Record — AUME growth prompts estimate increases

Record (LSE: REC)

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Research: Financials

Record — AUME growth prompts estimate increases

Record’s Q221 trading update confirmed that its new $8bn dynamic hedging mandate has started and that, prior to this, assets under management equivalent (AUME) expanded by 4% in the quarter. The group continues to work on developing new products and is deploying technology to enhance its ability to deliver these and existing products cost effectively.

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Financials

Record

AUME growth prompts estimate increases

Q221 trading update

Financial services

21 October 2020

Price

43p

Market cap

£86m

Net cash (£m) at end March 2020 excluding seed fund cash of £4.3m

18.0

Shares in issue

199.1m

Free float

56%

Code

REC

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

37.2

22.0

28.1

Rel (local)

38.9

27.4

52.9

52-week high/low

44.5p

26.3p

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

H121 results

24 November 2020

Q321 trading update

22 January 2021

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 Q221 trading update confirmed that its new $8bn dynamic hedging mandate has started and that, prior to this, assets under management equivalent (AUME) expanded by 4% in the quarter. The group continues to work on developing new products and is deploying technology to enhance its ability to deliver these and existing products cost effectively.

Year end

Revenue (£m)

PBT
(£m)

EPS*
(p)

DPS**
(p)

P/E
(x)

Yield
(%)

03/19

25.0

8.0

3.25

2.30

13.2

5.3

03/20

25.6

7.7

3.26

2.30

13.2

5.3

03/21e

24.9

6.5

2.68

2.30

16.0

5.3

03/22e

28.7

8.9

3.65

2.30

11.8

5.3

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

Q221 trading update

In September Record announced that it had, subject to contract, won an $8bn AUME dynamic hedging mandate. This important win is now confirmed and the mandate started at the beginning of Q321 (October) with AUME likely to build over several quarters. In Q221 AUME in dollar terms grew by 4% to $65.9bn, mainly reflecting exchange rate movements, scaling related to mandate volatility targeting and movements in equity and other markets (total +$2.4bn). Net client flows were positive at $0.2bn. Record is continuing to work on product innovation and is making progress in particular on an Impact/ESG bond product (here Record will effectively be managing the underlying exposure and the currency overlay, so similar to a conventional asset management product with fees at an appropriate level). As part of the group’s moves to retain talent and ensure succession planning, a joint share ownership plan was launched in September to provide equity-based incentives to key staff below board level. A sale of 4m shares by chairman Neil Record at 37.3p facilitated the launch.

Estimates raised in response to AUME increase

We have increased our estimates (EPS +13% FY21, +57% FY22) to take into account the moves in AUME outlined above while allowing for the sterling/dollar rate and some average management fee dilution because of the scale of the new dynamic hedging mandate and the move of some passive hedging mandates to a (lower) management fee with the potential for performance fees. There were no performance fees crystallised in Q221 and we have not assumed any in our estimates so this remains a potential source of upside for earnings and dividends.

Valuation: Below peer multiples

Although the shares have responded strongly to the news of the new dynamic hedging mandate, they still trade on calendar 2020 P/E and EV/EBITDA multiples below the average for a group of UK asset-managers. On our estimates, Record’s multiples will fall further as the full benefits of the increased level of AUME flow through.

Changes in AUME and investment performance

Exhibit 1 shows the recent progression of AUME and net flows. Overall AUME in US dollar terms increased by 4% in Q221 and by nearly 13% in H121 to $65.9bn: the year-on-year increase was 10%. In sterling terms AUME was marginally down from end June at £51.0bn versus £51.2bn. There was a small inflow in Q221 and a small outflow for H121 as a whole although, within this, the mix was favourable in terms of fee rates as there were inflows into Dynamic hedging (recent average fee rate c 15–16bp) and outflows from Passive hedging (average c 3bp).

We calculate that the average AUME in sterling terms for H121 increased by 6.8% when compared with the average for H120, reflecting a combination of positive net inflows, market moves, scaling and foreign exchange movements.

Exhibit 1: AUME changes

Year-end March

Q220

Q420

Q121

Q221

Q121

Q221

H121

$bn

AUME

Net flows

Dynamic hedging

3.2

2.5

2.9

3.2

0.1

0.4

0.5

Passive hedging

50.4

50.3

53.9

55.6

(0.6)

(0.2)

(0.8)

Currency for return

2.9

2.6

3.1

3.4

0.0

0.0

0.0

Multi-product

3.1

3.0

3.2

3.5

0.0

0.0

0.0

Cash and futures

0.3

0.2

0.2

0.2

0.0

0.0

0.0

Total

59.9

58.6

63.3

65.9

(0.5)

0.2

(0.3)

Markets

3.6

0.5

4.1

FX and scaling for mandate volatility targeting

1.6

1.9

3.5

Total change

4.7

2.6

7.3

Source: Record

Q221 investment performance was negative. The Dynamic Macro Currency strategy, which had performed very strongly in the January-March period (+6.92%) and then surrendered some of its gains in April-June as markets bounced (-3.39%), saw more modest erosion in the latest quarter (0.41%). The more systematic return-seeking strategies were also negative in the quarter and as a result the Multi-Strategy product was down 2.20% in the quarter (but still showing a positive return since inception of 0.33% per annum).

Estimate changes

Changes in key figures from our estimates are shown in Exhibit 2. The main driver of the changes is the increase in AUME highlighted earlier. Importantly, no additional investment in personnel or systems are required to service the new dynamic hedging mandate and this contributes to the substantial increase in our FY22 earnings estimate. We have assumed the $8bn is included progressively in AUME over three quarters. The fee rate is consistent with Record’s other dynamic hedging mandates, based on the size of allocation. We therefore expect the average fee rate, both for the mandate and for Dynamic hedging as a whole, to decrease as the mandate builds in size. Even so, the relatively high fee rate that applies to dynamic hedging compared with passive hedging, together with the assumption that the only marginal cost attached to the additional revenue is profit-related compensation (set at just over 30%), means there is a substantial impact on group profit as the mandate flows into AUME.

As noted earlier, there is also expected to be some dilution of average management fee in Passive hedging as a number of mandates have chosen to transfer from a management fee only basis to one with a lower management fee but with the potential for performance fees. Retaining these mandates on the alternative fee basis should help moderate the persistent pressure on passive hedging management fee rates, for a period.

No performance fees have been crystallised year to date, but, as a reminder, £2.3m was earned in FY19 and £1.8m in Q320. The £1.8m fee was equivalent to 0.4bp of the average trailing 12-month AUME at that point, which is material when compared with the group average management fee of 4.9bp for FY20. Our estimates do not include any assumed performance fees. By their nature, the timing of performance fees is intermittent and their level uncertain.

On a longer view, performance fees are likely to be a recurring feature for Record enhancing both earnings and dividend payments when they arise. New product introductions could help boost AUME, increase average fee rates in some cases and broaden diversification. IT modernisation has the potential both to enable competitive product offerings and to enhance the degree of operational gearing further as Record increases its focus on growth.

Exhibit 2: Estimate changes

 

Revenue (£m)

PBT (£m)

EPS (p)

DPS (p)*

 

Old

New

Change

Old

New

Change

Old

New

Change

Old

New

Change

03/21e

23.7

24.9

5%

5.7

6.5

13%

2.37

2.68

13%

2.30

2.30

0%

03/22e

24.0

28.7

20%

5.6

8.9

57%

2.33

3.65

57%

2.30

2.30

0%

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

Our dividend estimates shown above exclude special dividends. The board’s policy is to target a dividend at least covered by earnings and to take into account expected increases in costs and regulatory capital requirements. Given the cost and regulatory capital point we do not expect a special payment for FY21, subject to further estimate changes. In view of the increase in AUME a maintained ordinary dividend may still be a plausible assumption for this year. In light of our FY22 earnings estimate (3.65p) we would pencil in a special payment of 0.70p giving a total dividend of 3.0p.

For more detail on our estimates, see Exhibit 4.

Valuation

An updated version of our comparative valuation table, which puts Record in the context of a group of UK asset managers, is shown in Exhibit 3. 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 3: Comparing valuation with UK fund managers

Price

(p)

Market cap

(£m)

P/E 2020e

(x)

EV/EBITDA 2020e (x)

Dividend yield (%)

Ashmore

384

2,738

15.4

9.6

4.4

City of London Investment Group

400

203

11.1

N/A

7.5

Impax Asset Management

540

704

36.9

27.7

1.0

Jupiter

232

1,283

10.9

6.3

7.4

Liontrust

1,280

780

20.5

14.6

2.6

Man Group

118

2,245

12.9

8.5

6.9

Polar Capital

524

516

11.8

7.3

6.3

Schroders

2,836

7,484

16.1

11.1

4.0

Average

16.9

12.1

5.0

Record

43.0

85

15.2

10.6

5.3

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 October 2020.

Our table shows calendarised figures for 2020 P/E and EV/EBITDA. Record shares trade on below the peer averages for both measures. The earnings and EBITDA for calendar year 2020 benefit from a quarter of the performance fee earned in FY20 although, more significantly, the three quarters contribution from FY21 only includes a partial benefit from the new dynamic hedging mandate. The dividend yield of 5.3% is slightly above the peer average and there is the potential for this to be enhanced with a special dividend in due course (on our estimate the FY22 yield would be 7.0%).

Exhibit 4: Financial summary

£000s

 

 

2018

2019

2020

2021e

2022e

March

 

 

PROFIT & LOSS

 

 

 

 

 

 

 

Revenue

 

 

23,834

24,973

25,563

24,915

28,745

Operating expenses

 

 

(16,735)

(17,089)

(17,996)

(18,523)

(19,981)

Other income/(expense)

 

 

173

(8)

82

0

0

Operating Profit (before amort. and except.)

 

 

7,272

7,876

7,649

6,392

8,764

Finance income

 

 

56

113

88

86

86

Profit Before Tax

 

 

7,328

7,989

7,737

6,477

8,850

Taxation

(1,182)

(1,559)

(1,365)

(1,231)

(1,682)

Minority interests

 

 

0

0

48

40

30

Attributable profit

 

 

6,146

6,430

6,420

5,287

7,199

 

 

 

 

 

 

 

 

Revenue/AuME (excl. perf fees) bps

 

 

5.1

4.9

4.9

4.3

4.9

Operating margin (%)

 

 

30.5

31.5

29.9

25.7

30.5

 

 

 

 

 

 

 

 

Average Number of Shares Outstanding (m)

 

 

206.5

198.1

197.1

197.1

197.1

Basic EPS (p)

 

 

3.03

3.27

3.26

2.69

3.66

EPS - diluted (p)

 

 

2.98

3.25

3.26

2.68

3.65

Dividend per share (p)

 

 

2.30

2.30

2.30

2.30

2.30

Special dividend per share (p)

 

 

0.50

0.69

0.41

0.00

0.70

Total dividend (p)

 

 

2.80

2.99

2.71

2.30

3.00

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

Non-current assets

 

 

2,339

2,161

4,868

4,288

3,698

Intangible Assets

 

 

228

288

470

475

475

Tangible Assets

 

 

910

761

751

616

476

Investments

 

 

1,115

1,112

2,472

2,472

2,472

Other

 

 

86

0

1,175

725

275

Current Assets

 

 

29,737

31,427

31,149

30,888

33,961

Debtors

 

 

6,775

7,562

8,704

8,001

8,991

Cash

 

 

12,498

12,966

14,294

14,736

16,819

Money market instruments

 

 

10,198

10,735

7,958

7,958

7,958

Other

 

 

266

164

193

193

193

Current liabilities

 

 

(5,525)

(6,158)

(6,955)

(6,712)

(6,604)

Creditors

 

 

(2,630)

(2,736)

(3,009)

(2,766)

(3,108)

Financial liabilities

 

 

(2,467)

(2,621)

(2,191)

(2,191)

(2,191)

Other

 

 

(428)

(801)

(1,755)

(1,755)

(1,305)

Non-current liabilities

 

 

0

(29)

(901)

(451)

(451)

 

 

 

 

 

 

 

 

Net Assets

 

 

26,551

27,401

28,161

28,013

30,604

Minority interests

 

 

0

60

132

92

62

Net assets attributable to ordinary shareholders

 

26,551

27,341

28,029

27,921

30,542

 

 

 

 

 

 

 

 

No of shares at year end

 

 

199.1

199.1

199.1

199.1

199.1

NAV per share p

 

 

13.3

13.7

14.1

14.0

15.3

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

Operating Cash Flow

 

 

2,746

7,026

6,543

6,491

7,315

Capex

 

 

(236)

(72)

(243)

(140)

(140)

Cash flow from other investing activities

 

 

7,899

(561)

1,513

(64)

(64)

Dividends

 

 

(6,810)

(5,517)

(5,888)

(5,394)

(4,578)

Other financing activities

 

 

(10,367)

(613)

(943)

(450)

(450)

Other

 

 

146

205

346

0

0

Net Cash Flow

 

 

(6,622)

468

1,328

442

2,083

Opening cash/(net debt)

 

 

19,120

12,498

12,966

14,294

14,736

Closing net (debt)/cash

 

 

12,498

12,966

14,294

14,736

16,819

Closing net (debt)/cash inc money market instruments

22,696

23,701

22,252

22,694

24,777

 

 

 

 

 

 

 

 

AUME

 

 

 

 

 

 

 

Opening ($'bn)

 

 

58.2

62.2

57.3

58.6

71.4

Net new money flows

 

 

(1.2)

(4.5)

4.6

5.0

2.7

Market/other

 

 

5.2

(0.4)

(3.3)

7.8

0.4

Closing ($'bn)

 

 

62.2

57.3

58.6

71.4

74.4

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

1185 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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Cenkos’s first half results demonstrated the benefits of its flexible operating model and strength of its client relationships. While challenges related to COVID-19 are set to continue, Cenkos’s focus is on growth companies and its fund-raising year-to-date has had a greater emphasis on corporates financing M&A and growth opportunities rather than for defensive purposes. This should prove more sustainable although, as always, the timing of transactions in the encouraging pipeline reported remains uncertain.

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