Record — A reassuring update

Record (LSE: REC)

Last close As at 21/11/2024

GBP0.62

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Research: Financials

Record — A reassuring update

With more than 90% of assets under management equivalent (AUME) linked to equity and other market levels it was not surprising to see Record’s AUME fall by 9% in the quarter to end March. Positively, flows and client count moved little in the period. For FY20 as a whole AUME was up 2% in dollar terms, inflows were equivalent to 8% of the opening level and the number of clients increased by 11%. The group acts on a purely agency business, and has a sticky institutional client base and a strong net cash position.

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Financials

Record

A reassuring update

Q420 trading update

Financial services

22 April 2020

Price

32.4p

Market cap

£64m

Net cash (£m) at end September 2019 excluding seed fund cash of £5.8m

17.7

Shares in issue

196.7m

Free float

32%

Code

REC

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

19.8

(16.6)

14.2

Rel (local)

9.4

13.3

50.1

52-week high/low

41.2p

27.3p

Business description

Record is a specialist independent currency manager that provides a number of products and services, including passive and dynamic hedging, and a range of currency for return strategies, including funds and customised segregated accounts.

Next events

FY20 results

19 June 2020

Analysts

Andrew Mitchell

+44 (0)20 3681 2500

Martyn King

+44 (0)20 3077 5745

Record is a research client of Edison Investment Research Limited

With more than 90% of assets under management equivalent (AUME) linked to equity and other market levels it was not surprising to see Record’s AUME fall by 9% in the quarter to end March. Positively, flows and client count moved little in the period. For FY20 as a whole AUME was up 2% in dollar terms, inflows were equivalent to 8% of the opening level and the number of clients increased by 11%. The group acts on a purely agency business, and has a sticky institutional client base and a strong net cash position.

Year end

Revenue (£m)

PBT
(£m)

EPS*
(p)

DPS**
(p)

P/E
(x)

Yield
(%)

03/18

23.8

7.3

2.98

2.30

10.9

7.1

03/19

25.0

8.0

3.25

2.30

10.0

7.1

03/20e

25.1

7.8

3.17

2.30

10.2

7.1

03/21e

22.2

5.2

2.14

2.30

15.1

7.1

Note: **EPS is diluted. **DPS excludes special dividends.

Q4 AUME falls but flows positive for quarter and year

The AUME figure of $58.6bn for end March was down 9% compared with the end of December 2019 (and by 3% in sterling terms to £47.3bn). This was a satisfactory outcome given that nearly all passive and dynamic hedging and some multi-product mandates are linked to underlying equity or other market assets. On client AUME flows, a short-term tactical mandate of $1bn terminated in the period (previously announced). There was an inflow of $1.1bn into passive mandates, which, with other flows, meant a virtually neutral overall position in terms of client flows. The client count was also effectively stable at 72 (73 end December). As would be expected, market moves were substantially negative, knocking $4.5bn off the total while currency movements deducted a further $1.7bn. Record indicates that there has been no change in its dividend policy (cover of at least 1x) and that it expects to maintain payment of its ordinary dividend (full year 2.30p, implying a yield of 3.5% for the final payment alone).

Volatility poses challenges but may also help

Heightened volatility, reduced liquidity in foreign exchange markets and a move to remote working have presented challenges for currency managers but Record has continued to execute its mandates on behalf of clients without disruption, demonstrating the resilience of its operations. Client engagement during recent weeks has been strong and the market background seems likely to encourage clients and potential clients to maintain or add to risk-management mandates.

Valuation

Our EPS estimates for FY20 and FY21 are reduced by 3% and 24% respectively, primarily because of lower AUME following market moves. Nevertheless, the shares trade on a calendar year 2020 P/E below the peer average (or broadly in line for FY21). As before, our FY21 estimate does not assume any performance fees.

Changes in AUME and other points from update

Exhibit 1 shows further detail on the AUME levels and client net flows highlighted above. The first three columns showing AUME by strategy underline the impact of the market downturn in the quarter to end March. The flow analysis shows that there were overall net inflows in each quarter of the financial year with an overall total of $4.6bn for the year, suggesting the group’s continuous focus on innovation and improving service levels is having a beneficial effect. Even after negative market, foreign exchange and mandate scaling moves there was still a positive net movement for the year of $1.3bn.

Exhibit 1: AUME changes

Year-end March ($bn)

Q419

Q320

Q420

Q120

Q220

Q320

Q420

FY19

FY20

AUME

Net flows

Dynamic hedging

3.1

3.5

2.5

0.3

(0.1)

0.1

(0.1)

(0.7)

0.2

Passive hedging

48.2

53.4

50.3

0.1

1.5

1.4

1.1

(4.6)

4.1

Currency for return

2.7

3.3

2.6

(0.1)

0.3

0.0

0.1

0.9

0.3

Multi-product

3.0

4.2

3.0

0.0

0.0

1.0

(1.0)

0.0

0.0

Cash and futures

0.3

0.3

0.2

0.0

0.0

0.0

0.0

(0.1)

0.0

Total

57.3

64.7

58.6

0.3

1.7

2.5

0.1

(4.5)

4.6

Markets

0.0

1.3

0.0

(4.5)

2.3

(3.2)

FX and scaling for mandate volatility targeting

0.7

(1.4)

2.3

(1.7)

(2.7)

(0.1)

Total change

1.0

1.6

4.8

(6.1)

(4.9)

1.3

Source: Record

The Q420 investment performance of the return seeking strategies was mixed with the FTSE FRB10 Index (sterling excess return) down 3.98%. The Record Emerging Market product was particularly weak in a risk-off period, down 8.76%, although the annualised since-inception (November 2009) return for an ungeared portfolio was +1.19% pa. The Multi-Strategy product (with 4% target volatility) had a negative quarter (-5. 64%) but has also generated a positive since-inception (July 2012) return of +0.60% per year. Encouragingly, the Dynamic Macro Currency strategy produced a strong performance (+6.84%) reinforcing its record of achieving outperformance in periods of heightened risk aversion, periods that have been more challenging for the more systematic approaches. This strategy is managed by John Floyd whose hiring was announced at the interim stage. He is a seasoned FX professional who has managed a dynamic macro strategy for 15 years. This strategy is more discretionary than Record’s existing, primarily quantitatively driven strategies and is therefore complementary.

Exhibit 2: US trade-weighted real broad dollar index

Exhibit 3: Implied volatility – Swiss franc, euro versus US dollar

Source: Bloomberg

Source: Bloomberg. Note: For one year at the money options.

Exhibit 2: US trade-weighted real broad dollar index

Source: Bloomberg

Exhibit 3: Implied volatility – Swiss franc, euro versus US dollar

Source: Bloomberg. Note: For one year at the money options.

In a period of high volatility Record successfully moved to full remote working without disruption to client service, maintained staff wages and has not made use of the government job retention scheme. It has continued to navigate currency markets on behalf of clients with both increased trading volumes and restricted liquidity. The market conditions have generated greater client interaction and are likely to have encouraged some hedging clients to maintain or increase mandates while providing a more favourable background for future discussions with potential clients. Exhibit 2 shows the strength of the US dollar both on a medium-term view and in recent weeks; US hedging clients have benefited from the risk protection their mandates provide. Similarly, the sharp spike in volatility (Exhibit 3) will have acted as a reminder of the benefits of managing currency risk for investors in Europe.

As in previous quarters Record reports that management fees have been broadly stable (the group average in H120 was 4.8bps) but competitive pressure in hedging services remains a feature and Record continues to counter this through service levels and the introduction of service enhancements.

No performance fees were crystallised in the quarter but during Q320 £1.8m was crystallised (equivalent to c 0.4bps of the prior 12-month average AUME versus average passive hedging management fees of c 3bps).

Chief Executive Leslie Hill, who succeeded to the role in February and is a longstanding Record employee (joining in 1992 and previously deputy CEO and head of the client team), is aiming to re-energise the group’s growth strategy. Here one of the themes is to diversify revenue streams by responding to areas where clients are seeking help to implement strategies; this includes incorporating currency management into ESG and impact investing and including frontier currencies (despite the liquidity challenges involved). In addition, Record looks to promote the Dynamic Macro Strategy, where the recent performance should prove helpful.

Estimate changes

Changes in key figures from our estimates are shown in Exhibit 4. The changes for FY20 are relatively small and reflect changes in the sterling/US dollar (positive) and AUME level (negative) in Q420. The same factors apply for the whole of FY21 and we have assumed a somewhat higher level of staff cost to allow for modest further recruitment.

It should be noted that we do not allow for performance fees in our estimates until they have been crystallised so there are none included for FY21 compared with the £1.8m for FY20. On a longer view both performance fees and tactical mandates are likely to make a contribution to Record’s results but, given their episodic nature, it is difficult to set a reasonable level to allow within estimates.

Exhibit 4: Estimate changes

 

Revenue (£m)

PBT (£m)

EPS (p)

DPS (p)*

 

Old

New

Change

Old

New

Change

Old

New

Change

Old

New

Change

03/20e

25.5

25.1

-2%

8.0

7.8

-4%

3.28

3.17

-3%

2.30

2.30

0%

03/21e

24.0

22.2

-8%

6.8

5.2

-24%

2.81

2.14

-24%

2.30

2.30

0%

Source: Edison Investment Research. Note: *Dividend excludes any special payment.

Our dividend estimates shown above exclude special dividends and, based on our earnings estimates, we pencil in a special payment of 0.65p for FY20 (unchanged). For FY21 our new estimate would not provide scope for a special payment but would be close to covering the ordinary dividend, so we leave this unchanged at this stage, particularly given the potential to generate performance fees during the year. For more detail on our estimates, see Exhibit 6.


Valuation

An updated version of our valuation table, which shows Record in the context of a group of UK asset managers, is shown in Exhibit 5. Record is differentiated by its role as a specialist currency manager, but its fees are primarily based on the size of AUME, so, like the asset managers, it is exposed to movements in underlying equity and fixed income markets and flows.

Exhibit 5: Comparing valuation with UK fund managers

Price

(p)

Market cap

(£m)

P/E 2020e

(x)

EV/EBITDA 2020e (x)

Dividend yield (%)

Ashmore

357

2,547

14.2

8.8

4.7

City of London Investment Group

327

87

7.5

N/A

8.3

Impax Asset Management

364

475

29.7

22.1

1.5

Jupiter

208

950

10.7

5.0

8.2

Liontrust

1,000

555

19.1

12.9

2.7

Man Group

127

2,360

9.6

8.3

7.2

Polar Capital

410

396

11.7

7.0

8.0

Schroders

2,575

6,976

16.4

11.5

4.4

Average

14.9

10.8

5.6

Record

32

65

13.5

6.0

7.1

Source: Refinitiv, Edison Investment Research. Note: P/E and EV/EBITDA on a calendar-year basis. Record’s dividend yield excludes the special dividend. Priced at 21 April 2020.

Calendarised figures for P/E and EV/EBITDA (2020) show Record shares trading on multiples below the peer averages for both measures. The earnings for calendar year 2020 benefit from a quarter of the performance fee earned in FY20 and, as shown on the front page, the FY21e P/E is just above 15x. The dividend yield of 7.1% is at a premium to the peer average and there is the potential for this to be enhanced with a special dividend (on our estimate 0.65p for FY20).


Exhibit 6: Financial summary

Year end March (£’000s unless stated)

 

 

2017

2018

2019

2020e

2021e

 

 

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

 

 

 

 

 

Revenue

 

 

22,952

23,834

24,973

25,116

22,181

Operating expenses

 

 

(15,365)

(16,735)

(17,089)

(17,575)

(17,189)

Other income/(expense)

 

 

157

173

(8)

50

0

Operating Profit (before amort. and except.)

 

 

7,744

7,272

7,876

7,591

4,991

Finance income

 

 

112

56

113

167

175

Profit Before Tax

 

 

7,856

7,328

7,989

7,758

5,166

Taxation

(1,540)

(1,182)

(1,559)

(1,552)

(982)

Minority interests

 

 

0

0

0

55

40

Attributable profit

 

 

6,316

6,146

6,430

6,262

4,225

 

 

 

 

 

 

 

Revenue/AuME (excl. perf fees) bps

 

 

5.2

5.1

4.9

5.0

4.6

Operating margin (%)

 

 

33.7

30.5

31.5

30.2

22.5

 

 

 

 

 

 

 

Average diluted number of shares outstanding (m)

 

 

218.0

206.5

198.1

197.5

197.5

Basic EPS (p)

 

 

2.91

3.03

3.27

3.19

2.15

EPS - diluted (p)

 

 

2.90

2.98

3.25

3.17

2.14

Dividend per share (p)

 

 

2.00

2.30

2.30

2.30

2.30

Special dividend per share (p)

 

 

0.91

0.50

0.69

0.65

0.00

Total dividend (p)

 

 

2.91

2.80

2.99

2.95

2.30

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

Non-current assets

 

 

1,228

2,339

2,161

3,425

2,806

Intangible Assets

 

 

245

228

288

378

418

Tangible Assets

 

 

881

910

761

776

681

Investments

 

 

0

1,115

1,112

1,152

1,152

Other

 

 

102

86

0

1,119

555

Current Assets

 

 

44,247

29,737

31,427

32,231

29,999

Debtors

 

 

6,972

6,775

7,562

8,054

6,530

Cash

 

 

19,120

12,498

12,966

10,185

9,477

Money market instruments

 

 

18,102

10,198

10,735

13,860

13,860

Other

 

 

53

266

164

132

132

Current liabilities

 

 

(8,644)

(5,525)

(6,158)

(6,554)

(5,954)

Creditors

 

 

(3,013)

(2,630)

(2,736)

(3,171)

(2,571)

Financial liabilities

 

 

(4,779)

(2,467)

(2,621)

(2,721)

(2,721)

Other

 

 

(852)

(428)

(801)

(662)

(662)

Non-current liabilities

 

 

0

0

(29)

(1,170)

(606)

 

 

 

 

 

 

 

Net Assets

 

 

36,831

26,551

27,401

27,933

26,245

Minority interests

 

 

0

0

60

125

85

Net assets attributable to ordinary shareholders

 

36,831

26,551

27,341

27,808

26,160

 

 

 

 

 

 

 

No of shares at year end

 

 

221.4

199.1

199.1

199.1

199.1

NAV per share p

 

 

16.6

13.3

13.7

14.0

13.1

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

Operating Cash Flow

 

 

7,107

2,746

7,026

6,866

5,843

Capex

 

 

(899)

(236)

(72)

(250)

(140)

Cash flow from other investing activities

 

 

(5,159)

7,899

(561)

(3,148)

25

Dividends

 

 

(3,592)

(6,810)

(5,517)

(5,908)

(5,872)

Other financing activities

 

 

(193)

(10,367)

(613)

(461)

(564)

Other

 

 

136

146

205

120

0

Net Cash Flow

 

 

(2,600)

(6,622)

468

(2,781)

(708)

Opening cash/(net debt)

 

 

21,720

19,120

12,498

12,966

10,185

Other

 

 

0

0

0

0

0

Closing net (debt)/cash

 

 

19,120

12,498

12,966

10,185

9,477

Closing net debt/(cash) inc money market instruments

37,222

22,696

23,701

24,045

23,337

 

 

 

 

 

 

 

AUME

 

 

 

 

 

 

Opening ($'bn)

 

 

52.9

58.2

62.2

57.3

58.6

Net new money flows

 

 

3.1

(1.2)

(4.5)

4.6

0.0

Market/other

 

 

2.2

5.2

(0.4)

(3.3)

0.6

Closing ($'bn)

 

 

58.2

62.2

57.3

58.6

59.2

Source: Record accounts, Edison Investment Research


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This report has been commissioned by Record and prepared and issued by Edison, in consideration of a fee payable by Record. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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This report has been commissioned by Record and prepared and issued by Edison, in consideration of a fee payable by Record. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Research: Healthcare

Shield Therapeutics — Tim Watts succeeds Carl Sterritt as CEO

Shield Therapeutics (STX) has announced that founder Carl Sterritt has resigned from his role as CEO with mutual agreement from its main shareholders. Tim Watts has been appointed as CEO from his position of CFO (since August 2018). While the timing does come as a surprise, we do not expect any disruptions to the business strategy; successfully commercialising Feraccru through partners is key to STX realising its value. Importantly, the company reported an end-FY19 cash position of £4.1m and the post-period end upfront payment of $11.4m from ASK Pharm received in January 2020 extends the cash runway into 2021. Our valuation of STX is unchanged at £344.7m or 294p/share.

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