St James's PlaceOct 26 2020

Activist shareholder calls for cost overhaul at SJP

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Activist shareholder calls for cost overhaul at SJP

In an open letter sent to the board of SJP today (October 26) PrimeStone Capital, which owns 1.2 per cent of SJP's stock, claimed the company had "failed to deliver value for shareholders" over the past five years. 

Whilst the shareholder said SJP was a "fundamentally strong" business which had delivered value for clients, partners and employees, it warned its shares had underperformed in recent times. 

A source familiar with the situation said PrimeStone Capital wanted to see an overhaul of SJP's structure to reduce costs and "realise its full profit potential", which it claimed could see the company more than double its share price. 

The shareholder began investing in SJP last year but in an eleven-page letter today warned the advice giant had a "bloated organisational structure" with an "overly generous" compensation package "well above" its peers. 

SJP has frequently come under fire for its policy of rewarding partners with lavish perks such as cruises, but earlier this year announced it was overhauling its incentive packages to reward "the right behaviours".

Benoît Colas, managing partner at PrimeStone Capital, and Damian Hahnloser, partner at PrimeStone Capital, said: "SJP has delivered tremendous value for clients, advisers, employees and management … but not so much for shareholders over the last five years.

"It is time for the company to address its high cost base and change its culture in order to deliver its full value-creation potential to long-neglected owners.

"Far from coming at the expense of other stakeholders, we believe such a change will provide SJP’s clients and advisers with a leaner, more agile and more reactive SJP."

Shareholder value 

The main theme of the letter centred around a perceived shortfall in shareholder value, with PrimeStone warning the SJP share price had dropped 7 per cent since the end of 2015. 

It said this was "especially disappointing" given client assets had doubled over this same period. 

At £9.40 a share, SJP's stock price has slipped 2.5 per cent from the £9.65 it cost in October 2015 and 6.9 per cent from its price at the end of that year. 

However, before the pandemic struck and tumbled global markets, SJP's stock had reached £11.88 a share — up 25 per cent on October 2015.

But the wealth manager has struggled to maintain consistent growth, reaching its stock price high of £12.70 in January 2018.

The letter said: "The current share price does not reflect the full value of the strength of its business model, its leadership position or its long-term growth potential."

PrimeStone Capital also called on SJP to improve its financial communication to shareholders by reporting on revenues, costs, margins and KPIs "more comprehensively". 

A "bloated" structure 

PrimeStone, which owns 1.2 per cent of SJP's stock, took aim at "a suboptimal management" of SJP's cost base, which it claimed was the primary cause of falling shareholder value. 

The letter warned of a "bloated" organisational structure at the company, with more than 120 SJP employees holding a "head of" title. 

PrimeStone said: "We struggle to understand how SJP can have that many departments to be headed."

It added: "It is worth noting that several investors, including ourselves, have tried to get a better understanding of this cost inflation.

"For instance, we wanted to analyse staff numbers by function.

"We have not been provided with satisfactory answers but the outside-in perspective definitely raises significant concerns regarding the company’s spending culture."

'Excessive' pay and hiring 

PrimeStone also voiced concerns over "excessive" pay and hiring at SJP and urged the advice giant to shake-up its culture.

The shareholder's analysis found the number of in-house staff supporting advisers had jumped by 70 per cent over the last eight years.

PrimeStone said it had reviewed around 500 profiles of recent hires at SJP on LinkedIn, with the largest numbers of new joiners in administration, business analysis, personal assistants, project management and internal communication.

It added: "In addition, we noted 21 hires in marketing and 23 in investment despite neither marketing nor investments being core functions of SJP; the partner practices do the former and SJP’s external fund managers and consultants take care of the latter.

"Whilst we are limited to publicly available information, and only SJP can know the true picture, we nonetheless consider these trends very concerning."

PrimeStone research also suggested a quarter of SJP employees, excluding advisers, were earning more than £89,000 per year, a statistic the shareholder branded "staggering". 

SJP response 

In a statement to the market this morning SJP confirmed it had received PrimeStone Capital's letter. 

SJP said: "SJP proactively engages with shareholders with regards to group strategy and structure and looks forward to commencing a dialogue with PrimeStone in regard to the views outlined in its letter." 

The wealth manager said it would provide an update on its third quarter new business performance and funds under management tomorrow (October 27). 

Earlier this year SJP cut by a third its final dividend for 2019, withholding the difference until the "financial and economic impacts of Covid-19 [became] clearer".

The listed company reduced its final dividend for last year from 31.22p per share to 20 pence per share, with the difference of 11.22 pence per share to be withheld until further notice.

Andrew Croft, chief executive at SJP, promised the funds withheld from its dividend would be used to financially protect its partner firms if required during the coronavirus crisis. 

rachel.mortimer@ft.com 

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