MANX FINANCIAL #MFX

MANX FINANCIAL

#MFX

Buys -
Average -
Currently -
Target –
Timeframe –March 16



Current Mcap -

Before reading any of my drivel, it is absolutely imperative that you read the great El1te Trader's summary of #MFX. He rated it as a buy at 13.5p in Oct last year. He obviously sums up the past and issues far far better than i can. My piece below should be seen as a bolt on update to his fantastic piece. Operationally, things have gone fantastically from then but the SP is down, providing a mouthwatering trading/investing opportunity. Before reading my updated analysis, it's worth a quick read of the link below to set the scene.


http://www.theel1tetrader.com/2014/07/manx-financial-group-exploiting-change.html



So the state of play around 14 months ago was a 2013 Pre-Tax profit of £1.1mill and an MCap of around £13.5mill, SP 13.5p. Not too bad at all.

Lets fast forward to the 2015 interims...

Profit before tax:	£1.01 million - up 33% (2014: £0.76 million)
Net interest income:	£6.87 million - up 36% (2014: £5.05 million)
Operating income:	£4.53 million - up 19% (2014: £3.8 million)
Total assets:	£126.17 million - up 24% (2014: £101.68 million)
Loans:	£92.53 million - up 11% (2014: £83.07 million)
Customer accounts:	£105.67 million - up 25% (2014: £84.51 million)
Total equity:	£10.89 million - up 18% (2014: £9.25 million

I would be absolutely amazed if the EOY 2105 results (due out 27/02/16) dont show a pre tax profit of at least £2.2million. The current Mcap sits at £11.23million (date of writing 15/11/15). So the profits will have doubled since July 2014 and yet the share price is off by 15% or so. The "Outlook" section in the interims reads "
The Group has delivered excellent profitability for the first half of 2015 and I have every confidence that the full year will see this momentum maintained.  Our new business opportunities remain strong and we will continue to manage our operational costs as prudently as possible"

£1mill/half profit as a base case going forward

Since H1 2015 has already produced a £1m pre-tax profit, it's fair to assume that - stripping out any exceptional costs if they are looking at acquisition opportunities - pre-tax profits should continue at a run-rate of £1m per half year at a minimum. The key point with Manx Financial is that there are a lot of warrants and options in issue, that create a big difference between the earnings per share figures, and the diluted earnings per share figures. More precisely, in the interim results, headline EPS was 0.87 pence compared to a much lower 0.54 pence in diluted EPS.


However, even assuming no improvement in H2 2015, which is arguably unreasonable as they have a strong track record of half-yearly improvements, would put MFX on a 2015 PER of 6.5 on the ask price of 11.25p or 10.4 on a diluted basis. Considering the rapid rate of profit growth and the fact that yearly profit in 2013 was just £1.1m on a pre-tax basis, this puts MFX as the major valuation anomaly within the sector. Yes, the market may still be sour over the loan deals issued to Jim Mellon and other key management in a bailout deal after the financial crisis, but in my opinion the growth and valuation will eventually shine through this and the market will be willing to assign a higher valuation multiple - perhaps closer to 14-15 - which would translate through to a share price around 40% higher than the current ask price.

Industry comparison PEs

Average "Financial Services" PE is 17.5, so MFX are clearly below this but lets look at a few direct comparisons.

Company	Mcap	Pre-tax profit (last full year)	2015 PE
Manx Financial	£11.23mill	£1.73mill (YE Dec 14)	6.5 (headline)/10.4 diluted
1PM	£36mill	£1.62mill (YE May 15)	18.4
Private and Commercial	£31.6mill	£2.1mill (YE March 15)	15.7
Secure Trust Bank	£521mill	£26.1mill (YE Dec 14)	17.5
S&U	£282mill	£23.2mill (YE Jan 15)	15.4

As discussed before, the MFX PE is going to get smaller with a pre-tax profit of over £2.2mill for the cuurrent year being reported end of Feb 2016.
1PM is pretty much a direct comparison. The fact Manx Financial is so undervalued compared to it is hard to fathom. At one point 1PM was on a PE of over 40.

Other Valuation Metrics

	MANX FINANCIAL	FINANCIAL SERVICES SECTOR
EV to EBITDA	2.3	13.7
PRICE TO BOOK	1.2	2.5
PRICE TO CASH FLOW	1	19.3
PRICE TO SALES	0.8	4.1
NET DEBT TO EQUITY	0.7	1
RETURN ON EQUITY	17.2	15.1

It looks pretty tasty on the other metrics too.

Whats the bear case or downside?

Well for the life of me i cant make a convincing case for signficant downside from the current SP. Probably a large degree of confirmation bias. At some point MFX will re-rate. I think that will be in the run up to and post the EOY results 2016. The main bear case is around the warrants and director loans or if the lending sector starts to decline, but the outlook for major banks over the next few years is surprisingly bright and this could have a positive filter effect on the rest of the financial services sector. As it stands, the UK economy's performance is resilient and favourable for small challenger banks with Aldermore and OneSavings Bank great examples of the share price and profit momentum within the industry. Please leave a comment if you spot massive flaws\holes in the story.

Decision

I think these are a superb buy below 11p with £2.2mill profit around the corner.

 

Disclaimer

Clearly dont just buy based on my recommendation or anyone elses. Do your own reseach. Pick an entry you are happy with, pick a target exit you think is achiveable. This share may go up and down quite a bit before the target catalyst. The target catalyst may not be as good as hope resulting in an AIM sell off with decent losses if your entry is wrong