Subject: Fiske PLC
Here is another UK company. It’s a very small company but interesting. Certainly one a young Warren Buffett might have pondered. Possibly the type of thing he would be buying today if he was working with a tiny amount of capital.

There are some recent reports on it on Substack that get into a lot of detail if you search for Fiske.

A quick summary of the situation would be this.

77% of the of the market cap is in cash: £6.4m.

There is an investment in Euroclear, valued at the most recent London Stock Exchange disposal value of £5.3m. It’s probably worth double this. Euroclear is a toll bridge paying out 60% of earning in dividends.

The core business of Fiske PLC is stockbroking and investment management. The interesting thing is new management have transitioned the business from transactional commission fee income, towards more recurring funds under management recurring type revenue. It’s profitable and doing well of late under the new CEO (a couple of years in charge). They have significant AUM which would be valuable, even in a liquidation type situation. I am putting an ultra conservative value of £1.6m on it.

Those three pieces add up to £13.3m. Market cap is between £8m to £8.5m. This looks very cheap to me, given how conservative I am being with calculating intrinsic value. Below I argue for a more realistic valuation of £23m.

Management will determine what happens here. They could buy back shares; pay a special dividend; buy some more Euroclear; acquire more funds to manage and add operating leverage (probably the plan). The fact that they have so much cash currently, is perhaps a catalyst: they can’t really just sit on so much cash, for an extended period and will probably do something. Doing something good, looks like an easy move to me.

Cavet: A major issue with AIM companies is less regulation. I take comfort here in that these guys are trusted to own a piece of Euroclear and operate in the highly regulated financial services sector and have a long history in London.

Cavet: the bid offer spread is very wide and the stock does not trade that often.
I have bought some. This is not investment advice. Do your own research.

My more detailed notes from reading the filings:

This report may come across as incredibly ‘glass half full’ and overly conservative. That is intentional. We need to be sure the market is wrong about the value of this business before committing capital. This is not a sell side pitch.

Why would a business like this be so undervalued. It may be because it is a tiny illiquid stock that no one cares about, with investors focused on large cap US tech. It may be concerns over Russian sanctions. The really attractive thing about Fiske is that it’s so accessible and easy to understand.

Valuation, Margin of Safety & Risks
At the current bid price of 70p and the weighted average number of shares (11,830), the market capitalisation of the company is £8.3m.
The company has £6.4m of cash (latest balance sheet, plus Euroclear dividend received after the books closed). It will be higher than this as this UK company last reported on 31 December 2024 and is generating significant operating cashflows. 77% of the intrinsic value is cash, generating £226k in net interest (4%).

If really bad things happened, you don’t loose much (assuming management would pay out the capital to shareholders). A margin of safety. Two things that come to mind with this company as risks.

1. A Russian revenge cyber-attack on Euroclear that causes significant damage and impairs the value of that investment. I imagine this is already happening and Euroclear are keeping the Russian’s at bay. The dividends continue to flow into Fiske.

2. A stock market correction, or crash, cutting Fiske’s AUM impacting investment management fees and trading commissions. See the 2022 losses below.
If either of these two events happened, the intrinsic value could be materially impacted. You could argue that it’s already priced in and then some.
The company runs an Investment Management & Stockbroking business. It is an incredibly small organisation with only 50 employees but it is growing and performing well with its little niche of tailored customer service. An obvious challenge they have, compared to a company like A J Bell is diseconomies of scale. That makes investment in IT infrastructure and regulatory compliance expensive. The good news on this is they have spent a lot of money on the IT in recent years and are now seeing the costs reduce. On the regulatory front, the costs continue to eat into profits. In the next results for YE June 2025 there will be a significant hit to profits, as they expense costs of complying with Consumer Duty regulations. Regulatory costs may be lumpy but I would not expect them to go away.

With that said, what is this Management & Stockbroking business worth? How much is it making? Earnings before goodwill amortisation, before dividend and before interest income and after taxation looks like this:

2021: £255k
2022: £110k loss (markets down)
2023: £271k
2024: £852k
2025E: £319k (based on first half repeated but with £300k of additional regulatory costs, a wild guess).

What is that worth?

If we are being ultra conservative and put a 5x on the 2025 E, that’s £1.6m.
If we put a 5x on the 2024, that’s £4.3m, or £8.6m at 10x.

The company owns shares in Euroclear, a private company that acts as a financial market toll bridge within the EU, holding a dominant market share in securities settlement, for which it charges a fee. It facilitates the safe and efficient movement (settlement) of securities (like stocks and bonds) and money between participants, with assets under custody reaching over €40 trillion by the end of 2024, signifying its substantial role in the European financial infrastructure.
Euroclear plays a central, albeit complex, role in the Russian sanctions, holding approximately €180-200 billion in frozen Russian assets, predominantly belonging to Russia's Central Bank. This immobilization has generated substantial windfall profits for Euroclear, amounting to billions of euros (e.g., €4.4 billion in 2023, €7 billion in 2024), which the EU has largely decided to redirect towards aiding Ukraine, rather than returning to Russia. This situation has led to extensive litigation, with Euroclear facing numerous lawsuits, primarily in Russian courts, from entities seeking to reclaim or be compensated for their frozen assets, while the EU navigates the legal and political complexities of using these profits for Ukraine.

That sounds scary on first reading. However:

1. Fiske PLC is not being sued by the Russians. It continues to collect dividends from Euroclear and has no liability if somehow Euroclear became worthless.

2. Russia cannot unfreeze its assets in the EU through its own courts. That is not to say that this is not a complex and ongoing legal battle with implications for Euroclear and the broader EU financial system.

3. Profits referred to here, exclude the EU imposed ring fencing of returns from the frozen Russian assets (which are funnelled into Ukraine relief funds). The majority of these excess profits go to Ukraine but Euroclear is permitted by the EU to retain a portion to fund expenses, risks and losses including potential Russian lawsuits.

4. As one of the world’s critical Financial Market Infrastructure assets, it is strategically important to the EU financial system. Not the cause of the Russian sanctions and highly unlikely to come to significant undeserved harm.
Euroclear is performing strongly and consistently. In 2024 operating income increased by 42% and they continue to increase their dividend to shareholders. The most recently reported dividend receivable by Fiske is £490k. Euroclear have a stated payout ratio of 60%.

What is the Euroclear investment worth?
Fiske management report that there are regular private transactions in Euroclear shares. Fiske mark their investment in line with these arms length transactions. In recent years the value of Euroclear in private transactions has been increasing. At 31 December 2024 the investment was valued on that basis at £5.3m.
Grossing up the dividend receivable by Fiske from £490k to £817k (for the 60% payout ratio) and applying a 5x multiple, implies a value of £4.1m, or £8.2m at 10x. The £5.3m is a PE of 6.5x.

Adding that up, you get an ultra-conservative intrinsic value (IV) of £13.3m (£6.4m cash; Investment business £1.6m; Euroclear £5.3m). With a market capitalisation of £8.3m, that’s a 60% return to get back to this IV.

What is a more reasonable IV for the company?
Cash £6.4m
Investment business £8.5m (10 x 2024 earnings before acquisition goodwill amortisation, dividends and interest. Assumes the £300k guessed regulatory costs are non-recurring – maybe optimistic. But equally takes no account of recent progress being made by the management to grow AUM and customer base.)
Euroclear £8.2m (10x current earnings – still too cheap for a business like this perhaps…)

That comes to £23.1m, or a 178% return to get to this measure of IV.

What’s Next
That is all very well but we all know how these situations often turn into value traps. Unpleasant operating surprises, no multiple expansion and years go by and nothing much happens to the share price. There is no obvious catalyst here, so we might think like an owner.

In simple terms, let’s say we buy now and come back in 3 years and see what has happened. We assume no terrible negative surprises but no re-rating of the business or it’s investment happens. Let’s say they make £1m in earnings over the 3 years from the investment management and broking business (that’s very conservative, given they made £852k after tax owner earnings in 2024). Then add in another three years of dividend income from Euroclear at £1.5m and bank interest of £678k. That’s £3.1m of additional cash added to the current market capitalisation of £8.3m, or a 37% return over 3 years.

What will they do with the cash. They do not have a history of holding large cash balances and as investors they will be aware of inflation risks on holding cash. Part of the cash has built up from earnings and dividend income and part from the sale of a third of their Euroclear investment a few years ago. Management have talked about their platform and have added new customer books and managers, so small acquisitions seem likely, if they can find them. If not, maybe a special dividend. UK companies don’t often do buy backs but that would probably make sense.
Conclusion

On balance, this is an obviously deeply undervalued AIM listed company. It may not be possible to pick up significant amounts of shares but with some patience and limit orders, it can be done.

You have the 77% in cash, so don’t loose much. Then you have the Euroclear investment which appears to be a very attractive asset, hidden on this balance sheet from a disinterested stock market and no analyst coverage. What happens to its value after the war in Ukraine ends. Not that that should be relevant, as that risk is ring fenced and funded. What happens if the management of Fiske continue to grow their investment management and brokerage business, as they have done over the last few years.

It looks like a high probability of making 50% and a good chance of 150%.

If you are the one person that read this far...I would love to hear your thoughts good or bad?