Positive AUME flows and performance fees

Record 22 January 2020 Update
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Record

Positive AUME flows and performance fees

Q320 update

Financial services

22 January 2020

Price

40p

Market cap

£80m

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

4.6

7.9

27.8

Rel (local)

4.2

1.3

15.9

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

Q420 trading update

17 April 2020

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

Record’s Q320 update was positive, with a 4% inflow of assets under management equivalent (AUME) and the crystallisation of a performance fee in the period. AUME flows have now been positive since Q120, totalling $4.5bn (+8%) over nine months. The performance fees in this quarter follow on from a material contribution during FY19, reflecting value added for clients. Record continues to innovate and invest to counter competitive pressure, which has contributed to broadly stable management fee rates.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/18

23.8

7.3

2.98

2.30

13.4

5.8

03/19

25.0

8.0

3.25

2.30

12.3

5.8

03/20e

25.5

8.0

3.28

2.30

12.2

5.8

03/21e

24.0

6.8

2.81

2.30

14.2

5.8

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

Q320 update provides encouragement

AUME of $64.7bn at the end of December was up 8% in the quarter. We calculate that average sterling AUME in the quarter was virtually unchanged compared with H120, with the positive impact of net inflows offsetting strength in the pound towards the end of the calendar year. There were net inflows of $2.5bn, including a previously announced $1bn tactical mandate that is only expected to be in place for a short period. Other inflows were primarily in passive hedging and all came from existing clients or were associated with existing relationships. Market moves were neutral but foreign exchange movements added $2.3bn (Exhibit 1). Performance fees of £1.8m were crystallised in Q320 relating to performance over the six and 12 months to end December.

Estimates raised to reflect news

We have raised our estimates to reflect the AUME inflows, the performance fee reported and the sterling/dollar rate. We have only included the tactical mandate AUME for Q420 to show an FY21 estimate without the benefit of the related short-term revenue: in reality the mandate is quite likely to remain in place for longer than this. Our estimates do not assume the crystallisation of further performance fees and do not include potential AUME inflows or other outflows. Our EPS estimates increase by 30% and 14% for FY20 and FY21 respectively.

Valuation: below peer multiples and yield premium

Record shares trade below a comparative group of UK asset managers both in terms of P/E and EV/EBITDA (page 3). This is true even when performance fees are excluded. The shares offer a yield premium based on the ordinary dividend and the potential for additional income in the form of potential special payments, subject to the level of earnings.

Changes in AUME and investment performance

Exhibit 1 shows the progression of AUME from Q319 and net flows for the first three quarters of FY20. Overall AUME in US dollar terms increased by 8% in Q320 and by nearly 13% for 9M20, whereas sterling-denominated AUME was little changed at £48.8bn versus £48.6bn at end Q220. As noted earlier, we calculate the average AUME in sterling terms was stable when compared with the average for H120, reflecting the positive impact of net inflows offsetting the strength in sterling towards the end of calendar year 2019. The net inflow of $2.5bn in Q320 included a $1bn tactical mandate that is, subject to market movements, not expected to be of long duration. As can be seen, the majority of other inflows were in passive hedging.

Record notes there was an increase in the client count of three to 73. The three new clients (separate legal entities) were associated with existing client relationships. Even so, it is encouraging to see this broad indicator of progress continuing to rise (for reference this number stood at 60 at end FY18).

Exhibit 1: AUME changes

$bn

Q319

Q419

Q120

Q220

Q320

Q120

Q220

Q320

9M20

AUME

Net flows

Dynamic hedging

3.9

3.1

3.4

3.2

3.5

0.3

(0.1)

0.1

0.3

Passive hedging

48.4

48.2

48.9

50.4

53.4

0.1

1.5

1.4

3.0

Currency for return

2.4

2.7

2.6

2.9

3.3

(0.1)

0.3

0.0

0.2

Multi-product

2.9

3.0

3.1

3.1

4.2

0.0

0.0

1.0

1.0

Cash and futures

0.2

0.3

0.3

0.3

0.3

0.0

0.0

0.0

0.0

Total

57.8

57.3

58.3

59.9

64.7

0.3

1.7

2.5

4.5

Markets

0.0

1.3

0.0

1.3

FX and scaling for volatility targeting mandates

0.7

(1.4)

2.3

1.6

Total change

1.0

1.6

4.8

7.4

Source: Record

Q320 investment performance showed the FTSE FRB10 Index (sterling excess return) up 0.19%. The Record emerging market product generated an ungeared quarterly return of +1.04% and an annualised since-inception (November 2009) return of +2.15%. The Multi-Strategy product (with 4% target volatility) had a negative quarter (-0.46%) but has still generated a positive since inception (July 2012) return of +1.41% per year.

Estimate changes

Changes in key figures from our estimates are shown in Exhibit 2. Drivers of the changes are the increase in AUME, the inclusion for FY20 of the performance fee crystallised, and a modest negative effect of a change in the sterling/dollar rate assumed. As noted on the front page, our estimates do not assume the crystallisation of further performance fees although the £1.8m fee realised in Q320 follows £2.3m earned in FY19. The £1.8m is equivalent to 0.4bp of the trailing 12-month average AUME, which is material when compared either with passive hedging or group average management fee rates of c 3bp and 5bp respectively.

The $1bn tactical bespoke mandate is expected to generate fees broadly in line with Multi-Product mandates (c 20bp) and to be temporary. We have only included the $1bn AUME for Q420 so that our FY21 estimate excludes the temporary contribution to revenue this will provide. In practice the mandate may well be longer, benefiting FY21.

On a longer view, both performance fees and tactical mandates are likely to be recurring features for Record so there is an argument for including assumed contributions; the difficulty is setting an appropriate level. We note Q320 performance fees were for six- and 12-month periods to end 2019; given this and the incidence of performance fees last year, we assume there will be no further crystallisations in FY20.

Exhibit 2: Estimate changes

 

Revenue (£m)

PBT (£m)

EPS (p)

DPS (p)*

 

Old

New

Change

Old

New

Change

Old

New

Change

Old

New

Change

03/20e

22.8

25.5

12%

6.2

8.0

31%

2.52

3.28

30%

2.30

2.30

0%

03/21e

22.8

24.0

5%

6.0

6.8

14%

2.47

2.81

14%

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 have now pencilled in special payments of 0.65p and 0.25p for FY20 and FY21 respectively.

For more detail on our estimates, see Exhibit 4. For details of Record’s profile in terms of AUME by strategy, management fee rates, client analysis, geographical analysis and underlying asset class exposure, see our note published in November 2019.

Valuation

An updated version of our valuation, which shows 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 2019e (x)

Dividend yield (%)

Ashmore

554

3,934

16.6

12.4

3.0

City of London Investment Group

458

121

N/A

10.1

5.9

Impax Asset Management

385

501

25.2

20.4

1.4

Jupiter

383

1,748

13.7

9.4

4.5

Liontrust

1,275

696

15.5

13.5

2.1

Man Group

154

3,034

9.8

8.9

5.7

Polar Capital

574

553

12.0

8.2

5.7

Schroders

3,252

8,706

14.5

10.9

3.5

Average

15.3

11.7

4.0

Record

40

80

13.7

7.6

5.8

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 22 January 2020.

Our table shows calendarised figures for P/E (2020) and EV/EBITDA (2019). Record shares trade on below the peer averages for both measures. The earnings for calendar year 2020 benefit from a quarter of the performance fee earned in FY20 whereras the 2019 EV/EBITDA includes performance fees from both financial years. Excluding performance fees would push the P/E up to 14.3x and the EV/EBITDA to approximately 8.7x: both still below average. Meanwhile, the dividend yield of 5.8% is a premium to the peer average and there is the potential for this to be enhanced with a special dividend (on our estimate to 6.4%).

Exhibit 4: Financial summary

Year end March (£'000s unless stated)

 

 

2017

2018

2019

2020e

2021e

PROFIT & LOSS

 

 

 

 

 

 

 

Revenue

 

 

22,952

23,834

24,973

25,532

23,997

Operating expenses

 

 

(15,365)

(16,735)

(17,089)

(17,708)

(17,369)

Other income/(expense)

 

 

157

173

(8)

50

0

Operating Profit (before amort. and except.)

 

 

7,744

7,272

7,876

7,874

6,627

Finance income

 

 

112

56

113

167

175

Profit Before Tax

 

 

7,856

7,328

7,989

8,041

6,802

Taxation

(1,540)

(1,182)

(1,559)

(1,608)

(1,292)

Minority interests

 

 

0

0

0

55

40

Attributable profit

 

 

6,316

6,146

6,430

6,488

5,550

 

 

 

 

 

 

 

 

Revenue/AuME (excl. perf fees) bps

 

 

5.2

5.1

4.9

5.1

4.8

Operating margin (%)

 

 

33.7

30.5

31.5

30.8

27.6

 

 

 

 

 

 

 

 

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

3.31

2.83

EPS - diluted (p)

 

 

2.90

2.98

3.25

3.28

2.81

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

0.25

Total dividend (p)

 

 

2.91

2.80

2.99

2.95

2.55

 

 

 

 

 

 

 

 

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

32,554

31,761

Debtors

 

 

6,972

6,775

7,562

8,298

7,065

Cash

 

 

19,120

12,498

12,966

10,264

10,704

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)

(6,650)

(6,164)

Creditors

 

 

(3,013)

(2,630)

(2,736)

(3,267)

(2,781)

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

28,159

27,796

Minority interests

 

 

0

0

60

125

85

Net assets attributable to ordinary shareholders

 

36,831

26,551

27,341

28,034

27,711

 

 

 

 

 

 

 

 

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

14.1

13.9

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

Operating Cash Flow

 

 

7,107

2,746

7,026

6,944

6,992

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

(2,702)

440

Opening cash/(net debt)

 

 

21,720

19,120

12,498

12,966

10,264

Other

 

 

0

0

0

0

0

Closing net (debt)/cash

 

 

19,120

12,498

12,966

10,264

10,704

Closing net debt/(cash) inc money market instruments

37,222

22,696

23,701

24,124

24,564

 

 

 

 

 

 

 

 

AUME

 

 

 

 

 

 

 

Opening ($'bn)

 

 

52.9

58.2

62.2

57.3

61.3

Net new money flows

 

 

3.1

(1.2)

(4.5)

3.5

0.0

Market/other

 

 

2.2

5.2

(0.4)

0.5

0.6

Closing ($'bn)

 

 

58.2

62.2

57.3

61.3

61.9

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.

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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.

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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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