Record — Positive outlook for FY24

Record (LSE: REC)

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Research: Financials

Record — Positive outlook for FY24

Record continues to deliver on its diversification and modernisation strategy, reporting FY23 revenues of £44.7m, up 27% y-o-y. Excluding exceptionally strong performance fees of £5.8m, revenues grew by a solid 12% with all areas contributing. Additionally, in the Q124 trading update, Record earned performance fees of £0.5m, implying a run rate above our forecast for FY24. During Q124, net outflows of $2.5bn were recorded, predominantly in passive hedging. Our estimates are broadly unchanged since the passive hedging product is a lower fee earner. The strong pipeline of opportunities in Asset Management implies a material contribution to operating profit in FY24 and beyond. We introduce FY25 revenue and diluted EPS expectations of £52.0m and 6.97p, respectively, conservatively factoring in no major new asset management wins in FY25.

Written by

Robert Murphy

Managing Director, Financials and Investment Trusts

Record_resized

Financials

Record

Positive outlook for FY24

FY23 and Q124 results

Financial services

25 July 2023

Price

84.50p

Market cap

£168m

Net cash and money market instruments (£m) at end March 2023

14.5

Shares in issue

199.1m

Free float

37.2%

Code

REC

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.1)

0.4

20.7

Rel (local)

(8.1)

3.0

16.1

52-week high/low

98p

66p

Business description

Record is a specialist independent asset, 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

AGM

27 July 2023

Q224 trading update

20 October 2023

Analysts

Rob Murphy

+44 (0)20 3077 5700

Armando Hoxha

+44 (0)20 3077 5700

Record is a research client of Edison Investment Research Limited

Record continues to deliver on its diversification and modernisation strategy, reporting FY23 revenues of £44.7m, up 27% y-o-y. Excluding exceptionally strong performance fees of £5.8m, revenues grew by a solid 12% with all areas contributing. Additionally, in the Q124 trading update, Record earned performance fees of £0.5m, implying a run rate above our forecast for FY24. During Q124, net outflows of $2.5bn were recorded, predominantly in passive hedging. Our estimates are broadly unchanged since the passive hedging product is a lower fee earner. The strong pipeline of opportunities in Asset Management implies a material contribution to operating profit in FY24 and beyond. We introduce FY25 revenue and diluted EPS expectations of £52.0m and 6.97p, respectively, conservatively factoring in no major new asset management wins in FY25.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS**
(p)

P/E
(x)

Yield
(%)

03/22

35.2

10.9

4.37

3.60

19.3

4.3

03/23

44.7

14.6

5.81

4.50

14.6

5.3

03/24e

45.6

14.7

5.67

4.40

14.9

5.2

03/25e

52.0

18.0

6.97

5.40

12.1

6.4

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

Positive FY23 despite inflationary headwinds

FY23 revenue of £44.7m was in line with our expectations and headline operating margin increased slightly to 32% compared to 31% in FY22. However, excluding performance fees, the operating margin slipped from 30.3% to 27.4% as inflation affected personnel costs during a time of increased IT investment. Net income rose 31% y-o-y to £11.3m but was 5.4% below our estimates, mostly due to a higher tax rate of 22% versus 19% expected. Diluted EPS rose from 4.37p to 5.81p. In accordance with the shareholder-friendly dividend policy, the ordinary dividend jumped from 3.6p to 4.5p – higher than our estimate of 4.10p – while a special dividend of 0.68p took the total dividend for the year to 5.18p versus 4.52p.

Background and outlook

UK inflation remains sticky despite interest rates now at 5%. Consequently, Record is likely to face a more challenging cost environment. Notwithstanding this, core revenue momentum is strong and management remains focused on striving towards its ambitious FY25 targets: £60m in revenue, operating margin of c 40% and a dividend payout ratio of 70–90%. Positively, the newly obtained BaFin licence and opening of the Luxembourg Fund Umbrella are expected to result in new revenue sources.

Valuation: Trading at a premium to peers

Record trades at a significant premium to our selected list of comparable UK asset managers (see Exhibit 7). Year to date, Record’s share price has performed reasonably better than its comparators, driven by AUME inflows. On our FY25 estimates, the group trades at a P/E ratio of 12.1x with a yield of 6.4% (excluding the special dividend).

Record in numbers

We update our profile in numbers including assets under management equivalent (AUME), fee income, clients and asset class exposure (Exhibit 1). This includes our estimates of average fee rates by strategy and hedging fee exposure by underlying asset class. We highlight the following points:

Hedging services in total account for 90% of AUME and 65% of management fees, reflecting the lower fees that apply to passive hedging. The growth in dynamic hedging and currency for return since FY19 has reduced the proportion of management fees accounted for by passive hedging from 52% to 34% in FY23.

Since 2018, AUME has increased from $62.2bn to $87.7bn, a compound annual growth rate of 7.1%. The average fee rate has been maintained at 5.6bp.

Measured by AUME, 61% of clients have been with Record for over six years. However, with the expansion and diverse product offering of the business, it has exhibited a healthy inflow of new clients, with 46% joining within the past three years – measured by number. Typically, new clients will start off with a small amount of AUME but will grow this over time.

Geographically, Switzerland accounts for 38% of revenues, followed by the United States with 32%.

We estimate that 52% of hedging mandate fees relate to underlying equity assets, 16% to fixed income and 32% to other assets.

Exhibit 1: Profile in numbers (FY23 except where indicated)

Analysis by strategy

AUME (%)

Management fees* (%) FY19

FY23

Est. average fee rate (bp)**

Dynamic hedging

16.8

20.6

31.4

12.4

Passive hedging

72.7

52.0

33.7

2.5

Currency for return

4.4

8.0

17.7

18.2

Multi-product

5.9

19.4

17.2

17.9

Cash

0.1

N/A

N/A

5.6

Total

100.0

100.0

100.0

Value

$87.7bn

£22.3m

£38.3m

Client analysis

Concentration

% AUME

% fees

Longevity (years)

% clients

% AUME

Top 10

57

72

0-1

23

10

Next 10

14

14

1–3

23

18

Balance

30

14

3–6

23

11

6–10

12

24

>10

19

37

100

100

100

100

Geographical analysis and AUME progression

By country

% revenue

By invoice currency

% revenue

AUME progression

($bn)

US

32

US dollar

52

2018

62.2

Switzerland

38

Swiss franc

35

2019

57.3

Europe (rest)

21

Euro

9

2020

58.6

UK

6

Sterling

3

2021

80.1

Other

4

Other

2

2022

83.1

100

100

2023

87.7

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

Dynamic

Passive

Estimated % of hedging fees

Equity

84

23

52

Fixed income

0

31

16

Other

16

46

32

100

100

100

Source: Record, Edison Investment Research. Note: *Management fees 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.

FY23 and Q124 results analysis

AUME and management fees

As reported in the Q423 trading update, positive net inflows of $9.1bn were dampened by market moves and foreign exchange movements, resulting in an overall rise in AUME of $4.6bn to $87.7bn, up 5.5% and 19.6% in US dollar and sterling terms respectively.

Average AUME (which drives management fees) rose by a respectable 12% in sterling terms. In US dollar terms, average AUME fell by 1%. Record uses US dollars to report AUME figures, but it should be noted that only 24% of AUME is denoted in US dollars. Therefore, to avoid misrepresenting growth in AUME when the US dollar is strong against major currencies, it is more accurate to use the sterling figure to observe underlying growth.

Exhibit 2: FY23 AUME movements and management fees

Year end March

AUME movements ($bn)

End period AUME ($bn)

Average AUME (£bn)

Management fees (£000)

FY22

FY23

FY22

FY23

% change

FY22

FY23

% change

FY22

FY23

% change

Net inflow

Dynamic hedging

1.4

4.2

10.6

14.7

39%

7.6

9.7

27%

10,020

12,013

20%

Passive hedging

1.1

4.9

62.8

63.8

2%

46.3

51.3

11%

11,768

12,912

10%

Currency for return

0.4

(0.6)

5.0

3.9

(22%)

3.5

3.7

5%

5,513

6,789

23%

Multi-product

(0.5)

0.6

4.5

5.2

16%

3.7

3.7

(1%)

6,782

6,584

(3%)

Cash and futures

0.0

0.0

0.2

0.1

(50%)

0.1

0.1

(8%)

Total

2.4

9.1

83.1

87.7

6%

61.3

68.5

12%

34,083

38,298

12%

Markets

0.3

(3.8)

FX and scaling

0.3

(0.7)

Total change

3.0

4.6

Opening AUME

80.1

83.1

Closing AUME

83.1

87.7

Source: Record, Edison Investment Research

In Exhibit 3, we outline the changes in AUME following the Q124 update. The update reported outflows of $2.5bn, primarily driven by $3bn in outflows related to passive hedging. However, these outflows were partially offset by FX and scaling mandates, resulting in a net negative change to $1.3bn, bringing AUME to a total of $86.4bn.

We observe a consistent trend of outflows in passive hedging since Q323. Importantly, we note that such outflows do not necessarily indicate that Record is losing business, but we can assume that some AUME is being reallocated into other products.

The net $2.5bn outflow is only 2.9% of opening AUME ($87.7bn). Considering that passive hedging fees are relatively small, outflows have a minimal impact on final revenue. As Exhibit 5 shows, our new revenue estimates are broadly flat compared with our previous assumptions.

Exhibit 3: Q124 AUME movements

AUME ($bn)

Net flows ($bn)

Q422

Q123

Q423

Q124

Q123

Q223

Q323

Q423

Q124

Dynamic hedging

10.6

10.6

14.7

15.3

1.5

0.2

1.8

0.7

0.3

Passive hedging

62.8

58.2

63.8

61.6

0.7

6.5

(1.3)

(1.0)

(3.0)

Currency for return

5.0

4.5

3.9

4.1

(0.3)

0

0.3

(0.6)

0.1

Multi-product

4.5

4.4

5.2

5.3

0.1

(0.1)

(0.2)

0.8

0.1

Cash and futures

0.2

0.2

0.1

0.1

0.0

0.0

0.0

0.0

0.0

Total

83.1

77.9

87.7

86.4

2.0

6.6

0.6

(0.1)

(2.5)

Other movements

Markets

(3.9)

(0.9)

0.3

0.7

FX and scaling

(3.3)

(2.8)

4.3

1.1

1.2

Total change

(5.2)

2.9

5.2

1.7

(1.3)

Opening AUME

83.1

77.9

80.8

86

87.7

Closing AUME

77.9

80.8

86.0

87.7

86.4

% AUME change

3.7%

6.4%

2.0%

(1.5%)

Source: Record, Edison Investment Research

Key points from the income statement for FY23

Exhibit 4 shows the P&L account. We draw out key line items, with all comparisons made against FY22 unless stated otherwise:

Record reported £38.3m in management fees, up from £34.1m, as the group benefited from a $4.6bn addition to AUME in the year. Passive hedging, which has historically been a low-fee, low-growth strategy, saw revenues grow 9.7% as margin pressure began to ease and, increasingly, international managers are seeing value in outsourcing their hedging operations to Record. Dynamic hedging generated 20% more in revenue as strong inflows of $4.2bn were combined with the full year realisation of the $0.8bn net inflows recorded in FY22. Management fees for currency for return increased by 23% – despite net outflows of $0.6bn – to £6.8m as Record realised the full year impact of the EM Sustainable Finance Fund (EMSF) launched in June 2021 and achieved a higher average management fee of 18.2bp versus 15.5bp. The net outflows of $0.6bn can be expected to partially offset the gains made in FY23.

Average fee rates in FY23 remained flat at 5.6bp but the fee mix changed slightly: a drop in dynamic hedging by 80bp, an increase of 270bp to currency for return and a decrease of 40bp in multi-product (for comparison, see Exhibit 1 in our FY22 results note).

The differing pace of global central bank interest rate policy has allowed Record to capitalise on interest rate differentials, which were largely absent in a zero-rate world. Consequently, it earned performance fees of £5.8m in the year, an above-normal amount considering the 2015–22 average of £0.69m. Supported by performance fees, total revenue increased 27.4% to £44.7m. We highlight that Record does not consider performance fees as part of its plan to reach £60m in revenue by FY25. Stripping out performance fees, Record generated revenues of £38.9m or a 12% y-o-y increase. This is far above the 2012–22 CAGR of 5.4%.

Administrative expenses rose 26% to £29.9m, mainly attributable to increasing staff costs as Record employed more personnel. Average costs per employee, including directors, stands at £231,955 versus £200,963. Seeking to limit operational gearing in the long term, the group paid a one-off £3,000 to employees (excluding executive directors and board members) during the year to help with the cost-of-living crisis. The group has decided to offer an additional £2,000 to its employees during FY24. Record increased its spending on IT by 51% to £3.6m as it continues to focus on expanding operational efficiency and technological sophistication. IT spending represented 12% of administrative expenses (FY22: 10%).

Headline operating profit margin grew 1.6pp to 32.4% (FY21: 30.8%) due to exceptionally strong performance fees. The core margin excluding performance fees fell to 27.4% against 30.3% in FY22 as a result of cost inflation. We expect that the core operating margin will trend upwards through the growth of higher-margin products and the benefit of scale efficiencies via the integration of technology. Record aims to generate an operating margin of c 40% by FY25.

Profit before tax increased 35% to £14.6m, driven by robust year-on-year revenues. Notably, the contribution from performances fees virtually mitigated the increase in costs incurred.

An ordinary dividend of 4.50p has been declared for the full year, representing a payout ratio of 76% and an uplift of 25% from the FY22 dividend of 3.60p. Record has a progressive dividend policy and targets a payout ratio of 70–90% of basic EPS in the form of ordinary dividends. As the business is highly cash generative, there is usually ample room to pay additional special dividends while still investing capital for growth. In line with its policy of returning excess capital to shareholders, a special dividend of 0.68p has been declared for FY23, bringing total dividends declared to 5.18p (FY22: 4.52p), a total payout of 87% (FY22: 100%). Special dividends are subject to capital and liquidity requirements like working capital needs and expense buffers, and can be expected to be variable.

Exhibit 4: FY23 P&L analysis

£000s

FY20

FY21

FY22

FY23

% change vs FY22

Dynamic hedging

3,995

5,623

10,020

12,013

19.9%

Passive hedging

12,026

11,377

11,768

12,912

9.7%

Currency for return

1,982

2,005

5,513

6,789

23.1%

Multi-product

5,130

5,873

6,782

6,584

(2.9%)

Management fees

23,133

24,878

34,083

38,298

12.4%

Performance fees

1,819

81

499

5,805

1,063.3%

Other investment services income

611

453

570

586

2.8%

Total revenue

25,563

25,412

35,152

44,689

27.1%

Cost of sales

(255)

(399)

(219)

(370)

(83.1%)

Gross profit

25,308

25,013

34,933

44,652

27.8%

Administrative expenses

(17,741)

(18,934)

(23,726)

(29,888)

26.0%

Other income/expense

82

41

(372)

(293)

(21.2%)

Operating profit

7,649

6,120

10,835

14,471

33.6%

Net finance income

88

33

21

127

504.8%

Profit before tax

7,737

6,153

10,856

14,598

34.5%

Taxation

(1,365)

(802)

(2,225)

(3,259)

46.5%

Profit after tax

6,372

5,351

8,631

11,339

31.4%

Basic EPS (p)

3.26

2.75

4.52

5.95

31.8%

Diluted EPS (p)

3.26

2.73

4.37

5.81

32.7%

DPS (p)

2.71

2.75

4.52

5.18

14.6%

Operating margin

29.9%

24.1%

30.8%

32.4%

Operating margin excluding performance fees

27.0%

23.9%

30.3%

27.4%

Tax rate

18%

13%

20%

22%

Source: Record, Edison Investment Research

Update on three-pillar strategy

Record has a three-pillar strategy: modernisation, diversification and succession. These pillars form the blueprint for its ambitious medium-term targets in FY25: £60m in revenue, operating margins of c 40% (subject to falling inflation and excluding performance fees) and an ordinary dividend payout ratio of 70–90% of basic EPS. We examine progress on the strategy below.

Modernisation

Record continues to allocate capital towards improving IT infrastructure, spending £3.6m in FY23 or 12% of total operating expenses (10% in FY22). The enhanced IT capability is enabling Record to extend its commercial capabilities, remain competitive and enhance productivity and efficiency within the company. Following the year-end, the group launched R-platform, a client and business-facing portal focused on the automation of FX trade execution. The group intends to use the technology to provide an automated passive hedging service. Ultimately, this should enhance the client reporting experience via better data visualisation, while simultaneously improving operational costs and efficiency associated with trading activities. By upgrading and implementing new software, Record aims to scale efficiently and improve client service in the process. As we highlighted in a previous note, the group has already employed several tools: Microsoft Azure, Microsoft Power BI and Xceptor. These platforms serve the business to enhance security and data visualisation and enable scale.

Diversification

For 40 years Record served solely as a specialist currency overlay manager, which had become a profitable but low-growth business with ongoing fee compression. With the diversification strategy now being put into action, the group is expecting to generate significant business through its Record Asset Management (RAM) subsidiary, which is authorised and regulated in Germany by BaFin. The subsidiary is run by the CEO and group head of sales, Jan Witte, and focuses predominately on alternative assets. RAM has also opened its Luxembourg RAIF Fund Umbrella. Through the formation of partnerships with other asset managers, RAM is able to take on the role of structurer, distributor, portfolio manager and currency hedger at significantly enhanced revenue margins compared to traditional currency hedging businesses. Although there has recently been a delay in the launch of some of these new products, management has emphasised the very strong pipeline of opportunities in FY24. For instance, the group is close to launching an infrastructure fund, which is likely to be of significant size, where it will assume the role of asset manager. This is expected to become live during FY24. Record will further use its partnerships to enhance its offering, exampled by the Protected Equities product it created for a multi-family office (expected to be released in Q224).

Another subsidiary adding to both the diversification and modernisation pillars is Record Digital Asset Ventures (RDAV) run by CEO and group CTO Rebecca Venis. RDAV has ring-fenced c £2m in capital to invest in early-stage financial technology companies and digital assets. By the end of FY23, 75% in capital has been committed in the form of direct investments and investment funds investing in start-up and early-stage technology and digital asset companies. An example of the progress made is in the partnership with Fasanara Capital, a specialist in digital lending, where Record was able to win three mandates with its unique investment objectives. Although investments made through RDAV are immaterial to Record’s bottom line, the initiative reflects its intention to become more technologically sophisticated.

Succession

Record announced in March this year that founder Neil Record will step down from the role of chairman at the July AGM, to be replaced by David Morrison, current non-executive director. In addition to serving on the board, David has a strong background in venture and growth businesses. Neil Record will continue to be a significant shareholder.

Record’s operational structure also changed during FY23 to facilitate the three-pillar strategy. Under the parent company Record Financial Group, Record Currency Management (RCM), Record Group Services, RDAV and RAM operate as subsidiaries. Jan Witte, group global head of sales, has been promoted to CEO of RCM from 1 May 2023 and this has enabled group CEO Leslie Hill to put increased focus on delivering group targets.

Similarly, Rebecca Venis, group CTO and incumbent CEO of RDAV, is responsible for modernising the group’s IT infrastructure alongside leading Record’s digital venture business. The new business structure serves to provide autonomy to each division, while adhering to the group’s goals. Management continues to place emphasis on supporting the professional growth and well-being of its employees. Following the restructuring, staff retention has returned to 90% after sliding to 74% in FY22.

Outlook and estimates: Trending upwards

In this section we reflect on the FY23 results, adjust our FY24 estimates, introduce our FY25 estimates and construct a hypothetical scenario whereby Record achieves its FY25 targets.

Overall results for FY23 were close to our estimates, with the tax line explaining most of the difference. Revenues for FY23 were reported largely in line at £44.7m. PBT came in 1% lower than our estimate due to slightly higher ‘other expenses’ than originally forecast. The final tax rate was 22% versus our assumed 19%, meaning reported net income was 5% below our forecast at £11.3m. Consequently, diluted EPS was also 5% below our estimates. On the other hand, the ordinary dividend per share was 4.50p, 10% higher than our forecast of 4.10p.

Based on the outflows in passive hedging revealed in the Q124 trading update, we have lowered our FY24 AUME forecast from $92.6bn to $91.7bn. This is still a positive AUME movement, implying 4.6% growth from end-FY23 AUME of $87.7bn. This is based on forecast net inflows of $3.9bn. Within the $3.9bn net flow figure, we factor in $1.65bn of new flows from RAM based on the performance of the EMSF and comments on the potential near-term pipeline during the earnings call. We have maintained an annualised management fee of 6.1bp. We assume marginal increases to fee rates in currency for return and multi-product while passive hedging rates stay flat and dynamic hedging drops a touch versus FY23. Despite the outflow observed in Q124 in passive hedging, it has minimal impact on our forecasts due to the low management fees it generates. Subsequently, our revenue estimate, which includes performance fees, has increased marginally from £45.5m to £45.6m. As inflation appears to be quite sticky in the UK, we have increased our previous estimate of operating expenses by 2% to £31.4m. Thus, our PBT assumption has fallen marginally by 2% to £14.7m, compared to our previous estimates of £15m. On a diluted EPS estimate of 5.67p, we expect Record to declare an ordinary dividend of 4.40p, implying a dividend payout ratio of 76% on basic EPS of 5.76p.

We highlight that FY23 revenues were boosted by performance fees of £5.8m. In FY24 we factor in £1.5m in performance fees, which is more in line with historical averages supported by continuing interest differentials in the market. However, we note that performance fees of £0.5m in Q124 imply an annualised performance fee of £2m, above our current estimate. Our estimated operating margin for FY24 is consequently 31.1%, just over a percentage point lower than 32.4% in FY23. However, we expect the underlying operating margin excluding performance fees to be 29.9% in FY24, better than 27.4% in FY23 as a result of higher-margin new products and positive operating leverage.

Introducing our FY25 estimates, we assume a further 5.2% growth in AUME to $96.5bn driven by $4.8bn in net inflows. We estimate annualised management fees of 6.64bp, with fee rate increases mainly derived from currency for return and multi-product. Passive hedging remains flat with FY24, while dynamic hedging fees drop slightly to 12.2bp. In FY25, we have conservatively assumed no flows or additions to AUME in the Asset Management business as visibility on exact timings of new product launches is low. On this assumption, we calculate revenue of £52.0m, which includes £1m in performance fees and £0.6m in other investment income. We forecast administrative expenses growing by 10% from FY24 as the company continues its expansion and incurs costs in the form of IT and increased staff costs. We forecast operating income of £17.5m, representing a 33.6% operating margin (on an underlying revenue basis) and 33.0% margin excluding performance fees. In line with FY24, we maintain a tax rate of 25%.

Record maintains its FY25 target to achieve £60m in revenue, with an operating margin of c 40% (subject to inflation) and maintaining a dividend payout ratio of 70–90% by FY25. We regard this target as achievable but ambitious given the impact of inflation on costs and the uncertainty around the timing of new product launches, which will be lumpy. However, should additional product launches come to market more quickly, the FY25 targets become more easily achievable due to the pipeline effect on revenues. For example, the group is currently developing an infrastructure fund where it will assume the position of asset manager. We would expect the infrastructure fund to be relatively large (similar to the EMSF) and secure attractive long-term fee rates due to the nature of the underlying asset. We highlight that some of these new funds have been delayed and are now expected to be more material contributors to revenue later in FY24.

In our model, we have conservatively assumed zero inflows into the Asset Management segment in FY25 following $1.65bn of assumed inflows assumed for FY24. The FY24 inflows relate to the $1bn EMSF, which is performing very well with further inflows expected from the potential infrastructure mandate and other asset management initiatives.

Exhibit 5: Estimate changes and introducing FY25 estimates

£m

FY23

FY24

FY25

Old

Actual

Change

Old

New

Change

New

Revenue

44.8

44.7

0%

45.5

45.6

0%

52.0

PBT

14.8

14.6

(1%)

15.0

14.7

(2%)

18.0

EPS* (p)

6.10

5.81

(5%)

5.72

5.67

(1%)

6.97

DPS (p)

4.10

4.50

10%

4.20

4.40

5%

5.40

Source: Record, Edison Investment Research. Note: *EPS is diluted.

As explained above, our FY25 forecasts for revenues and operating margin are below Record’s targets. In Exhibit 6 below we model a scenario for Record to achieve its targets.

According to our current revenue assumptions, we would need to see an increase in pre-performance fee revenues of £9m in order to achieve the target £60m. To bridge this gap, we focus on modifying our net inflow assumptions into the Asset Management business. As it stands, between Q224 and end FY25, we assume average AUME of $1.1bn in the RAM business. To meet the £60m target, average AUME would have to increase to $3.0bn during the period, all other things being equal.

Our implied operating margin, excluding performance fees, is 33%, falling short of the c 40% target. To reach the 40% margin, operating costs would have to be limited to £36m, or 5% above our current estimates, keeping our investment income assumptions constant. The cost increase is modest considering the extra AUME Record would have to facilitate to achieve the revenue target. In our opinion, it would be difficult to envision a scenario where Record onboarded a sizeable increase in AUME while only slightly increasing its costs.

Exhibit 6: Sensitivity table

£m unless otherwise stated

Current FY25 estimates

FY25 target scenario

Revenue excluding performance fees

50,968

60,000

Operating costs

(34,403)

(36,000)

Operating profit

17,485

24,000

Average AUME ($bn)

1.1

3.0

Average management fee rate (bp)

30

30

Operating margin excluding performance fees

33.0%

40.0%

Source: Edison Investment Research

Valuation

We update our comparative valuation table in Exhibit 7. Year to date, Record shares are down by 6.8% compared to our chosen asset manager peer group, which is down an average of 10.2%. Although Record is not a traditional asset manager, its earnings growth relies on being able to grow AUME and, in contrast to the peer group which is suffering net outflows, Record has generated net inflows of 11% of opening AUME in FY23. Additionally, we expect AUME to reach $91.7bn in FY24, a 6% increase from the opening AUME of $86.4bn in Q124.The company is also on the verge of a step change in growth and profitability from its Asset Management initiatives. As a result, Record currently trades at a 18% premium to the average calendarized P/E and 66% premium to the peer group EV/EBITDA multiple. On our FY25 estimates, Record trades at a P/E ratio of 12.1x with a yield of 6.4% excluding special dividends. Including the special dividend, Record has a prospective yield of 7.6%.

Exhibit 7: Comparing valuation with UK fund managers

Price
(p)

Market cap
(£m)

P/E
2023e (x)

EV/EBITDA
2023e (x)

Dividend yield
(%)

Ashmore

203

1,449

15.2

6.8

8.3

City of London Investment Group

415

210

N/A

N/A

8.0

Impax Asset Management

581

772

15.4

10.5

4.8

Jupiter

105

572

9.0

2.3

8.0

Liontrust

664

432

7.4

3.6

10.9

Man Group

233

3,598

13.0

8.7

5.2

Polar Capital

486

493

13.0

2.9

9.5

Schroders

459

7,405

14.4

11.0

4.6

Average

12.5

6.5

7.4

Record

84.50

168

14.8

10.8

5.3

Source: Refinitiv, Edison Investment Research. Note: P/E and EV/EBITDA are on a calendar-year basis. Record’s (FY23) dividend yield excludes the special dividend. Priced at 25 July 2023.

Exhibit 8: Financial summary

Year end 31 March, £'000s

 

 

2019

2020

2021

2022

2023

2024e

2025e

PROFIT & LOSS

 

 

 

 

 

 

 

 

 

Revenue

 

 

24,973

25,563

25,412

35,152

44,689

45,578

51,968

Operating expenses

 

 

(17,089)

(17,996)

(19,333)

(23,945)

(29,925)

(31,365)

(34,443)

Other income/(expense)

 

 

(8)

82

41

(372)

(293)

(40)

(40)

Operating profit (before amort. and except.)

 

 

7,876

7,649

6,120

10,835

14,471

14,173

17,485

Finance income

 

 

113

88

33

21

127

500

550

Profit before tax

 

 

7,989

7,737

6,153

10,856

14,598

14,673

18,035

Taxation

(1,559)

(1,365)

(802)

(2,225)

(3,259)

(3,668)

(4,509)

Minority interests

 

 

0

48

0

0

0

0

0

Attributable profit

 

 

6,430

6,420

5,351

8,631

11,339

11,004

13,526

Revenue/AUME (excluding perf fees) bp

 

 

4.9

4.9

4.8

5.6

5.6

6.1

6.6

Operating margin (%)

 

 

31.5

29.9

24.1

30.8

32.4

31.1

33.6

Average number of shares outstanding (m)

 

 

198.1

197.1

196.2

197.3

195.3

194.2

194.2

Basic EPS (p)

 

 

3.27

3.26

2.75

4.52

5.95

5.76

7.08

EPS - diluted (p)

 

 

3.25

3.26

2.73

4.37

5.81

5.67

6.97

Dividend per share (p)

 

 

2.30

2.30

2.30

3.60

4.50

4.40

5.40

Special dividend per share (p)

 

 

0.69

0.41

0.45

0.92

0.68

0.80

1.00

Total dividend (p)

 

 

2.99

2.71

2.75

4.52

5.18

5.20

6.40

BALANCE SHEET

 

 

 

 

 

 

 

 

 

Non-current assets

 

 

2,161

4,868

5,153

6,084

7,813

7,918

8,048

Intangible Assets

 

 

288

470

420

562

1,390

1,850

2,310

Tangible Assets

 

 

761

751

683

401

377

352

352

Investments

 

 

1,112

2,472

3,046

3,447

4,901

4,901

4,901

Other

 

 

0

1,175

1,004

1,674

1,145

815

485

Current assets

 

 

31,427

31,149

28,045

27,141

28,924

28,707

30,644

Debtors

 

 

7,562

8,704

8,006

9,883

14,373

15,145

16,861

Cash

 

 

12,966

14,294

6,847

3,345

9,948

8,959

9,180

Money market instruments

 

 

10,735

7,958

12,932

13,913

4,549

4,549

4,549

Other

 

 

164

193

260

0

54

54

54

Current liabilities

 

 

(6,158)

(6,955)

(5,992)

(6,210)

(7,630)

(7,623)

(8,011)

Creditors

 

 

(2,736)

(3,009)

(3,426)

(4,721)

(6,011)

(6,334)

(7,052)

Financial liabilities

 

 

(2,621)

(2,191)

(1,696)

0

0

0

0

Other

 

 

(801)

(1,755)

(870)

(1,489)

(1,619)

(1,289)

(959)

Non-current liabilities

 

 

(29)

(901)

(407)

(1,085)

(816)

(816)

(816)

Net assets

 

 

27,401

28,161

26,799

25,930

28,291

28,186

30,236

Minority interests

 

 

60

132

0

0

0

0

0

Net assets attributable to ordinary shareholders

 

27,341

28,029

26,799

25,930

28,291

28,186

29,866

No of shares at year end

 

 

199.1

199.1

199.1

199.1

199.1

199.1

199.1

NAV per share p

 

 

13.7

14.1

13.5

13.0

14.2

14.2

15.0

CASH FLOW

 

 

 

 

 

 

 

 

 

Operating cash flow

 

 

7,026

6,543

6,798

11,355

12,263

10,775

12,698

Capex

 

 

(72)

(243)

(230)

(75)

(272)

(225)

(250)

Cash flow from other investing activities

 

 

(561)

1,513

(6,210)

(3,392)

7,498

(100)

(50)

Dividends

 

 

(5,517)

(5,888)

(5,290)

(6,512)

(9,095)

(10,610)

(11,346)

Other financing activities

 

 

(613)

(943)

(2,368)

(5,019)

(3,942)

(830)

(830)

Other

 

 

205

346

(147)

141

151

0

0

Net cash flow

 

 

468

1,328

(7,447)

(3,502)

6,603

(989)

221

Opening cash/(net debt)

 

 

12,498

12,966

14,294

6,847

3,345

9,948

8,959

Closing net (debt)/cash

 

 

12,966

14,294

6,847

3,345

9,948

8,959

9,180

Closing net (debt)/cash incl. money market instruments

23,701

22,252

19,779

17,258

14,497

13,508

13,729

AUME ($bn)

 

 

 

 

 

 

 

 

 

Opening

 

 

62.2

57.3

58.6

80.1

83.1

87.7

91.7

Net new money flows

 

 

(4.5)

4.6

9.7

2.4

9.1

2.1

3.8

Market/other

 

 

(0.4)

(3.3)

11.8

0.6

(4.5)

1.9

1.0

Closing

 

 

57.3

58.6

80.1

83.1

87.7

91.7

96.5

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 £60,000 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 2023 Edison Investment Research Limited (Edison).

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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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 £60,000 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 2023 Edison Investment Research Limited (Edison).

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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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