Record — Another performance fee to bolster FY19

Record (LSE: REC)

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Research: Financials

Record — Another performance fee to bolster FY19

Record’s Q319 trading update showed a 6.5% decline in AUME, reflecting a combination of outflows, market weakness and foreign exchange moves. This leads to a 10% reduction in our FY20e earnings. For the current year the negative effect is more than offset by crystallisation of a further performance fee, which is a reminder of the potential for positive earnings surprises in subsequent periods, where we assume none. Following further price weakness, the valuation appears cautious.

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Financials

Record

Another performance fee to bolster FY19

Q319 trading update

Financial services

22 January 2019

Price

30.70p

Market cap

£61m

Net cash (£m) at end-September 2018

22.8

Shares in issue

199.1m

Free float

32%

Code

REC

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.0

4.0

(27.1)

Rel (local)

(2.3)

5.2

(19.3)

52-week high/low

51.10p

29.50p

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

Q419 trading update

17 April 2019

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

Record’s Q319 trading update showed a 6.5% decline in AUME, reflecting a combination of outflows, market weakness and foreign exchange moves. This leads to a 10% reduction in our FY20e earnings. For the current year the negative effect is more than offset by crystallisation of a further performance fee, which is a reminder of the potential for positive earnings surprises in subsequent periods, where we assume none. Following further price weakness, the valuation appears cautious.

Year end

Revenue (£m)

PBT
(£m)

EPS*
(p)

DPS**
(p)

P/E
(x)

Yield
(%)

03/17

23.0

7.9

2.90

2.00

10.6

6.5

03/18

23.8

7.3

2.98

2.30

10.3

7.5

03/19e

24.7

7.5

3.02

2.30

10.2

7.5

03/20e

21.4

5.1

2.08

2.32

14.7

7.6

Note: *EPS are diluted and **DPS excludes special dividends.

Markets trim AUME but performance fee to boost EPS

Record’s Q319 trading update for the period to end December showed assets under management equivalent (AUME) down 6.5% in the quarter to $57.8bn, or 4.2% lower in sterling terms. While below the assumption made in our estimates following H119, this was broadly unsurprising in the context of weakness in equity markets and the previously announced mandate terminations in passive hedging ($2.5bn). In the event, not all the $2.5bn has left yet, but will do shortly and there was a (relatively) small additional outflow of $0.5bn in passive hedging. FX moves and mandate scaling, where volatility targets apply, trimmed a further $0.9bn from the total AUME. Positively, there was an inflow in the currency for return area and another performance fee was earned in the quarter (£1.3m, relating to performance over a six-month period), giving total performance fees of £2.35m for 9M19.

Outlook

The group is still seeing a good level of interest in its services diversified by customer, product and geography. The environment of political and economic uncertainties globally remains conducive to Record’s discussions with potential clients. The performance fee earned in the quarter underlines the point that the enhanced hedging and other mandates capable of earning performance fees have the potential to offset the lower management fees they carry and to counter the competitive pressures that remain a feature of the market. Our EPS estimate for the current year is increased by 12%, reflecting the additional performance fee, and for FY20 the lower AUME starting point results in a 10% reduction (with no performance fees assumed).

Valuation

The shares trade on prospective earnings multiples that are below or just above a comparator group of UK fund managers, while the dividend yield is 7.5% (before the special dividend), which appears cautious for a differentiated and well-capitalised business (capital buffer over the regulatory requirement of c £14m).

Changes in AUME and investment performance

As noted, markets had a negative impact on AUME during Record’s third quarter. Exhibit 1 makes clear that there is particularly a high level of equity market exposure in dynamic hedging. In addition to the hedging products, some multi-product mandates are also linked to equity and other markets. Equity markets were notably weak in the period with the MSCI World index, as an example, down 13.4% in the period.

Exhibit 1: Underlying asset class exposure of dynamic and passive hedging AUME (H119)

% AUME

Revenue

Dynamic

Passive

Est % of total

Equity

95

27

46

Fixed income

0

41

29

Other

5

32

24

100

100

100

Source: Record, Edison Investment Research

Exhibit 2 analyses both AUME level and the net flows by period. Here we can see that market moves had a negative impact of $2bn, equivalent to 3.2% of opening AUME. Foreign exchange and scaling effects in volatility-based mandates had a further 1.5% adverse effect. Turning to flows, there was a $1.3bn outflow in passive hedging, of which $0.8bn related to the $2.5bn mandate terminations announced in the Q219 update. There was an additional outflow of $0.5bn, which at 1% of AUME is within the normal ebb and flow of mandates. The remaining mandates within the $2.5bn are likely to leave shortly. Otherwise, there has been a $0.3bn inflow in currency for return.

Exhibit 2: AUME changes

$bn

Q318

Q418

Q119

Q219

Q319

Q119

Q219

Q319

9M19

AUME

Net flows

Dynamic hedging

4.5

4.3

4.3

4.4

3.9

0.4

0.0

0.0

0.4

Passive hedging

54.3

53.0

52

51.7

48.4

(0.4)

(0.6)

(1.3)

(2.3)

Currency for return

1.7

1.6

2.3

2.4

2.4

0.6

0.0

0.3

0.9

Multi-product

3.1

3.0

3.0

3.0

2.9

0.0

0.0

0.0

0.0

Cash and futures

0.3

0.3

0.3

0.3

0.2

0.0

0.0

(0.1)

(0.1)

Total

63.9

62.2

61.9

61.8

57.8

0.6

(0.6)

(1.1)

(1.1)

Markets

1.2

0.1

(2.0)

(0.7)

FX and scaling for volatility targeting mandates

(2.1)

0.4

(0.9)

(2.6)

Total change

(0.3)

(0.1)

(4.0)

(4.4)

Source: Record, Edison Investment Research

Client numbers are virtually unchanged at 65 versus 66 previously, but within this five have left and four have been added. Only two more will leave with the departure of the remaining element of the $2.5bn of terminations.

On investment performance in the currency for return strategies, Record reports a marked turnaround in emerging markets, which generated a positive return of 2.42% in the quarter giving an annualised performance (ungeared) of +1.76% since inception (30 November 2009). The multi-strategy product performance was also positive at +0.77% in the quarter.

Estimate changes

Estimate changes for revenue, pre-tax profit and EPS are shown in Exhibit 3. The key drivers of the changes are the additional performance fee crystallised in Q319 and the new, lower starting base for AUME following the update. There is a small positive sterling/dollar currency translation effect compared with our previous estimates. Other assumptions, in particular fee margins, are unchanged. As noted earlier, we do not assume performance fees will be earned in future periods and only include AUME flows already announced. We do allow for some market growth in the underlying assets for hedging (+2% pa).

Exhibit 3: Estimate changes

 

Revenue (£m)

PBT (£m)

EPS (p)

DPS (p)

 

Old

New

% chg. 

Old

New

% chg. 

Old

New

% chg. 

Old

New

% chg.

03/19e

23.7

24.7

4%

6.7

7.5

12%

2.69

3.02

12%

2.30

2.30

0%

03/20e

22.4

21.4

-4%

5.7

5.1

-10%

2.31

2.08

-10%

2.32

2.32

0%

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

Valuation

Exhibit 4 shows the recent share performance for Record and the group of UK asset managers that we use for valuation comparison. While Record is differentiated by its currency management specialisation, its fees are generally based on AUME and, as noted above, this means that there is a sensitivity to equity and other markets, as for the asset managers. Most of the asset managers have been affected by weakness in equity markets and pressures on fee margins while the Record share price has been weaker than the average for the asset managers over the periods shown, probably reflecting the neutral then negative AUME flows and negative foreign exchange effects it has experienced.

Exhibit 4: Recent share price performance (%)

One month

Three months

One year

Ytd

From
12-month high

Ashmore

4.3

6.9

-10.9

3.2

-14.6

City of London Investment Group

-0.3

-1.6

-13.7

-0.4

-17.4

Impax Asset Management

-9.8

-25.3

-3.2

-10.4

-34.2

Jupiter

9.9

-7.3

-44.1

7.7

-46.3

Liontrust

0.9

-9.8

1.6

-0.5

-17.0

Man Group

14.0

3.4

-31.1

10.5

-32.9

Polar Capital

3.6

-19.5

-8.0

1.0

-35.4

Schroders

10.8

-7.2

-28.7

8.1

-30.2

Average

4.2

-7.5

-17.3

2.4

-28.5

Record

-1.5

-15.1

-29.5

-4.5

-43.6

Source: Refinitiv, Edison Investment Research. Priced as at 18.01.19

As shown in Exhibit 5 (the table shows multiples on a calendarised basis), the combination of price weakness and estimate changes leaves Record on below and slightly above average P/E multiples for CY18 and CY19 and on a below average EV/EBITDA (CY19). The yield (before special dividend) is 7.5%. Including last year’s special dividend would give a yield of over 9%.

Exhibit 5: Comparing valuation with UK fund managers

Price
(p)

Market cap (£m)

P/E 2018e
(x)

P/E 2019e
(x)

EV/EBITDA 2019e (x)

Dividend yield (%)

Ashmore

377

2,712

16.7

15.1

8.9

4.4

City of London Investment Group

379

102

10.2

10.9

7.8

7.1

Impax Asset Management

185

243

15.5

14.6

10.3

2.2

Jupiter

318

1,455

10.1

11.7

7.2

5.4

Liontrust

579

295

12.9

12.3

8.5

3.6

Man Group

147

2,281

12.5

9.9

7.2

5.4

Polar Capital

477

449

10.6

10.8

6.5

5.9

Schroders

2,642

7,167

12.1

12.3

10.4

4.3

Average

12.6

12.2

8.3

4.8

Record

30

60

10.0

12.9

7.8

7.7

Source: Refinitiv, Edison Investment Research. Note: P/Es and EV/EBITDA on a calendar year basis. REC dividend yield excludes special dividend (0.5p) and including this the FY18 dividend was 2.8p. Priced as at 18.01.19

Exhibit 6: Financial summary

Year end 31 March

£000s

 

2015

2016

2017

2018

2019e

2020e

PROFIT & LOSS

 

 

 

 

 

 

 

 

Revenue (underlying)

 

 

20,865

21,246

22,952

23,834

24,665

21,416

Revenue

 

 

21,057

21,134

22,952

23,834

24,665

21,416

Operating expenses

 

 

(13,521)

(14,344)

(15,365)

(16,735)

(17,094)

(16,386)

Other income/(expense)

 

 

0

0

157

173

(138)

0

Operating Profit (before amort. and except.)

 

 

7,536

6,790

7,744

7,272

7,433

5,030

Finance income

 

 

146

143

112

56

92

91

Profit Before Tax

 

 

7,682

6,933

7,856

7,328

7,525

5,121

Taxation

(1,708)

(1,523)

(1,540)

(1,182)

(1,505)

(973)

Minority interests

 

 

(192)

131

0

0

0

0

Attributable profit

 

 

5,782

5,541

6,316

6,146

6,020

4,148

Normalised revenue (underlying)

 

 

20,865

21,246

22,952

23,834

24,665

21,416

Operating expenses (excl. dep'n and amortisation)

 

 

(13,206)

(14,023)

(15,023)

(16,430)

(16,809)

(16,101)

EBITDA

 

 

7,659

7,223

7,929

7,404

7,856

5,315

Depreciation and amortisation

 

 

(315)

(321)

(342)

(305)

(285)

(285)

Other income/(expense)

 

 

0

0

157

173

(138)

0

Normalised Operating profits

 

 

7,344

6,902

7,744

7,272

7,433

5,030

Finance income

 

 

146

143

112

56

92

91

Profit Before Tax (norm)

 

 

7,490

7,045

7,856

7,328

7,525

5,121

Normalised revenue/AuME (excl. perf fees) bps

 

 

6.2

6.0

5.2

5.1

4.8

4.7

Normalised operating margin (%)

 

 

35.2

32.5

33.7

30.5

30.1

23.5

Average Number of Shares Outstanding (m)

 

 

218.4

217.9

218.0

206.5

199.1

199.1

Basic EPS (p)

 

 

2.66

2.55

2.91

3.03

3.07

2.11

EPS - normalised (p)

 

 

2.65

2.54

2.90

2.98

3.02

2.08

Dividend per share (p)

 

 

1.65

1.65

2.00

2.30

2.30

2.32

Special dividend per share (p)

 

 

0.00

0.00

0.91

0.50

0.77

0.00

Total dividend (p)

 

 

1.65

1.65

2.91

2.80

3.07

2.32

BALANCE SHEET

 

 

 

 

 

 

 

 

Fixed Assets

 

 

3,273

423

1,228

2,339

2,212

2,217

Intangible Assets

 

 

504

299

245

228

363

448

Tangible Assets

 

 

129

81

881

910

740

660

Investments

 

 

2,567

0

0

1,115

1,075

1,075

Deferred tax assets

 

 

73

43

102

86

34

34

Current Assets

 

 

37,053

40,541

44,247

29,737

31,735

29,346

Debtors

 

 

6,324

5,695

6,972

6,775

8,036

7,174

Cash

 

 

12,010

21,720

19,120

12,498

13,717

12,190

Money market instruments

 

 

18,100

13,020

18,102

10,198

9,804

9,804

Other

 

 

619

106

53

266

178

178

Current Liabilities

 

 

(4,522)

(3,256)

(8,644)

(5,525)

(7,035)

(6,633)

Creditors

 

 

(2,949)

(2,372)

(3,013)

(2,630)

(3,749)

(3,347)

Financial liabilities

 

 

0

0

(4,779)

(2,467)

(2,361)

(2,361)

Other

 

 

(1,573)

(884)

(852)

(428)

(925)

(925)

Net Assets

 

 

35,804

37,708

36,831

26,551

26,913

24,930

Minority interests

 

 

3,876

4,019

0

0

0

0

Net assets attributable to ordinary shareholders

 

31,928

33,689

36,831

26,551

26,913

24,930

No of shares at year end

 

 

217.5

217.2

221.4

199.1

199.1

199.1

NAV per share p

14.7

15.5

16.6

13.3

13.5

12.5

CASH FLOW

 

 

 

 

 

 

 

 

Operating Cash Flow

 

 

6,472

5,509

7,107

2,746

6,631

4,802

Capex

 

 

(128)

(29)

(899)

(236)

(50)

(140)

Cash flow from investing activities

 

 

0

(39)

(189)

(82)

(200)

(150)

Dividends

 

 

(3,266)

(3,750)

(3,592)

(6,810)

(5,541)

(6,131)

Other financing activities

 

 

(2,571)

7,737

(5,163)

(2,386)

106

91

Other

 

 

0

282

136

146

274

0

Net Cash Flow

 

 

507

9,710

(2,600)

(6,622)

1,219

(1,528)

Opening cash/(net debt)

 

 

11,503

12,010

21,720

19,120

12,498

13,717

Other

 

 

0

0

0

0

0

0

Closing net (debt)/cash

 

 

12,010

21,720

19,120

12,498

13,717

12,190

Closing net debt/(cash) inc money market instruments

30,110

34,740

37,222

22,696

23,521

21,994

AUME

 

 

 

 

 

 

 

 

Opening ($bn)

 

 

51.9

55.4

52.9

58.2

62.2

60.5

Net new money flows

 

 

2.9

(1.4)

3.1

(1.2)

(2.8)

0.0

Market/other

 

 

0.6

(1.1)

2.2

5.2

1.1

1.1

Closing ($bn)

 

 

55.4

52.9

58.2

62.2

60.5

61.6

Source: Record accounts, Edison Investment Research

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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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MOD Resources — Sandfire’s bid undervalues MOD

MOD Resources has raised A$10m through an oversubscribed institutional placing at a price of A$0.30/share (17p/share), a 36% premium to the closing price on 18 January 2019. The company also intends to raise a further A$5m through a fully underwritten rights issue at A$24/share (13p/share). In addition, the company has received an unsolicited, non-binding, indicative all-share offer from Sandfire Resources (SFR:AU) at a price of A$0.38/share (21p/share). The board of MOD believes the Sandfire offer undervalues the company’s assets.

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