Shares in junior stockbroker Bell Financial Group Ltd (ASX: BFG) are soaring today after the firm revealed it expects to reveal a full year profit above $24 million when it reports its full year results.
This would be a 9% lift above the prior year's result and as a result the shares have climbed 4% to 76 cents during afternoon trade. The group provides over the phone and online broking services to retail, institutional and corporate clients, alongside sell side investment and capital market advisory services to retail and corporate clients.
The group's core retail broking business increased revenues by 14% to $114 million for a profit before tax of $13 million in what looks a strong result. While on the other hand its institutional and capital markets business saw revenues fall 16% to $34.3 million which delivered a profit before tax of $7.2 million, down 29% on 2015. This is a disappointing result that reflects the cyclical nature of capital markets work and the competitive environment.
In terms of growth the group is also looking to grow its advice business that looks after retail clients' funds either through portfolio, cash or superannuation administration services, among others.
Value?
Bell Financial delivered 6.2 cents in earnigns per share over the 2015 financial year and could be expected to earn close to 7 cents in 2016 if you use the expected profit growth as a guide.
That means it trades on an undemanding valuation at 76 cents, with a good dividend yield. However, it remains that the group is unlikely to ever shoot the lights out while operating in a competitive environment with no real advantages.
Powerful competitors
For example Bell Financial is competing with the retail brokerage arms of the Commonweatlth Bank of Australia (ASX: CBA) or National Australia Bank Ltd (ASX: NAB), both of which can regularly discount prices and have far bigger technology and support budgets to impress investors.
When it comes to financial services scale matters and another advantage some businesses can gain over others in the capital markets advisory space is via reputational excellence or trust that encourages potential clients to send work the large player's way even if it is for premium fees. A lot of capital markets advisory work requires substantial know how so the likes of Macquarie Group Ltd (ASX: MQG) can consistently do well via their reputation and deep pools of human resources.
For these reasons I would prefer the larger financials over the smaller ones, even if Bell Financial does appear on a cheap valuation.
