Record — Enhancing products and service

Record (LSE: REC)

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Research: Financials

Record — Enhancing products and service

Record has maintained its commitment to improving service levels and introducing new products to meet client needs. In H120 this included a new strategy within the currency for return area and it is extending its derivative management capabilities to asset classes outside currency. These initiatives may not affect earnings significantly in the near term but are part of a process of innovation and investment that has helped to limit fee margin erosion and provide a stronger base for future client acquisition.

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Financials

Record

Enhancing products and service

H120 results

Financial services

28 November 2019

Price

41p

Market cap

£82m

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

17.7

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

28.8

31.1

Rel (local)

0.5

22.6

23.5

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

Q320 trading update

17 January 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

Record has maintained its commitment to improving service levels and introducing new products to meet client needs. In H120 this included a new strategy within the currency for return area and it is extending its derivative management capabilities to asset classes outside currency. These initiatives may not affect earnings significantly in the near term but are part of a process of innovation and investment that has helped to limit fee margin erosion and provide a stronger base for future client acquisition.

Year end

Revenue (£m)

PBT
(£m)

EPS*
(p)

DPS**
(p)

P/E
(x)

Yield
(%)

03/18

23.8

7.3

2.98

2.30

13.8

5.6

03/19

25.0

8.0

3.25

2.30

12.6

5.6

03/20e

22.8

6.2

2.52

2.30

16.3

5.6

03/21e

22.8

6.0

2.47

2.30

16.6

5.6

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

H120 results slightly ahead of expectation

Assets under management equivalent (AUME) had already been reported and in US dollar terms were up 4.6% to $59.9bn in H120, mainly as a result of net inflows of $2bn. Average AUME in sterling terms was marginally down on H119 and after small mix and fee margin effects, management fees were down just 3%. There were no performance fees in the period (vs £1m in H119) so revenues were down nearly 10% to £11.4m. Costs were held broadly stable with lower variable compensation offsetting investment in IT and people to support client services and new products. This meant the decline in pre-tax profit from £4.0m in H119 to £3.2m essentially reflected the absence of an equivalent performance fee this year. Diluted EPS was 1.29p versus 1.61p and the interim dividend was maintained at 1.15p. The balance sheet remains strong with no debt and own cash of £17.7m.

Encouraging outlook

The global backdrop, with continuing sources of geopolitical uncertainty, remains favourable for Record when meeting potential and existing clients. It sees an encouraging range of opportunities across its product range and geographies. The group’s track record and position as an independent currency manager allied with its dedication to improving and customising services for clients stand it in good stead to counter competitive pressures and grow the business over the longer term.

Valuation

Our EPS estimate for the current year is increased by 6%, reflecting the slightly better than expected H1 outcome and higher AUME level. For FY21 these positive effects are neutralised by the recent strengthening in the sterling/US dollar rate. Compared with asset management peers, Record trades on a similar prospective P/E rating and offers a yield premium and the potential for a special dividend if performance fees are earned.

Independent specialist currency manager

Founded in 1983 by chairman Neil Record, the company’s main activity is providing currency hedging services, acting as an agent for clients, including public and private defined benefit pension schemes and other institutional investors. Record also offers currency for return, multi-product and related services.

The passive hedging product seeks to provide cost-effective reduction of exposure to currency risk for clients’ international portfolios. To counter competitive pressures from large banks, Record places strong emphasis on providing a tailored service to meet customer requirements and may include additional services as part of its offering. Its enhanced passive hedging service provides the same risk mitigation but aims to exploit structural inefficiencies in currency markets to deliver an enhanced outcome. Dynamic hedging also targets systematic reduction of currency risk while seeking to modify the level of hedging to allow clients to gain some benefit from weakness in their own currency. Currency for return strategies aim to exploit stable inefficiencies in currency markets and include a number of strategies: forward rate bias, emerging market currencies, momentum, value and, recently introduced, range-trading and dynamic macro currency (see comments below). The multi-product category includes mandates where hedging and return-seeking strategies are combined on a bespoke basis.

Exhibit 1: Record profile in numbers (H120)

Analysis by strategy

AUME (%)

Management fees (%)*

Est. average fee rate (bp)**

Dynamic hedging

5.3

17.9

15

Passive hedging

84.1

52.8

3

Currency for return

4.8

8.6

9

Multi-product

5.2

20.7

19

Cash

0.5

N/A

N/A

Total

100.0

100.0

5

Value

$59.9bn

£11.1m

Client analysis

Number (by financial year)

Type

% AUME

Concentration

% fees

Longevity (years)

%

2015

55

Public pension funds

42

Top 10

76

≤1

16

2016

58

Corporate pension funds

42

Next 10

19

>1 to ≤3

23

2017

59

Foundations & trusts

11

Balance

5

>3 to≤ 6

23

2018

60

Other

5

>6 to ≤10

14

2019

65

>10

24

H120

70

100

100

100

Geographical analysis

AUME progression ($bn)

By country

% fees

% AUME

2015

55.4

Switzerland

41

Europe ex-UK

74

2016

52.9

US

26

North America

12

2017

58.2

UK

10

UK

12

2018

62.2

Other

22

RoW

2

2019

57.3

100

100

H120

59.9

Underlying asset class exposure of dynamic and passive hedging AUME (%)

Dynamic

Passive

Est. % of hedging fees

Equity

100

29

47

Fixed income

0

42

31

Other

0

29

22

100

100

100

Source: Record, Edison Investment Research. Notes: *Management fee excluding performance fees. **Fee rate is our own calculation and within each strategy there will be a range of mandate types and fee structures/levels. Rounding may mean some columns do not sum.

We have collated Record’s disclosure analysing AUME and management fee exposure in the table above. The first section gives an analysis of AUME, fees and fee rates by strategy. This underlines the importance of hedging services that in total accounted for 70% of revenue in H120. Passive hedging AUME was 84% of the total but the relatively low fee rates that prevail in this area, at c 3bp on average, meant the strategy contributed 53% of management fees.

The client analysis shows a progression in the number of clients over the period shown with a net addition of five in the first half of the current year. This count is by legal entity and a commercial relationship includes a number of entities so there can be lumpy movements in the client count. In total, 38% of clients have been with Record for over six years. The institutional nature of the market served (with 84% of AUME from pension funds) means client concentration is quite high with 76% of fees earned from the top 10 clients.

The geographical analysis shows the importance of Swiss mandates (mainly for hedging services), which accounted for 41% of fees, whereas Europe ex-UK accounted for 74% of AUME. The base currency exposure of AUME at end-March was 57% in Swiss francs, 16% in euros, 13% in sterling and 11% in US dollars. Between FY15 and H120 AUME increased from $55.4bn to $59.9bn with the progression dampened by an outflow of $4.5bn in FY19, primarily from passive hedging mandates where specific developments, including moving to a unitised structure, played a role in the terminations.

Finally, looking at the underlying asset class exposure for the hedging mandates, equity markets account for an estimated 47% of hedging management fees with fixed income 31%. As shown, dynamic hedging mandates were entirely equity related while passive hedging exposure was more balanced, including 42% in fixed income and 29% in other assets.

Recent AUME changes and first-half results

AUME

As announced in its October trading update, Record’s AUME increased by $2.6bn (4.6% or 10.6% in sterling terms) during H120 with most of the increase accounted for by net inflows of $2bn for this period (see Exhibit 2). The main element within this was passive hedging mandates where the net inflow was $1.6bn. Most of the inflow took place in the second quarter and largely reflected adjustments to existing clients’ mandates. Market movements accounted for a positive $1.3bn change whereas foreign exchange and mandate scaling effects generated a negative move of $0.7bn. Compared with end-H119, US dollar AUME was 3% lower whereas, based on reported quarter-end figures, we calculate that sterling-denominated average AUME was marginally lower in H120 than in H119 (0.2%).

Exhibit 2: AUME changes

Year-end March

Q219

Q419

Q120

Q220

Q120

Q220

H120

$bn

AUME

AUME

AUME

AUME

Net flows

Net flows

Net flows

Dynamic hedging

4.3

3.1

3.4

3.2

0.3

(0.1)

0.2

Passive hedging

52.0

48.2

48.9

50.4

0.1

1.5

1.6

Currency for return

2.3

2.7

2.6

2.9

(0.1)

0.3

0.2

Multi-product

3.0

3.0

3.1

3.1

0.0

0.0

0.0

Cash and futures

0.3

0.3

0.3

0.3

0.0

0.0

0.0

Total

61.9

57.3

58.3

59.9

0.3

1.7

2.0

Markets

0.0

1.3

1.3

FX and scaling for mandate volatility targeting

0.7

(1.4)

(0.7)

Total change

1.0

1.6

2.6

Source: Record, Edison Investment Research

H120 results

The profit and loss for H120 with analysis of changes since H119 and H219 is set out in Exhibit 3. Comments on key areas are below with comparisons between H120 and H119 unless stated.

Total management fees were down 2.5% reflecting a combination of a marginally lower average AUME level (see comments above) and mix changes.

Within this, dynamic hedging fees fell by 15.2% as average AUME in this area (down c 20% in sterling terms) was reduced by discretionary profit-taking undertaken by Record on behalf of a client in FY19. This reduction has been partially reversed in the current year.

Total revenue was nearly 10% lower as there was no performance fee crystallised in the period compared with H119, which included fees of £1m.

Fee margins on a like-for-like basis were broadly stable and we calculate the average fee margin for the group has been similar over the last three half-year periods, at 4.8bp per year for H120 based on the reported revenue and AUME figures. The effect of the uptake of the enhanced passive hedging product with a c 10% lower management fee and the potential for performance fees on management fee margin has been limited.

Costs were nearly flat with lower variable compensation offsetting investment in people and IT to support continued client service enhancement and new products. Although lower, variable compensation as a percentage of pre-bonus operating profit increased to 31.6% (30%), reflecting the adoption of more flexible profit share rules that take account of individual performance to a greater extent. The variable payment percentage may range between 25% and 35%.

The containment of costs meant there was only a £0.9m (22%) reduction in pre-tax profits essentially reflecting the absence of performance fees.

The interim dividend was unchanged at 1.15p and the group remains committed to its policy of paying out excess earnings subject to capital and investment requirements.

Exhibit 3: H120 P&L analysis

£000

H119

H219

H120

Change vs H119

Change vs H219

Dynamic hedging

2,351

2,247

1,994

-15.2%

-11.3%

Passive hedging

5,999

5,611

5,880

-2.0%

4.8%

Currency for return

899

876

958

6.6%

9.4%

Multi-product

2,172

2,153

2,301

5.9%

6.9%

Management fees

11,421

10,887

11,133

-2.5%

2.3%

Performance fees

1,048

1,285

0

-100.0%

-100.0%

Other investment services income

155

177

252

62.6%

42.4%

Total revenue

12,624

12,349

11,385

-9.8%

-7.8%

Cost of sales

-194

-191

-119

-38.7%

-37.7%

Gross profit

12,430

12,158

11,266

-9.4%

-7.3%

Administrative expenses

-8,295

-8,409

-8,232

-0.8%

-2.1%

Other income/expense

-138

130

50

-136.2%

-61.5%

Operating profit

3,997

3,879

3,084

-22.8%

-20.5%

Net finance income

41

72

83

102.4%

15.3%

Profit before tax

4,038

3,951

3,167

-21.6%

-19.8%

Taxation

-822

-737

-652

-20.7%

-11.5%

Profit after tax

3,216

3,214

2,515

-21.8%

-21.7%

Diluted EPS (p)

1.61

1.62

1.29

-19.8%

-20.1%

DPS (p)

1.15

1.84

1.15

0.0%

Tax rate

20%

19%

21%

Source: Record, Edison Investment Research

Exhibit 4 shows the performance of currency for return fund, index and composite performance in the half year and since inception. All showed positive returns in the half year with the Multi-Strategy Composite in particular showing a relatively favourable combination of return and volatility since inception, with an information ratio of 0.55 compared with 0.42 for the Deutsche Bank currency index (in US dollar with equal weighting between carry, momentum and value). Record also reported that the long-term performance puts it in the top quartile of its peer group. The product combines carry, emerging market, momentum, value and range trading strands. The addition of a complementary dynamic macro strategy should help to generate a diversified return. The performance of the Multi-Strategy Fund is still affected by a weak initial period following its launch in 2018 but was positive in H120.

Record has also reported the performance of the enhanced passive hedging programme relative to a fixed tenor benchmark. This showed a half-year return of 0.04% and a since-inception (October 2014) annual return of 0.12%. This is material in the context of Record’s average passive hedging management fee margin of 0.03% per year.

Exhibit 4: Currency for return investment performance to 30 September 2019

Gearing

Half-year return

Return SI pa

Volatility SI pa

Inception

Fund

Record FTSE FRB10 Index Fund

1.8

0.27%

1.70%

6.73%

Dec-10

Record Emerging Market Currency Fund

1.0

3.67%

1.63%

6.33%

Dec-10

Record Currency Multi-Strategy Fund

 

0.77%

-1.72%

9.33%

Feb-18

Index/composite returns

FTSE Currency FRB10 GBP excess return

 

0.02%

2.18%

4.50%

Dec-87

Record Multi-Strategy Composite (4% target volatility)

 

2.38%

1.52%

2.80%

Jul-12

Source: Record. Note: All GBP base apart from Record Multi-Strategy Composite, which is on a US$ base and shows excess returns gross of fees.

Record continues with its strategy of product innovation to counter downward pressure on fee rates and, with the results, announced the New York hiring of John Floyd, a seasoned FX market manager 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. In particular, it has demonstrated outperformance in periods of heightened risk aversion in markets that have been more challenging for the more systematic approaches.

Another development is to broaden the application of Record’s experience and established market relationships in managing derivatives and derivative overlays by offering a service in asset classes outside currency. Record has for some time managed equity and other derivative strategies to generate synthetic returns on cash deposits required to meet hedging cash flow requirements. As a result this offering has not required significant development of systems and capability. Record expects clients to use this service to facilitate tactical positioning without adjusting underlying portfolio positioning so there would not be related AUME and fees will be reported as part of other investment services income, along with fees from the hedging signal agreement with WisdomTree asset management and other services.

Outlook, estimate changes

Currency volatility between the euro, US dollar and Swiss franc (Exhibit 5) has been subdued in comparison with 2014/16, but continued geopolitical uncertainties provide a favourable backdrop for Record’s conversations with existing and potential clients. Together with Record’s own work to enhance service levels and develop new products, this has contributed to what the company describe as a good range of new business opportunities diversified by geography and product. The more recent product initiatives and continued measured investment in IT and people should support the prospects for longer-term growth.

As previously, our forecasts do not assume either AUME inflows or outflows beyond those already announced. Similarly, we do not assume any performance fees until these have been crystallised and announced.

Exhibit 5: Implied volatility for one year at the money options CHF and EUR vs USD

Source: Bloomberg. Note: CHF = Swiss franc, EUR = euro, USD = US dollar.

The main factors driving changes in our estimates (see below) are the increase in AUME reported for the first half, minor positive adjustments to assumed fee margins based on implied values for H120 and updating the assumed sterling/US dollar exchange rates (significantly negative for FY21) to reflect recent market moves. Further details of our estimates are shown in the financial summary (Exhibit 8).

Exhibit 6: Estimate changes

 

Revenue (£m)

PBT (£m)

EPS (p)

DPS (p)*

 

Old

New

Change

Old

New

Change

Old

New

Change

Old

New

Change

03/20e

22.2

22.8

2%

5.8

6.2

6%

2.38

2.52

6%

2.32

2.30

-1%

03/21e

23.0

22.8

-1%

6.0

6.0

0%

2.46

2.47

0%

2.34

2.30

-2%

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

The group figure for net cash and money market instruments managed as cash was similar to the year-end figure at £23.5m (£23.7m). Stripping out the cash held by seed funds (non-controlling interests) gives an own cash figure of £17.7m.

Valuation

An updated version of our valuation table, which shows Record in the context of a group of UK asset managers, is shown below. 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 7: Comparing valuation with UK fund managers

Price

(p)

Market cap

(£m)

P/E 2019e

(x)

EV/EBITDA 2019e (x)

Dividend yield (%)

Ashmore

467

3,314

17.8

11.4

3.6

City of London Investment Group

445

118

12.4

10.1

6.1

Impax Asset Management

286

371

26.5

19.0

1.4

Jupiter

375

1,707

13.3

8.9

4.6

Liontrust

918

500

16.8

12.7

2.9

Man Group

147

2,864

11.0

8.3

6.0

Polar Capital

526

507

12.9

7.0

6.3

Schroders

3,289

8,780

16.9

12.2

3.5

Average

16.0

11.2

4.3

Record

41

81

15.1

9.3

5.6

Source: Refinitiv, Edison Investment Research. Note: P/Es and EV/EBITDA on a calendar year basis. Record’s dividend yield excludes the special dividend. Priced at 26 November 2019.

Although Record’s shares appreciated strongly after the October second-quarter trading update, they previously lagged the asset manager peers and now trade on below the peer average calendar year 2019 P/E and EV/EBITDA ratios. The earnings for calendar year 2019 do benefit from a proportion of the £1m performance fee earned in FY19 and our FY20 Record earnings estimate does not include any performance fees; for FY20 Record is trading on a P/E of 16.3x, only a modest premium to the peer multiple of 15.6x for the same period. Meanwhile, the dividend yield of 5.6% is a premium to the peer average and there is the potential for this to be enhanced with a special dividend, particularly if performance fees are crystallised.

Exhibit 8: Financial summary

Year end March

£'000s 

 

2017

2018

2019

2020e

2021e

PROFIT & LOSS

 

 

 

 

 

 

 

Revenue

 

 

22,952

23,834

24,973

22,763

22,823

Operating expenses

 

 

(15,365)

(16,735)

(17,089)

(16,822)

(17,006)

Other income/(expense)

 

 

157

173

(8)

50

0

Operating Profit (before amort. and except.)

 

 

7,744

7,272

7,876

5,991

5,818

Finance income

 

 

112

56

113

166

165

Profit Before Tax

 

 

7,856

7,328

7,989

6,156

5,982

Taxation

(1,540)

(1,182)

(1,559)

(1,231)

(1,137)

Minority interests

 

 

0

0

0

55

40

Attributable profit

 

 

6,316

6,146

6,430

4,980

4,886

 

 

 

 

 

 

Revenue/AuME (excl. perf fees) bps

 

 

5.2

5.1

4.9

4.9

4.8

Operating margin (%)

 

 

33.7

30.5

31.5

26.3

25.5

 

 

 

 

 

 

Average Number of Shares Outstanding (m)

 

 

218.0

206.5

198.1

197.5

197.5

Basic EPS (p)

 

 

2.91

3.03

3.27

2.54

2.49

EPS - diluted (p)

 

 

2.90

2.98

3.25

2.52

2.47

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

0.00

0.00

Total dividend (p)

 

 

2.91

2.80

2.99

2.30

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

30,406

30,747

Debtors

 

 

6,972

6,775

7,562

6,674

6,720

Cash

 

 

19,120

12,498

12,966

9,740

10,035

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)

(6,010)

(6,028)

Creditors

 

 

(3,013)

(2,630)

(2,736)

(2,627)

(2,645)

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

26,651

26,918

Minority interests

 

 

0

0

60

125

85

Net assets attributable to ordinary shareholders

 

36,831

26,551

27,341

26,526

26,833

 

 

 

 

 

 

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

13.3

13.5

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

Operating Cash Flow

 

 

7,107

2,746

7,026

6,423

5,562

Capex

 

 

(899)

(236)

(72)

(250)

(140)

Cash flow from other investing activities

 

 

(5,159)

7,899

(561)

(3,149)

15

Dividends

 

 

(3,592)

(6,810)

(5,517)

(5,908)

(4,578)

Other financing activities

 

 

(193)

(10,367)

(613)

(461)

(564)

Other

 

 

136

146

205

120

0

Net Cash Flow

 

 

(2,600)

(6,622)

468

(3,226)

294

Opening cash/(net debt)

 

 

21,720

19,120

12,498

12,966

9,740

Other

 

 

0

0

0

0

0

Closing net (debt)/cash

 

 

19,120

12,498

12,966

9,740

10,035

Closing net debt/(cash) inc money market instruments

37,222

22,696

23,701

23,600

23,895

 

 

 

 

 

 

AUME

 

 

 

 

 

Opening ($'bn)

 

 

52.9

58.2

62.2

57.3

59.8

Net new money flows

 

 

3.1

(1.2)

(4.5)

2.0

0.0

Market/other

 

 

2.2

5.2

(0.4)

0.5

0.6

Closing ($'bn)

 

 

58.2

62.2

57.3

59.8

60.4

Source: Record accounts, Edison Investment Research


General disclaimer and copyright

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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

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

General disclaimer and copyright

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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

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: Consumer

OPAP — Surprising extraordinary dividend for Q120

OPAP’s Q319 results saw similar trends to H119 and were in line with our estimates. Gross gaming revenues (GGR) increased 6.7% to €393.6m, driven by a 43.2% increase in video lottery terminals (VLT) GGR and a stronger lottery performance. Alongside revenue growth, OPAP is successfully containing costs, which led to a 25.8% EBITDA margin and a 24.5% increase in net profit. OPAP has announced that it will pay an extraordinary dividend in Q120 (rather than an interim dividend) – on our estimates this equates to an 11.9% dividend yield for FY19. For FY20, OPAP trades at 8.6x EV/EBITDA and 15.2x P/E with an 8.9% dividend yield.

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