The recent budget was tagged ‘boring’ by most commentators. But there was one bombshell hidden within it which served to undermine STM (AIM: STM) whose shares dropped 30 per cent in the aftermath.
QROP tax blow
STM is a financial services administration company with offices in the offshore centres of Malta, Gibraltar and the Channel Islands. Its main business is the administration of 11,000 Qualifying Recognised Overseas Pension Schemes which expats use to transfer their accrued UK pension rights. The budget dealt a blow to individuals from countries outside the European Economic Area by introducing a tax on future transfers. STM’s existing book of business is fine, but 80 per cent of its expected new business flows in QROPs are now challenged.
It isn’t the end of the world however. Recurring revenues account for 90 per cent of the division’s income and around half the company’s business is in other products. It has been building its life assurance business through last year’s purchase of LCH, which also brought SIPP administration into the group. Those offshore workers will still need financial planning but the answer might now turn out to be a life assurance or SIPP wrapper, which STM can offer, rather than a QROP.
The key will be to ensure the overseas intermediary relationships that STM has been building will look to offer those other STM products to their clients. Meanwhile there’s the annuity-like income from existing business and some efficiency gains to come from the LCH purchase. CEO Alan Kentish also anticipates some consolidation opportunities as owners of smaller QROP books consider exiting the business.
The balance sheet is fine with £8.6million of net cash and profits should still nudge upwards this year. At 37p the shares trade on a p/e of 9 and yield 4 per cent which should mean there’s little downside before the way forward becomes a little clearer.