Lloyd Fonds — Healthy organic AUM expansion

LF completed the repositioning of its business model to an active liquid asset manager in FY20 and now focuses on expanding its core AUM, reaching €1.97bn at end-June 2021, compared to €1.1bn at 30 June 2020. The fully organic growth was driven by strong customer acquisition (c 70% of the increase) as well as healthy fund performance (30%), according to management. In H121 alone, AUM expanded by 18.7%, from €1.66bn at end-2020, with the investment fund segment reaching c €1.4bn, wealth management €430m (assisted by a few larger mandate wins) and AI-supported individual portfolio management (LAIC) €140m.

H121 revenues were €18.2m (almost a threefold increase compared to €6.2m recorded in H120), with c €15.9m attributable to the new core business segment, LF Liquid Assets (€3.6m in H120). We note that SPSW Capital, the fund management subsidiary, contributed c €15.6m of management and performance fees, with a further €1.1m in sales commissions included in the LF Group total. The company also reported €1.1m in revenue from the real assets segment (vs €2.6m in H120), which consists of legacy assets in shipping, real estate, aircraft, etc, and is gradually being phased out.

Higher overall fund volume fuelled an increase in cost of sales from €0.3m in H120 to €1.3m in H121 due to higher distribution fees. LF also reported c 16.3% y-o-y increase in personnel costs to €5.9m. However, it was attributable to the costs of the employee stock option programme and phantom stock plan for the management rather than employment growth (73 employees as at end-June 2021 vs 72 a year earlier). Consequently, H121 EBITDA was €7.2m, compared to a loss of €2.4m in H120. LF significantly increased its financial results (financial income minus financial expenses), which was slightly positive in H121, against a negative €1.9m in H120. The improvement was assisted by the €6.7m growth in financial income, driven by a one-off revaluation to the fair value of LF’s two associate companies which were reclassified as financial assets. Based on our conversation with management, we understand this was related to a carrying value uplift of shipping assets held by these companies. Financial expenses included one-offs as well: an adjustment of the purchase price liability related to SPSW Capital (€4.9m) acquisition and interest expense on this purchase price liability (€1.1m).

The net profit ex-minorities in H121 was €3.7m, compared to a net loss of €3.9m in H120. This helped increase equity to €47.2m at 30 June 2021 from 42.7m at end-2020, and improve the equity ratio to 42% (vs 37.6% at 31 December 2020). It is worth noting that the net profit attributable to SPSW minorities (LF holds a 90% stake in the business) amounted to €1.3m in H121.

In the period, the company has slightly reduced its net debt from €12.4m to €11.5m. Meanwhile, the operating cash flow improved to €13m (from an outflow of €0.5m in H120) and is close to the management target for FY21 of €14–16m.

According to management guidance, the company expects further AUM expansion (mainly organic) in FY21, targeting €2.4bn by the end of the year. It also continues to target AUM of €7bn by end-2024, as it wants to play significant role in the asset management market consolidation process, looking for attractive acquisition opportunities within the wealth management segment with at least €1bn AUM per entity. Having said that, we note that LF has not completed any acquisitions in FY20 and in FY21 to date. Before the end of 2024, LF also wants to reach a 45% EBITDA margin, calculated based on net sales (revenue less costs of sales), which was 43% in H121.

On 29 June 2021, the supervisory board approved the offering of up to a 9.75% share in LF subsidiary LAIC Capital, in the form of blockchain-based participation rights (LAIC Token 21). Based on the subsidiary’s valuation amounting to c €50m, the expected proceeds from the sale, executed in two tranches by the end of August 2021, reached c €5m (the first tranche already sold in June and July amounted to €4.2m). Proceeds from the LAIC token raise will be used, among others things, for investments in the infrastructure behind the LAIC platform (including the API interface), as well as strengthening its marketing and distribution efforts. In addition to further expansion financing raised in the process, the purpose of the issue is also to realise first-mover advantages in the tokenised assets market, as LF’s management believes it is the future of capital markets. The experience gained during the offering could be used in the tokenisation of similar assets (including LF’s funds) providing access to new groups of investors, and potentially improving the company’s top line by accelerating the growth of the business.

Currently, LF’s portfolio consists of eight investment funds with various risk profiles. LF Active Value Selection, which is not being offered to private investors, focuses on small and mid caps in the DACH region, mainly in Germany. It is fully invested and it is the only fund in the portfolio holding short equity positions, amounting to c 3.6% of its assets as at 31 March 2021 (last available factsheet). LF European Emerging Champions, which was launched on 1 June 2021, targets small and mid caps from innovative sectors, including IT (40.9% exposure as at 31 July 2021) and healthcare (20.1%). We note that almost 50% of the fund’s assets are in Scandinavia, with Germany ranking second with a 34.7% share. LF European Hidden Champions focuses on micro and small caps from IT (43%) and industrial (16.7%) sectors, located mainly in Germany (56.4%). LF Green Dividend World, which invests in dividend-paying companies, offers more diversified exposure in terms of region and sector, similar to both mixed funds (LF WHC Global Discovery and LF Global Multi Asset Sustainable).

All of the funds managed by LF group reported positive returns in a one-year period and year-to-date as at 2 September 2021. They mainly benefited from the post-pandemic rebound in the broad equity market (MSCI World up 22.8% year-to-date in euro terms), as even the mixed funds hold a significant share of their assets in equities (LF WHC Global Discovery: 92.7%; LF Global Multi Asset Sustainable: 71.3%). Meanwhile the fixed-income funds recorded muted returns in 2021 to date, as they continue to operate in a record-low interest rate environment.

For valuation purposes, we continue to compare LF with a peer group including international asset managers, which (except for Frenkel Topping) have significantly higher market capitalisation and more AUM. Based on the last available data, LF’s price to AUM ratio sits at 6.4%, which is 1.6pp higher than the peer group average. We believe this could be attributable to the ambitious AUM expansion plans of LF’s management and initial success in its realisation, which led to an over 50% year-to-date share price increase.

Based on P/E multiples for 2021–23e, LF trades at a significant, however rapidly diminishing, premium to peers, which, we believe, is related to the early stage of the strategic shift towards active asset management. Having said that, we note that in H121 the company’s EPS was €0.28, while Refinitiv consensus EPS estimates as at 3 September 2021 stand at €0.10 per share in FY21. Meanwhile, based on EV/EBITDA multiples for 2021–23e, the company’s shares trade at an expanding discount to peers. We believe that the difference in valuation based on both multiples could be attributable to the significant portion of profit attributable minorities (which EBITDA is not adjusted for), according to Refinitiv consensus data. As management expects significant new investments in the short and mid term, LF will not pay out any dividend from FY20 earnings.