A quick glance at the fundamentals suggests there is a compelling case for investing in Lighthouse, the independent financial adviser (IFA) and pension administration group.

Lighthouse’s market value is a mere £11 million at the current 15p. However, annual sales totalled £32.6 million in the 12 months to December, earnings exceeded £472,000 (against a loss of £800,000 the year before), the cash pile doubled to £5.1 million and the flow of annualised investment funds was approaching £700 million.

At the pre-tax line it did make a loss, but this was largely related to the purchase of Carrwood (of which more below). Recurring revenues ‘increased substantially’ to £7 million and in its present guise the company is the ‘sixth largest IFA group in the UK’, quotes chief executive Malcolm Streatfield from figures published by the Life & Investment Insider from 2005.

So why is Lighthouse valued so ungenerously? ‘There are reasons, but the market’s experience of the IFA and related sector has been less than ideal,’ says Streatfield. He doesn’t mention them by name of course, but Streatfield is referring to previously disappointing ventures like InterAlliance, which racked up tens of millions of pounds of losses before being merged with the equally disappointing Millfield in 2004. This corporate marriage did little for the prospects of either group – Millfield’s shares were recently suspended pending clarification of its financial position. Another venture to disappoint investors is Tenon. It wrote off a tub-thumping £100 million or so a few years back, after raising and then spending a similar amount between 2000 and 2002.

‘There are a few good players and we like to think we are one of them,’ argues Streatfield. ‘We have never been rebuked or had our capital adequacy challenged by the regulators. We have been cashflow-positive for two years and our goal now is to join the dividend list.’

Five divisions make up Lighthouse’s business empire. Lighthouse Temple is the national IFA and has around 147 registered advisers across the UK. Lighthouse owns the brand, the clients and all the income that is derived from them, although the advisers are technically self-employed. Income per adviser rose from £47,000 to £54,000 last year and this arm contributed £2.8 million to group gross profits.

Lighthouse Xpress is the group’s network division. As at December it had 305 advisers who operate as sole traders with Lighthouse providing the necessary legal, regulatory and professional indemnity cover. Its contribution to gross profits jumped 19 per cent to £1.6 million. The number of advisers at Xpress actually fell last year, although these were largely ‘poorly performing’ operators. According to Streatfield, the increase in mortgage work and the changes to the FSA’s registration requirements all bode well for the future.

Lighthouse Wealth and Lighthouse Practices largely advise high-net-worth individuals and contributed £0.6 million to gross profits last year.

Lighthouse Carrwood is the newest arm, created following the purchase of Carrwood in December 2005 for an initial £3.3 million (£3.2 million in shares and the remainder in cash). It delivered turnover in 2005 of £6.8 million as the annual ‘production’ per adviser hit £120,000, well above the Lighthouse average. It differs from the other divisions in that its 39 advisers and managers are salaried and trade from accountancy firms.

Its core focus is the provision of advice to business owners and high-net-worth individuals and it manages over 200 group pension schemes and associated corporate benefits on behalf of ‘an impressive client list’.

The last outfit is City Pensions (CP), which was acquired as part of the Carrwood acquisition. The attraction of CP is that it administers 800 self-invested personal pensions (SIPPs) and 200 small self-administered schemes (SASSs). This is an intriguing space to be in following recent changes to the pensions on 6 April, which injected a greater degree of flexibility into the sector that should fuel growth.

House broker Daniel Stewart, buoyed by the fact that Lighthouse has more than 500 advisers in its stable, expects the company to produce profits before tax of £2.2 million in 2006 on sales of £43 million. That puts the group on a p/e of 5.0, which falls to a mere 4.4 for 2007 when profits of £2.7 million are expected.

‘Whether the current market value reflects our true worth is not something I am really allowed to comment on,’ says Streatfield, ‘but we are more substantial than people realise. This is a business with influence over £3.5 billion of funds.’