With a market capitalisation of only £100m, Harwood Wealth Management (LSE: HW) flies under the radar of most investors. However, if the company’s returns since its initial market offering are anything to go by, investors shouldn’t pass up this exciting growth opportunity.
Growing through acquisitions
Harwood was admitted to trading on the Alternative Investment Market on 29 March 2016, and since then shares have gained 60.3% excluding dividends.
These gains could be just the start for the fast-growing wealth management business. Indeed, today the company announced its interim results for the six months ended 30 April 2017 and all metrics showed strong growth. For the period, assets under influence rose 94% to £3.3bn, revenue grew 53% to £7.8m, and gross profit rose 63% to £4.9m. 75% of revenue is recurring. For the six-month period, the company generated £1.5m in cash, and at the end of the half, the company had £19.8m of cash on the balance sheet, a mixture of both cash generated from operations and a successful placing at the beginning of 2017 which raised £10.4m.
Harwood is growing through a mix of both organic growth and acquisitions. During the fiscal first half, the company acquired four smaller firms for an aggregate consideration of £2.1m to boost growth. One of these acquisitions, Network Direct was responsible for £1bn of assets under influence growth, the rest of the acquisitions accounted for growth of £0.3bn, and £0.3bn came from organic growth as well as market gains.
For the fiscal first half, Harwood generated a pre-tax profit of £330,000 and earnings per share of 0.27p. For the full year, City analysts had expected the group to report earnings per share of 4.9p on a pre-tax profit of £3.6m. Based on the current run rate it’s difficult to see how the company can meet this target.
Still, it looks as if management is not going to rest just yet. According to today’s results release, since the period end, the company has spent a further £585,000 on two additional acquisitions and is evaluating 11 others. With a cash balance of nearly £20m, Harwood has plenty of firepower to pursue further consolidation in the wealth management sector, and it seems vendor’s are actively approaching the group with proposals to sell. Management notes in today’s release that there has been a “greater number of potential offenders approaching us directly” since it became a public company.
Further growth ahead
As City targets for growth are uncertain, it’s difficult to place a value on shares in Harwood today. However, the cash-rich consolidator is bound to achieve steady growth for investors as it consolidates the highly fragmented wealth management sector. What’s more, as the firm grows it should be able to extract significant synergies from the businesses it acquires thanks to economies of scale, accelerating growth.
Overall, if you’re looking for a small-cap that has the potential to grow rapidly over the next few years in a well-established market, Harwood could be a perfect choice.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.