It’s been a tough year for Close Brothers Group (LSE:CBG). The FTSE 250 business has seen a share price drop of 56% over this period. Considering that the index as a whole is up 17% over the last year, Close Brothers has lagged significantly. Yet, is it now an undervalued purchase, or is it game over?
Problems galore
Part of the issue came at the start of this year, with the announcement from the Financial Conduct Authority (FCA) that it was investigating historical motor finance commission arrangements and sales. At the time, anyalsts thought that Close Brothers could be fined up to £200m. As a result, the business decided to cut the dividend and trim back on costs, which further caused the share price to tumble as income investors threw in the towel.
Given that we’re still not at the end of the FCA probe, the management team took the decision recently to sell off the asset management business to raise money. The cash proceeds from this sale should be around £172m, a good buffer for whatever might happen in the future.
Unfortunately, the stock’s down further from this announcement. The asset management arm was profitable and a good source of income for the group. Even though it’ll net the cash from selling, the long-term earnings it could have provided will now be gone.
Restarting the engines
The business will be hoping to have a fresh start and move on from the problems of the past year. However, we still don’t know when the FCA will conclude the investigation, or what fines it’ll hand out (if any). Therefore, it’s almost impossible for Close Brothers to move on until this chapter is closed.
If a fine isn’t forthcoming, then I’d expect a sharp share price rally. With cash on hand from the recent sale, the management team could invest heavily in new growth opportunities, helping to fuel a strong 2025. After all, the core group operations are already performing.
The latest annual report showed that the loan book increased 6% versus the previous year, with operating income up 1%. This might not seem fantastic but, so far, the firm hasn’t seen a sharp exodus of clients, which bodes well.
However, if a fine is handed down, it could take longer to rebuild the business. The size of the fine would impact the finances, potentially leading to the firm having to borrow more money. The reputational impact would be negative, causing any short-term rally to potentially fizzle out. This is one of the main risks I see going forward.
It isn’t game over
Even though I’m not going to invest right now, it’s too early for me to say with conviction that the business is in real trouble. Until the FCA concludes the investigation, I doubt we’ll see the stock recover. But if Close Brothers gets a favourable ruling and puts this saga behind it, it could certainly be game on instead!
