Charles Stanley and Alliance Trust

Stockbroker Charles Stanley (CAY) today announced their Preliminary Results for the year ending in March, and also announced they had exchanged contracts for the disposal of the CSS Division. The results were somewhat better than expected, but there was a loss before tax of £6.1 million, albeit with positive underlying earnings per share. Charles Stanley have a considerable retail investor client base and it is always worthwhile for investors to keep an eye on the financial position of their stockbroker. The last thing any investor wants, particularly those in nominee accounts, is for their broker to get into financial difficulties and risk administration or action by regulators.

The balance sheet of the company does not look that strong (current ratio only 1.13). Although they had £28m of cash on the balance sheet at the year end, this is swamped by the large amount for trade receivables of £267m offset by £265m of trade payables. However they did raise £15.8 million from investors after the year end which puts them in a stronger position and they should receive more cash from the disposal of the CSS division over the next year.

It is particularly interesting to look at the Charles Stanley Direct (“CS Direct”) division’s performance which provides what they call a “full service digital investment platform” for investors. Although the number of accounts went up substantially by 37%, it continued to lose money. This is surely ominous for Alliance Trust who are competing in the same area with the Alliance Trust Savings (ATS) platform and who are trying to expand it by adding clients – for example by the recent acquisition of Stocktrade.

What is more Charles Stanley invested £2.6m in “internally generated software” during the year which they capitalised (see Note 14) a lot of which surely went on CS Direct. This shows the size of investment that is now required in technology to maintain competitiveness in the stockbroking market.  In addition they wrote off £8.3m in asset impairments of which £3.0m was in CS Direct. It does not look a particularly healthy part of their business surely? Some questions for the AGM no doubt there.

Why is stockbroking such a competitive and unprofitable business for many operators? Because there are few barriers to entry is one reason, with some platforms offering the technology as a “white label” solution to new entrants and not a lot of apparent service differentiation. In addition because of the high capital costs to develop new platform technology, and on-going maintenance costs, there is always a tendency to try to increase volume to better cover the overheads. This leads to aggressive competition on price to grab market share and over excitement about acquisitions with large client bases. As in the airline business, it can result in lots of players losing money. Alliance Trust beware.

Roger Lawson