Quilter | A waiting game

Quilter Plc is underperforming peers in 2019 YTD due to the loss of 12 Investment Managers in Quilter Cheviot in Q3'18. The pending platform migration (completion in H1'20) remains an overhang on operating performance as advisors refrain from adding new clients. The sale of Quilter Life Assurance (QLA) will reduce operating profit (AOP) by c.15% in FY'20 but the proceeds (c.GBP425m) add balance sheet flexibility. Share buybacks represent the best use of capital for Quilter considering the stock is 30% to 50% undervalued relative to peer St James's Place. Share buybacks will be accretive to our AOP/share forecasts by up to 17% in FY'20.

Quilter has outperformed the JSE and the FTSE100 YTD with 22% and 18% return respectively. We believe the counter remains undervalued but caution that the complexity associated with a platform migration of Quilter's scale (GBP55bn in AUM) adds risk to our FY'20 earnings forecasts. Normalised flows and improving operating leverage are dependent on a successful platform migration in H1'20. Base on managements thorough system testing and phased migration plan we assess the risk of operational and reputational damage from a failed migration to be low but not insignificant. We expect the share to rerate from a c.14x forward P/E to a c.17x forward P/E post the replatforming.