The FTSE 100 has taken about 10 years to rise by 80%. The first company I’m going to look at today has achieved the same result in six months.
Investment platform AJ Bell (LSE: AJB) floated on the London Stock Exchange in December 2018, since when its shares have rocketed higher. The group now has a market cap of £1.7bn and is a member of the FTSE 250.
The firm’s half-year results were published on Thursday and gave us some insight into why the shares are so highly rated.
Revenue for the six months to 31 March rose by 17% to £50.1m, compared to the same period last year. Pre-tax profit for the period climbed 27% to £17.7m, leaving the group with a pre-tax profit of £32.1m for the last 12 months.
If you’re thinking that sounds like a small profit figure for a company valued at £1.7bn, then I’d agree. But I can see some reasons why AJ Bell should continue to command a high valuation.
The next Hargreaves Lansdown?
AJ Bell is very profitable, and it’s growing fast. There’s also a third attraction — investors are hoping the firm will replicate the success of its larger rival Hargreaves Lansdown, whose share price has risen by 1,077% since its flotation in 2007.
Here’s how the two companies compare on some key metrics at the time of writing:
|
|
AJ Bell |
Hargreaves Lansdown |
|
Assets under administration |
£47.7bn |
£97.8bn |
|
Market cap |
£1.7bn |
£10.9bn |
|
12-month operating profit margin |
33.0% |
63.5% |
|
12-month return on equity |
36.9% |
67.4% |
You can see that AJ Bell has roughly half the assets under administration, but its market value is only 16% that of Hargreaves.
The main reason for this is that AJ Bell is much less profitable — at the moment. My calculations suggest that AJ Bell’s operating margin and return on equity are about half those of Hargreaves.
However, its operating margin has risen from 31.5% to 33% in the last six months alone. If the group can continue to expand, then I’d expect economies of scale to lift this margin even higher.
Time to buy? AJ Bell shares now trade on 60 times 2019 forecast earnings, compared to a multiple of 43 times earnings for Hargreaves.
Although I expect AJ Bell to continue growing, I think that’s quite expensive. At this level I’d continue to hold, but I’d wait for a better opportunity to buy.
I really like this business
One business I’ve rated highly since its flotation in 2016 is bowling alley operator Hollywood Bowl (LSE: BOWL). The firm’s shares have gained 35% since 2016, compared to a gain of 6% for the FTSE 100.
Sales have risen by 20% since 2016 as the group has invested in new locations and revamped existing centres. Figures released on Thursday confirmed that growth remains strong.
Like-for-like sales rose by 4.4% during the six months to 31 March, while average profit from each centre rose by 4.7% during the period. These figures suggest to me that costs are under control and that customer spending remains strong.
Keep buying?
After a strong performance over the last six months, the shares now trade on about 17 times 2019 forecast earnings, with a 3.3% dividend yield.
I think the stock could still be worth buying at this level. Although it’s not as cheap as it was, this business is highly profitable and should profit from growing consumer demand for experience-led activities.
