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Record — Opportunities to offset hedging outflows

Record (LSE: REC)

Last close As at 05/08/2026

GBP0.44

▲ 0.60 (1.37%)

Market capitalisation

GBP89m

More on this equity

Research: Financials

Record — Opportunities to offset hedging outflows

In its second-quarter update, Record reported a broadly stable figure for assets under management equivalent (AUME), but also included news of a noticeable passive hedging outflow due in Q319. While this prompts 3% and 9% reductions in our FY19 and FY20 EPS estimates, the group is seeing good opportunities to win new business and our estimates exclude both potential AUME inflows and performance fees.

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Written by

Financials

Record

Opportunities to offset hedging outflows

Q219 trading update

Financial services

25 October 2018

Price

29.95p

Market cap

£60m

Net cash (£m) at end-March 2018

22.7

Shares in issue

199.1m

Free float

32%

Code

REC

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(26.1)

(27.6)

(33.8)

Rel (local)

(20.3)

(19.6)

(28.4)

52-week high/low

51.1p

29.5p

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

H119 results

23 November 2018

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

In its second-quarter update, Record reported a broadly stable figure for assets under management equivalent (AUME), but also included news of a noticeable passive hedging outflow due in Q319. While this prompts 3% and 9% reductions in our FY19 and FY20 EPS estimates, the group is seeing good opportunities to win new business and our estimates exclude both potential AUME inflows and performance fees.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/17

23.0

7.9

2.90

2.00

10.3

6.7

03/18

23.8

7.3

2.98

2.30

10.1

7.7

03/19e

23.4

6.6

2.69

2.30

11.1

7.7

03/20e

22.4

5.7

2.31

2.32

12.9

7.7

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

Q219 update

There was a modest net outflow of client AUME during the quarter ($0.6bn), which exactly matched the aggregate inflow in the first quarter. Other moves (related to market levels and scaling of mandates based on volatility) were a net positive of $0.5bn, leaving end-September AUME at $61.8bn, 0.2% below the June figure or, in sterling terms, up 1.1% to £47.4bn. Client terminations in passive hedging are set to result in estimated outflows of $2.5bn in Q319. These arise from clients switching to a different fund structure or hedging approach, although Record notes that there is continued competitive pressure, particularly in passive hedging.

Outlook: New products and services a key focus

To address competitive pressures and develop the business, Record is continuing to invest in enhanced service levels and new products. The recently introduced enhanced passive hedging product is an example of this, offering clients the opportunity to reduce costs (see discussion of this in our 20 June note). With this update, Record highlights a new approach to emerging market currency hedging that it believes will have wide application. It has already provided the basis for an extension of its licensing agreement with WisdomTree Asset Management. The level of currency volatility (we track this using the one-year implied volatility of exchange rates between the US dollar and Swiss franc and euro) has remained within a relatively narrow range, but prominence of significant geopolitical and macroeconomic uncertainties means that the environment remains favourable for Record’s discussions with potential clients and the company sees encouraging interest across a range of products and geographies.

Valuation

Record’s shares have weakened since the update, reflecting the prospective passive hedging outflow. This leaves the shares on below peer-average P/E and EBITDA levels, which appears cautious given the potential for inflows and/or performance fees to reverse the estimate reduction we have made for FY20.

Q219 trading update

The quarterly update to the end of September 2018 showed AUME of $61.8bn, marginally lower than at end-June. Outflows in passive hedging of $0.6bn matched the overall inflow in the first quarter, which we would regard as within the range of normal business fluctuation. Changes in market levels, scaling related to mandates with volatility targeting and foreign exchange movements were a net positive (+$0.5bn). AUME details for Q418 to Q219 are shown in Exhibit 1. For H119 as a whole, flows were therefore neutral while market, FX and scaling effects were a net $0.4bn negative.

Exhibit 1: AUME changes

Year-end March

Q418

Q119

Q219

Q119

Q219

H119

$bn

AUME

AUME

AUME

Net flows

Net flows

Net flows

Dynamic hedging

4.3

4.3

4.4

0.4

0.0

0.4

Passive hedging

53.0

52

51.7

(0.4)

(0.6)

(1.0)

Currency for return

1.6

2.3

2.4

0.6

0.0

0.6

Multi-product

3.0

3

3

0.0

0.0

0.0

Cash and futures

0.3

0.3

0.3

0.0

0.0

0.0

Total

62.2

61.9

61.8

0.6

(0.6)

0.0

Markets

1.2

0.1

1.3

FX and scaling for mandate volatility targeting

(2.1)

0.4

(1.7)

Total change

(0.3)

(0.1)

(0.4)

Source: Record, Edison Investment Research

Record reports its number of clients as an additional broad indicator and this increased from 60 at the year-end to 64 at the end of the first quarter and 66 at the end of Q219. On a longer view, the client count has increased from 44 in 2013.

A longer-term perspective is relevant when considering the notification of the termination of passive hedging mandates for two commercial relationships totalling up to $2.5bn and involving up to seven clients (the client count is based on separate legal entities, some of which may effectively represent the same commercial relationship). Competitive pressures remain a feature of the market but these terminations reflected specific developments, such as the decision to move investments into a unitised structure, as part of which the client will use the administrator to provide a hedging service. The outflow is expected to take place in the third quarter. While the termination is larger in scale than the net flows seen in the first two quarters, Record did win a $2.2bn mandate that took effect during Q119 and in its comments reports an encouraging range of opportunities.

Fees. Allowing for the introduction of the enhanced passive hedging product, which has a lower management fee with the opportunity to earn a performance fee, rates for most products have been broadly unchanged during the second quarter. Within our forecast changes, we have factored in a slightly lower fee margin for passive hedging prospectively as we assume the mandates terminating will have been on a higher management fee basis than the newer enhanced product. There was no performance fee crystallised during the quarter ($1m during Q119).

On performance, Record reported negative returns during its second quarter; for the FTSE Currency FRB10 index and the emerging market products, at -0.40% and -1.24% respectively. The multi-strategy product (ungeared) returned 0.74% during the quarter, compared with a negative return of 1.09% in Q119. Even so, the longest-standing multi-strategy mandate (since inception end-July 2012) is still showing a positive return of 0.89% per annum on an ungeared basis.

In its other comments, Record notes that it is continuing to invest in client service levels and new products, providing differentiation and supporting overall fee rates in the face of pressure seen in passive hedging in particular. One example of this investment has been the engagement of New Change FX to provide independent foreign exchange data, which in turn helps to give clients transparency over best execution.

The group sees a range of new business opportunities both geographically and by product. An example of new product development is the extension of Record’s licensing relationship with WisdomTree Asset Management, under which it will provide signals derived from a new emerging market hedging approach, which is seen as having a wide range of applications.

Financials

Exhibit 2 shows the changes in key figures from our forecasts following the trading update. Our estimate for FY19 is slightly reduced with a more favourable £/$ rate partly offsetting the time-weighted impact of the AUME outflow indicated for Q319. There is a modest revenue and higher profit impact in 2020e, reflecting the full-year effect of the outflow. We have not allowed for any performance fees in our forecasts beyond the £1m crystallised in Q119. Also, we have only allowed for the net business flows signalled in the trading updates for the first two quarters.

Exhibit 2: 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

23.4

-1%

6.9

6.6

-3%

2.78

2.69

-3%

2.37

2.30

-3%

03/20e

23.2

22.4

-3%

6.3

5.7

-9%

2.54

2.31

-9%

2.44

2.32

-5%

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

Valuation

We have updated our valuation table showing Record’s valuation in the context of a group of UK asset managers. While Record is differentiated by its role as a specialist currency manager, 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: Earnings and EBITDA multiples for UK fund managers

Price (p)

Market capitalisation (£m)

P/E (x)

EV/EBITDA (x)

Ashmore

356

2,535

14.2

10.2

City of London Inv Group

385

103

10.0

6.5

Impax Asset Management

248

323

22.2

50.2

Jupiter

339

1,553

10.5

6.3

Liontrust

650

329

12.7

20.2

Man Group

147

2,317

9.4

5.1

Polar Capital

610

574

12.9

24.5

Schroders

2,765

7,481

12.4

11.0

Average

13.0

16.7

Record

29.5

59

10.7

6.0

Source: Bloomberg, Edison Investment Research. Note: P/E and EV/EBITDA using calendar 2018 estimated earnings and last reported EBITDA, respectively. Priced as at 22 October 2018.

The shares have weakened noticeably following the trading update, leaving them below the peer-average P/E ratio (calendar 2018). Our Record estimate for FY19 includes the £1m performance fee already crystallised but FY20 has no performance fee and the full impact of the outflow highlighted above; for this year, Record is trading on an estimated P/E of c 12.9x, which could prove cautious if positive net inflows resume and further performance fees are crystallised. The EV/EBITDA ratios are historical and, within a wide range, Record is significantly below both the average (16.7x) and median (10.6x) values. For reference, based on our reduced FY20 estimate, Record trades on a 7.6x EV/EBITDA.

Exhibit 4: Financial summary

£'000s

 

 

2015

2016

2017

2018

2019e

2020e

March

 

 

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

 

 

 

 

 

 

Revenue (underlying)

 

 

20,865

21,246

22,952

23,834

23,412

22,424

Revenue

 

 

21,057

21,134

22,952

23,834

23,412

22,424

Operating expenses

 

 

(13,521)

(14,344)

(15,365)

(16,735)

(16,874)

(16,853)

Other income/(expense)

 

 

0

0

157

173

0

0

Operating Profit (before amort. and except.)

 

 

7,536

6,790

7,744

7,272

6,538

5,570

Finance income

 

 

146

143

112

56

107

138

Profit Before Tax

 

 

7,682

6,933

7,856

7,328

6,645

5,708

Taxation

(1,708)

(1,523)

(1,540)

(1,182)

(1,263)

(1,085)

Minority interests

 

 

(192)

131

0

0

0

0

Attributable profit

 

 

5,782

5,541

6,316

6,146

5,383

4,624

 

 

 

 

 

 

 

 

 

Normalised revenue (underlying)

 

 

20,865

21,246

22,952

23,834

23,412

22,424

Operating expenses (excl. dep'n and amortisation)

 

 

(13,206)

(14,023)

(15,023)

(16,430)

(16,564)

(16,543)

EBITDA

 

 

7,659

7,223

7,929

7,404

6,848

5,880

Depreciation and amortisation

 

 

(315)

(321)

(342)

(305)

(310)

(310)

Other income/(expense)

 

 

0

0

157

173

0

0

Normalised Operating profits

 

 

7,344

6,902

7,744

7,272

6,538

5,570

Finance income

 

 

146

143

112

56

107

138

Profit Before Tax (norm)

 

 

7,490

7,045

7,856

7,328

6,645

5,708

Normalised revenue/AuME (excl. perf fees) bps

 

 

6.2

6.0

5.2

5.1

4.8

4.8

Normalised operating margin (%)

 

 

35.2

32.5

33.7

30.5

27.9

24.8

Average Number of Shares Outstanding (m)

 

 

218.4

217.9

218.0

206.5

200.1

200.1

Basic EPS (p)

 

 

2.66

2.55

2.91

3.03

2.70

2.32

EPS - normalised (p)

 

 

2.65

2.54

2.90

2.98

2.69

2.31

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

0.40

0.00

Total dividend (p)

 

 

1.65

1.65

2.91

2.80

2.70

2.32

BALANCE SHEET

 

 

 

 

 

 

 

 

Fixed Assets

 

 

3,273

423

1,228

2,339

2,229

2,179

Intangible Assets

 

 

504

299

245

228

178

178

Tangible Assets

 

 

129

81

881

910

850

800

Investments

 

 

2,567

0

0

1,115

1,115

1,115

Deferred tax assets

 

 

73

43

102

86

86

86

Current Assets

 

 

37,053

40,541

44,247

29,737

29,552

28,851

Debtors

 

 

6,324

5,695

6,972

6,775

6,507

6,556

Cash

 

 

12,010

21,720

19,120

12,498

12,581

11,830

Money market instruments

 

 

18,100

13,020

18,102

10,198

10,198

10,198

Other

 

 

619

106

53

266

266

266

Current Liabilities

 

 

(4,522)

(3,256)

(8,644)

(5,525)

(5,421)

(5,440)

Creditors

 

 

(2,949)

(2,372)

(3,013)

(2,630)

(2,526)

(2,545)

Financial liabilities

 

 

0

0

(4,779)

(2,467)

(2,467)

(2,467)

Other

 

 

(1,573)

(884)

(852)

(428)

(428)

(428)

Net Assets

 

 

35,804

37,708

36,831

26,551

26,360

25,590

Minority interests

 

 

3,876

4,019

0

0

0

0

Net assets attributable to ordinary shareholders

 

31,928

33,689

36,831

26,551

26,360

25,590

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

13.2

12.9

CASH FLOW

 

 

 

 

 

 

 

 

Operating Cash Flow

 

 

6,472

5,509

7,107

2,746

5,749

4,766

Capex

 

 

(128)

(29)

(899)

(236)

(150)

(160)

Cash flow from investing activities

 

 

0

(39)

(189)

(82)

(50)

(100)

Dividends

 

 

(3,266)

(3,750)

(3,592)

(6,810)

(5,574)

(5,394)

Other financing activities

 

 

(2,571)

7,737

(5,163)

(2,386)

107

138

Other

 

 

0

282

136

146

0

0

Net Cash Flow

 

 

507

9,710

(2,600)

(6,622)

83

(751)

Opening cash/(net debt)

 

 

11,503

12,010

21,720

19,120

12,498

12,581

Other

 

 

0

0

0

0

0

0

Closing net (debt)/cash

 

 

12,010

21,720

19,120

12,498

12,581

11,830

Closing net debt/(cash) inc money market instruments

30,110

34,740

37,222

22,696

22,779

22,028

AUME

 

 

 

 

 

 

 

 

Opening ($bn)

 

 

51.9

55.4

52.9

58.2

62.2

63.3

Net new money flows

 

 

2.9

(1.4)

3.1

(1.2)

0.0

0.0

Market/other

 

 

0.6

(1.1)

2.2

5.2

1.1

1.2

Closing ($bn)

 

 

55.4

52.9

58.2

62.2

63.3

64.5

Source: Company accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Record and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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. 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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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “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.

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

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

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Record and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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Germany

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US

Sydney +61 (0)2 8249 8342

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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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