Rathbones (RAT) £19.10

Loss to date: 10%

We recommended wealth management outfit Rathbones (RAT) in April 2022 as a read-across from RBC’s £1.6 billion bid for UK asset manager Brewin Dolphin, but since then things have been extremely quiet on the UK corporate front.

Financial firms in general have had a rough ride of late, and it is no reflection on Rathbones that its shares are 10% lower since we said to buy – shares in the UK’s largest quoted fund manager Schroders (SDR) are down twice as much over the same period.

WHAT HAS HAPPENED SINCE WE SAID TO BUY?

Despite an unfavourable investment backdrop, Rathbones increased its operating profits last year thanks to higher fee income, commissions and net interest income on the back of higher rates.

This month Rathbones revealed it had seized the initiative and agreed to take over the UK wealth management unit of Anglo-South African bank Investec (INVP) in a share-for-share merger to create a group with £100 billion of assets under management and administration.

Under the terms of the deal, which values Investec’s UK wealth and investment business at around £840 million, Investec will own a 41.25% economic interest in the enlarged Rathbones but just a 29.9% voting share.

WHAT SHOULD INVESTORS DO NOW?

In a sense, things are just warming up for Rathbones with the takeover of the Investec UK private wealth management business.

The firms share a similar culture and similar business models, so putting the two together and extracting cash synergies shouldn’t be a difficult task.

Rathbones’ chief executive Paul Stockton predicts annual savings of £60 million within three years due to economies of scale and higher net interest income, but Jefferies analyst Julian Roberts reckons £60 million is ‘not a big stretch’ and is forecasting a 15% uplift to Rathbones’ earnings per share as early as 2025.

Roberts calls the deal ‘a step change in scale’ for Rathbones and says he expects more consolidation in the sector. With management executing well, it is worth holding on to Rathbones shares.

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