says the broader financial services industry is undergoing a consolidation phase.
On the stock brokerage side margins are under pressure and in various other areas of the financial services industry compliance costs are escalating.
McLachlan says there are a fair number of smaller individually run operations that don’t necessarily want or can’t afford to comply with new regulation. These smaller operators tend to put these businesses or their books up for sale, which allows larger groups to buy them out.
He doubts if any of the listed companies in this space would be for sale and/or of a reasonable size that Anchor would be willing to take a risk buying them.
“You don’t want to make an acquisition that is too big, because you’re putting your group at risk then.”
But in the unlisted space, there are numerous small ones that could be good fits, he says.
Since Anchor operates in the asset management space it is unlikely that it would pursue opportunities that aren’t related to its core focus in the short-term.
Peter Armitage, chief executive officer of the Anchor Group, says it is in a nice strategic position as it raised about R250 million at the end of last year. Using a combination of shares and cash it can spend more than
R300 million if opportunities arose.
Armitage says they have a great research team and capability and anything that can add assets to their business and leverage off that could potentially make good sense.
Anthony Clark, analyst at Vunani Securities, says Anchor has set its sights on deals with other asset management companies who are looking to outsource their asset management to a third party source (like Anchor) and could buy individual financial advisory firms.
These are individuals or groups of employees or people that have built up a small asset management business ranging between R1 billion and
R3 billion. Merging these small companies into an existing operation creates operational leverage as costs are stripped out, he says.
But businesses would have to be cheap and the focus will predominantly be on gathering assets and not necessarily people, Clark says.
Against this background he believes it is unlikely that Anchor would buy Efficient.
“I’m not saying it’s not possible, but it just seems unlikely.”
Anchor’s assets under management have grown considerably over the past year and if it grows to R15 billion or R20 billion this year, the underlying profit leverage will be substantial. This will translate into higher earnings per share and higher dividends, he notes.
“It’s a fast growing company and if the money it manages grows and it remains very efficient and its costs remain low, it makes more money. It’s as simple as that,” Clark says.
The share price
McLachlan says retail hype combined with a lack of liquidity in the script has driven the share price higher.
While the company’s fundamentals and its expected profit trajectory is quite good, at current levels even good results have the potential to disappoint the market if it is not as good at the market expected, he says.
Clark says the share price movement is the result of an expectation that assets under management will grow and lead to higher profits.
Anchor Group is one of his Top 5 stock picks for 2015. He expects it to end the year at a minimum of R12 a share.
“I think the share price currently has good long-term growth prospects,” Clark says.