Record — Positive flow and muted market impact Q422

Record (LSE: REC)

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Research: Financials

Record — Positive flow and muted market impact Q422

For FY22 as a whole, Record’s assets under management equivalent (AUME) increased by 3.7% and were only slightly lower in Q422 on market movements. The group is seeing the benefits of diversification and new products, both in terms of AUME and average fee rates. Increased investment in staff and technology have tempered short-term expected earnings growth, but operational gearing benefits should become more evident once new products gain further traction.

Andrew Mitchell

Written by

Andrew Mitchell

Director, Financials

Financials

Record

Positive flow and muted market impact Q422

Q422 update

Financial services

27 April 2022

Price

75p

Market cap

£142m

Net cash (£m) at end-September 2021

17.3

Shares in issue

199.1m

Free float

53%

Code

REC

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.2

2.7

(10.7)

Rel (local)

5.7

4.9

(13.4)

52-week high/low

102p

65p

Business description

Record is a specialist independent currency and derivatives manager. It provides a number of products and services for institutional clients, including passive and dynamic hedging and a range of currency for return strategies, including funds and customised segregated accounts.

Next events

FY22 results

21 June 2022

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

For FY22 as a whole, Record’s assets under management equivalent (AUME) increased by 3.7% and were only slightly lower in Q422 on market movements. The group is seeing the benefits of diversification and new products, both in terms of AUME and average fee rates. Increased investment in staff and technology have tempered short-term expected earnings growth, but operational gearing benefits should become more evident once new products gain further traction.

Year end

Revenue (£m)

PBT
(£m)

EPS*
(p)

DPS**
(p)

P/E
(x)

Yield
(%)

03/20

25.6

7.7

3.26

2.30

23.0

3.1

03/21

25.4

6.2

2.73

2.30

27.5

3.1

03/22e

35.2

11.0

4.40

3.80

17.0

5.1

03/23e

39.3

11.6

4.77

4.40

15.7

5.9

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

Q422 update

Record’s Q422 trading update showed (March) year-end AUME at $83.1bn, up 3.7% over 12 months and down 2.6% in the quarter. There was a $0.8bn net inflow in Q422 and $2.4bn for the full year (3.0% of opening AUME). Other moves in Q422 were a 2.7% or $2.3bn negative market move and a $0.7bn reduction, resulting from foreign exchange movements and scaling in mandates with a volatility target. We calculate that average AUME in sterling terms increased by 17.4% for FY22. Record earned performance fees of £0.5m in the quarter, reflecting increased interest rate differentials in the market, which create better opportunities for enhanced passive hedging mandates to add value.

Background and outlook

The resilience in Record’s AUME in a period of weakness in some markets reflects the diversity of market exposures of underlying client portfolios. Likewise, the diversity of client types may have contributed to a positive quarter for flows, with no indication of a weaker trend since the period end. Indeed, since end March an existing dynamic hedging client has allocated a further $1bn to its mandate, with a further $1bn expected to follow in H123. Record notes that, because of the scale of this mandate, the marginal fee rate will be below the existing average in this product segment. Record continues work to diversify its product range and in January, announced the launch of the KOMMUNALIS+ private debt fund in Germany, an example of working with distributor and client partners.

Estimates adjusted for increased AUME and costs

Reflecting the crystallisation of a performance fee in Q422, our FY22 pre-tax and EPS estimates are increased by 5%. FY23 benefits from the likely $2bn in additional dynamic hedging AUME in H123, but increased staff and IT costs mean our pre-tax profit and diluted EPS estimates are reduced by 5%. The shares, therefore, trade on prospective multiples of 17.0x and 15.7x for FY22 and FY23. Including an assumed special dividend, the FY22 estimated yield is 5.5%.

Changes in AUME

Exhibit 1 shows the progression in AUME since the end of FY21 with net flows, market and other changes for each quarter, and the whole of FY22 and FY21.

Looking at fourth-quarter net flows, the changes were relatively small, with an inflow in passive hedging and outflows in multi-product and dynamic hedging (the latter reflected profit-taking by a client, a process that has usually been followed by a gradual rebuilding of the position subject to market conditions). Weakness in markets, increased volatility and foreign exchange moves produced a combined negative move of $3bn (or 3.5% of opening AUME). Overall AUME was 2.6% lower in the quarter.

For FY22, the net inflow was 3.0% of opening AUME or $2.4bn, including a net $1.3bn increase in the higher-fee rate segments (dynamic hedging, currency for return and multi-product). Market and foreign exchange movements together with scaling for mandates with a volatility target added $0.6bn. This gave a $3.0bn (or 3.7%) overall increase in AUME.

Exhibit 1: AUME progression Q422 and FY22

$bn

AUME

Net flows and other moves

Year end March

Q421

Q322

Q422

Q122

Q222

Q322

Q422

FY21

FY22

Dynamic hedging

9.3

11.5

10.6

0.0

0.6

1.1

(0.3)

6.6

1.4

Passive hedging

61.5

63.8

62.8

0.9

(0.6)

(0.5)

1.3

2.1

1.1

Currency for return

3.9

4.9

5.0

0.9

0.1

(0.6)

0.0

0.0

0.4

Multi-product

5.2

4.9

4.5

0.0

0.0

(0.3)

(0.2)

1.0

(0.5)

Cash and futures

0.2

0.2

0.2

0.0

0.0

0.0

0.0

0.0

0.0

Total

80.1

85.3

83.1

1.8

0.1

(0.3)

0.8

9.7

2.4

Markets

1.3

0.5

0.8

(2.3)

8.4

0.3

FX and scaling for mandate volatility targeting

1.3

(1.0)

0.7

(0.7)

3.4

0.3

Total change

4.4

(0.4)

1.2

(2.2)

21.5

3.0

Source: Record

Estimate changes

As a reminder, there are four main drivers of change when looking at our estimates for FY22 and FY23, compared with FY21. These are:

The addition of a large dynamic hedging mandate that began in H221 (see $6.6bn inflow in Exhibit 1). Because of its size, it has a lower fee rate than the previous dynamic hedging average, but nevertheless pushes up the group average fee rate. As noted, a total dynamic hedging inflow of $2bn is expected for H123. We assume the average fee rate in this segment will drop from an estimated c 13.6bp in FY22 to 12.0bp in FY23.

The Record EM Sustainable Finance Fund began to contribute from Q222. Its AUM has increased from c $0.75bn to c $1.2bn and it seems reasonable to factor in some further allocations of assets to the fund going forward. We have assumed $0.4bn for FY23. This number is indicative with risks in both directions.

The KOMMUNALIS+ private debt fund launched in Q422. We assume AUM builds progressively from $0.25bn to $1.5bn by the end of FY23. Again, this is an indicative estimate, but at this stage in the fund’s development the fee contribution would remain modest in a group context (c £0.7m FY23e), given the level of AUM assumed.

As the group continues to invest in the pursuit of its growth agenda, costs are expected to increase strongly in FY22 and FY23, with total operating expenses up 24% and 16% respectively. Variable compensation (the group profit share scheme) and increases in fixed salaries are factors here. Non-personnel costs, including the cost of IT projects and data licences, are assumed to rise by 19% for FY22 and 30% for FY23.

For the remaining elements of AUME, we have not assumed any positive or negative net flows in our estimates. We have also assumed there are no further performance fees over the forecast period, following the £0.5m crystallised in Q422. With greater interest rate differentials prevailing in markets, the background for enhanced passive hedging mandates is more favourable than previously, but in the currency for return category the multi-strategy product still has some ground to catch up before earning performance fees.

As shown in Exhibit 2, our estimates for FY22 and FY23 revenue are increased with factors, including the performance fee recorded in Q422 and inflows into dynamic hedging expected in H123 respectively. We have allowed for higher than previously assumed costs in FY23 (particularly relating to IT projects and data licences), which results in reductions of 5% in our pre-tax profit and EPS estimates. We have made a similar reduction in our FY23 dividend assumption (including special payment).

Exhibit 2: Estimate changes

 

Revenue (£m)

PBT (£m)

EPS (p)

DPS (p)*

 

Old

New

Change

Old

New

Change

Old

New

Change

Old

New

Change

03/22e

34.4

35.2

2%

10.6

11.0

5%

4.21

4.40

5%

3.80

3.80

0%

03/23e

38.2

39.3

3%

12.3

11.6

-5%

5.05

4.77

-5%

4.60

4.40

-4%

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

Valuation comparison

Exhibit 3 shows an updated version of our comparative valuation table, with a selection of quoted UK fund managers. Year-to-date, the comparator asset managers share prices are down 24% on average, while Record shares are 9% lower, presumably reflecting its lower sensitivity to equity market volatility. It continues to trade at a premium to the average calendarised P/E and EV/EBITDA multiples for the comparators, although the P/E premium may narrow as the potential benefits of the new product introductions outpace the increase in costs. On our estimates, Record’s prospective yield (including special dividend) would be 5.5% for FY22 and 6.1% for FY23.

Exhibit 3: Comparing valuation with UK fund managers

Price
(p)

Market cap

(£m)

P/E

2022e (x)

EV/EBITDA 2021e (x)

Dividend yield (%)

Ashmore

224

1,618

11.0

4.7

7.5

City of London Investment Group

462

237

9.6

N/A

7.1

Impax Asset Management

840

1,129

19.1

15.4

2.5

Jupiter

185

1,037

10.2

4.6

9.2

Liontrust

1,170

770

10.0

6.6

4.0

Man Group

232

3,970

9.2

6.7

2.9

Polar Capital

557

566

10.7

6.0

7.2

Schroders

2,868

7,946

12.3

8.1

4.3

Average

11.5

7.4

5.6

Record

75.00

142

16.0

11.3

3.1

Source: Refinitiv, Edison Investment Research. Note: P/E and EV/EBITDA on a calendar-year basis. Record’s (FY21) dividend yield excludes the special dividend. Priced at 26 April 2022.

Exhibit 4: Financial summary

Year end 31 March

£000s 

 

2018

2019

2020

2021

2022e

2023e

PROFIT & LOSS

 

 

 

 

 

 

 

 

Revenue

 

 

23,834

24,973

25,563

25,412

35,241

39,307

Operating expenses

 

 

(16,735)

(17,089)

(17,996)

(19,333)

(23,944)

(27,695)

Other income/(expense)

 

 

173

(8)

82

41

(284)

(40)

Operating Profit (before amort. and except.)

 

 

7,272

7,876

7,649

6,120

11,014

11,572

Finance income

 

 

56

113

88

33

17

16

Profit Before Tax

 

 

7,328

7,989

7,737

6,153

11,031

11,588

Taxation

(1,182)

(1,559)

(1,365)

(802)

(2,316)

(2,202)

Minority interests

 

 

0

0

48

0

0

0

Attributable profit

 

 

6,146

6,430

6,420

5,351

8,714

9,386

 

 

 

 

 

 

 

 

Revenue/AUME (excl. perf fees) bps

 

 

5.1

4.9

4.9

4.8

5.6

5.9

Operating margin (%)

 

 

30.5

31.5

29.9

24.1

31.3

29.4

 

 

 

 

 

 

 

 

Average Number of Shares Outstanding (m)

 

 

206.5

198.1

197.1

196.2

198.0

196.8

Basic EPS (p)

 

 

3.03

3.27

3.26

2.75

4.56

4.95

EPS - diluted (p)

 

 

2.98

3.25

3.26

2.73

4.40

4.77

Dividend per share (p)

 

 

2.30

2.30

2.30

2.30

3.80

4.40

Special dividend per share (p)

 

 

0.50

0.69

0.41

0.45

0.30

0.20

Total dividend (p)

 

 

2.80

2.99

2.71

2.75

4.10

4.60

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

Non-current assets

 

 

2,339

2,161

4,868

5,153

4,724

4,274

Intangible Assets

 

 

228

288

470

420

370

320

Tangible Assets

 

 

910

761

751

683

473

268

Investments

 

 

1,115

1,112

2,472

3,046

3,178

3,178

Other

 

 

86

0

1,175

1,004

703

508

Current Assets

 

 

29,737

31,427

31,149

28,045

27,313

27,736

Debtors

 

 

6,775

7,562

8,704

8,006

10,180

10,946

Cash

 

 

12,498

12,966

14,294

6,847

11,258

10,915

Money market instruments

 

 

10,198

10,735

7,958

12,932

5,875

5,875

Other

 

 

266

164

193

260

0

0

Current liabilities

 

 

(5,525)

(6,158)

(6,955)

(5,992)

(6,093)

(6,239)

Creditors

 

 

(2,630)

(2,736)

(3,009)

(3,426)

(4,537)

(4,878)

Financial liabilities

 

 

(2,467)

(2,621)

(2,191)

(1,696)

0

0

Other

 

 

(428)

(801)

(1,755)

(870)

(1,556)

(1,361)

Non-current liabilities

 

 

0

(29)

(901)

(407)

(77)

(77)

 

 

 

 

 

 

 

 

Net Assets

 

 

26,551

27,401

28,161

26,799

25,867

25,694

Minority interests

 

 

0

60

132

0

0

0

Net assets attributable to ordinary shareholders

 

 

26,551

27,341

28,029

26,799

25,867

25,694

 

 

 

 

 

 

 

 

No of shares at year end

 

 

199.1

199.1

199.1

199.1

199.1

199.1

NAV per share p

 

 

13.3

13.7

14.1

13.5

13.0

12.9

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

Operating Cash Flow

 

 

2,746

7,026

6,543

6,798

10,489

9,691

Capex

 

 

(236)

(72)

(243)

(230)

(140)

(145)

Cash flow from other investing activities

 

 

7,899

(561)

1,513

(6,210)

5,074

(134)

Dividends

 

 

(6,810)

(5,517)

(5,888)

(5,290)

(6,672)

(8,559)

Other financing activities

 

 

(10,367)

(613)

(943)

(2,368)

(4,378)

(1,195)

Other

 

 

146

205

346

(147)

38

0

Net Cash Flow

 

 

(6,622)

468

1,328

(7,447)

4,411

(342)

Opening cash/(net debt)

 

 

19,120

12,498

12,966

14,294

6,847

11,258

Closing net (debt)/cash

 

 

12,498

12,966

14,294

6,847

11,258

10,915

Closing net (debt)/cash inc money market instruments

 

22,696

23,701

22,252

19,779

17,133

16,790

 

 

 

 

 

 

 

 

AUME ($bn)

 

 

 

 

 

 

 

Opening

 

 

58.2

62.2

57.3

58.6

80.1

83.1

Net new money flows

 

 

(1.2)

(4.5)

4.6

9.7

2.4

3.9

Market/other

 

 

5.2

(0.4)

(3.3)

11.8

0.6

0.9

Closing

 

 

62.2

57.3

58.6

80.1

83.1

87.9

Source: Record accounts, Edison Investment Research


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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Research: Healthcare

Ergomed — Healthy fundamentals for 2022

Ergomed’s FY21 results showed that adjusted EBITDA of £25.4m was ahead of our estimate of £24.0m and consensus of £23.4m. A strong order book (£239.7m, up 24.2% y-o-y), continued overall business growth and a rapidly improving balance sheet position Ergomed for another solid year of growth. Ergomed recently acquired ADAMAS Consulting Group, which we have now incorporated in our model. A UK-based quality assurance services provider, ADAMAS will diversify revenue sources (its offerings do not overlap with Ergomed’s). According to management, the acquisition should be immediately accretive to earnings. We have raised our valuation to £777m or 1,577p/share (versus 1,536p/share previously).

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