Brewin Dolphin FY11/12 Results: Steady Progress

Re-structuring of pricing has seen good growth in recurring income (68% group revenue) for Berwin Dolphin Holdings (BRW.L) while non-recurring trading commissions are under pressure. There has been some re-pricing-related outflow of funds, but it remains well within management expectations and funds under management (FUM) were £25.9bn. Costs were well controlled, with the major benefit from the cost programme expected to come in 2013/14. There was a modest beat against our expectations in both income and costs and we expect a small uplift to consensus numbers on these results.

Structure of pricing changed
The pricing model for the wealth management industry is changing with both regulatory pressure from the Retail Distribution Review (RDR) and customer behaviour. Brewin Dolphin (BD) introduced its new pricing earlier in the year, which has seen a shift from non-recurring to recurring income, a trend compounded by falling trading volumes reducing commissions. The total income growth (2%) is better than the small decline reported at the interim stage.

Funds flow distorted by re-pricing
Funds were always at risk from a major re-pricing and management indicated that the changes would be neutral to total funds if there was a loss of 7.5% advisory funds and 5% discretionary fund income. Two-thirds of the discretionary portfolio has re-priced, with 0.6% recorded attrition, and 28% of the advisory funds have re-priced, with 2.8% attrition. This is still early in the complex re-pricing cycle and it would be premature to simply extrapolate the experience to date. As more clients are affected and have had time to think, greater losses may be anticipated. It is likely that the discretionary losses will be well within tolerance levels while the advisory ones may not. Product profitability is such that every 1% by which discretionary outflows are better than expected, compensates a 2-3% excess outflow of advisory funds. Overall, we believe the cumulative loss of income is likely to be within tolerance levels.

Valuation: Some upside
Our approaches indicate a value of c 215p unchanged from previous analyses. There has been an immaterial change in the sum-of-the-parts, as we now assume a slightly higher proportion of higher-rated discretionary funds.

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