Currency in GBP
Last close As at 03/02/2023
GBP7.55
▲ −2.00 (−0.26%)
Market capitalisation
GBP287m
Research: Financials
Gresham House (GHE) has given a further positive trading update supported by its exposure to the management of real assets and capability in sustainable investment. This profile also contributes significant opportunities for long-term growth across a range of investment strategies. M&A may augment this but only if management identifies targets that could meet or exceed the target 20% ROCE.
Gresham House |
Resilient near-term and set for secular growth |
Capital markets day |
Financial services |
21 November 2022 |
Share price performance
Business description
Next events
Analyst
Gresham House is a research client of Edison Investment Research Limited |
Gresham House (GHE) has given a further positive trading update supported by its exposure to the management of real assets and capability in sustainable investment. This profile also contributes significant opportunities for long-term growth across a range of investment strategies. M&A may augment this but only if management identifies targets that could meet or exceed the target 20% ROCE.
Year end |
Revenue |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/21 |
70.4 |
20.2 |
49.3 |
10.0 |
15.6 |
1.3 |
12/22e |
76.6 |
25.9 |
52.1 |
13.5 |
14.7 |
1.8 |
12/23e |
84.7 |
31.0 |
58.6 |
17.0 |
13.1 |
2.2 |
12/24e |
95.6 |
37.1 |
67.1 |
24.0 |
11.4 |
3.1 |
Note: *PBT and EPS (diluted) are adjusted, excluding performance fees, realised gains, amortisation and depreciation, exceptional items and share-based payments related to acquisitions.
Trading update signals the group is on track
In combination with its capital markets day on 9 November, GHE issued a positive trading update for the nine-month period to end September. Assets under management (AUM) stood at £7.5bn, compared with £7.3bn at the half year, and were up 15% since the year end. FY22 adjusted operating profit is expected to be in line with market expectations (range £25.3m to £26.5m, with our estimate unchanged at £25.9m).
Differentiation supports resilience and outlook
In its second annual capital markets day, the group set out how it continues to pursue its strategy of profitable growth in alternative asset management. Sustainability is embedded at Gresham House and its differentiated capabilities mean that it is in a good position to continue growth against a more difficult macroeconomic background. On a longer view, the organic structural growth opportunities remain in place and a disciplined approach is taken to M&A.
Valuation
In the year to date, Gresham House shares have shown greater resilience than European and North American peers on average. They trade on a prospective P/E (adjusted earnings) of 14.7x and an EV/EBITDA multiple of 9.6x, which are both lower than the averages for its peers (see Exhibit 6 for further detail).
Selected points from the capital markets day
The capital markets day presentation replays and documents can be seen here.
Quick background
Since the management buy in December 2014, led by CEO Tony Dalwood, Gresham House has developed as a specialist alternative asset manager focused on sustainable investments. Growth has mainly been organic, augmented by acquisitions that have added capabilities, AUM and opportunities for growth. As Exhibit 1 shows, since 2018, AUM has grown at a compound rate of 41% including 33% organic growth.
Exhibit 1: AUM growth from 2018 |
Source: Gresham House. Note: Organic growth comprises net fund flows and performance. |
Exhibit 2 gives an analysis of the composition of AUM and contributions to management fees and operating profit. At end September, Real Assets accounted for 77% of AUM and Strategic Equity 23%. Somewhat lower average fee rates for Real Assets meant that the contribution to management fees (in FY21) was 63% and for strategic equity 37%.
Exhibit 2: Gresham House in numbers
Analysis by strategy |
|||||||||
Category |
AUM end September 2022 |
Management fees* |
Adj. operating profit** (%) |
Fee rate*** |
|||||
Public equity |
12 |
80 |
|||||||
Private equity |
10 |
230 |
|||||||
Strategic Equity total |
23 |
37 |
42 |
162 |
|||||
Forestry |
45 |
80 |
|||||||
New energy and sustainable infrastructure |
23 |
100 |
|||||||
Real estate |
10 |
140 |
|||||||
Real Assets total |
77 |
63 |
58 |
110 |
|||||
Total |
100 |
100 |
100 |
125 |
|||||
Value |
£7,500m |
£62.2m |
£38.4m** |
||||||
Client and fund type |
|||||||||
Client type (end June 2022) |
% of AUM |
Fund type (end September 2022) |
% of AUM |
||||||
Wholesale/retail |
41 |
Listed |
31 |
||||||
Institutional/local govt pension schemes/charity |
43 |
Limited partnership |
32 |
||||||
High net worth/family office |
38 |
Segregated mandate |
26 |
||||||
Open-ended |
19 |
||||||||
100 |
100 |
Source: Gresham House, Edison Investment Research. Notes: *FY21 management fee excluding performance fees. **FY21 Operating profit for Real Assets and Strategic Equity divisions of £38.4m is before the deduction of central cost (including depreciation and amortisation) of £18.2m after which the consolidated adjusted operating profit was £20.2m. ***Fee rates for Strategic Equity, Real Assets and group totals are our own calculations based on reported revenue and the average of period-end AUM levels for FY21. Other figures are gross revenue margins indicated by company.
Differentiation
The AUM analysis above highlights the specialist nature of Gresham House’s asset management services that differentiates it from most UK-quoted asset managers; it has a strong exposure to real assets, sustainable investing and a distinctive offering within Strategic Equity (both public equity funds and private equity within VCT funds).
Resilience
These exposures have conferred resilience during a more difficult market background for asset managers this year. This is evident in the continued growth in AUM in the first nine months of the year (see Exhibit 3) and the indication that the group is on track to generate adjusted operating profits in line with market expectations.
Exhibit 3: Growth in AUM 9M22 |
Source: Gresham House |
Underlying this performance has been continued structural growth in demand for sustainable investment in the real assets managed by Gresham House together with the historically strong performance of the Strategic Equity funds.
The group’s exposure to the management of real assets provides mitigation to inflation risks, with Gresham House setting out a chart demonstrating that forestry returns, for example, show a historical correlation with inflation rates (measured over five-year periods). While higher risk-free rates have negative valuation implications, Gresham House sees the interest rate sensitivity of its investments as relatively low, reflecting gearing levels and explicit or implicit inflation linkage in areas such as Sustainable Infrastructure and New Energy.
Some investments in the Strategic Equity area are susceptible to the current economic slowdown, but diversification and the manager’s ability to provide advice and potentially further finance for private equity investments protects investor performance and the long-term prospects for these companies.
Valuation of alternative assets
Gresham House noted that it has received questions from investors about the methods used to value assets that are not traded on public markets. It intends to provide greater transparency on this subject and made the following points in its presentation.
Starting with forestry, RICS (Royal Institution of Chartered Surveyors) valuations are carried out by third-party valuers using comparable market transactions as the basis. The long-term lifecycle of forestry (40-plus years) and the ability to manage harvesting over a window of perhaps 15 years means that there is reduced sensitivity to fluctuations in timber prices during the economic cycle.
For New Energy and Sustainable Infrastructure discounted cash flow models are employed, which are externally verified. In the case of New Energy these are driven by forward power price curves and, as noted above, there is inflation linkage across the asset classes.
Real Estate RICS valuations are carried out by JLL and CBRE. Residential Secure Income REIT (more than half the £0.7bn managed in this category) benefits from 97% inflation-linked revenue.
Growth
The long-term trend towards allocation to alternative investments and sustainable funds has been maintained over many years. In the current year, even when overall fund flows have been negative, Morningstar has reported that first-half flows into sustainable funds have been more resilient than for funds as a whole.
Turning to the specific structural opportunities addressed by Gresham House’s current strategies, we have updated a table shown in our May initiation report. This shows existing capacity or AUM level and the indicated market opportunity or AUM capacity demonstrating significant organic opportunities.
Exhibit 4: Growth opportunities in existing investment strategies
Strategy |
Existing capacity/level |
Market opportunity/capacity |
New Energy battery storage |
GRID capacity 0.5GW and 0.5GW under construction |
Needed by National Grid by 2025 15GW |
Sustainable infrastructure |
c £0.8m Sep 22 AUM |
Opportunity across 6 subsectors over £1tn |
Real Estate – UK Housing |
£0.7bn Sep 22 AUM |
£10bn per annum (half shared ownership and half build to rent) |
Forestry |
£0.6bn acquired 2021 |
Over £10bn per annum forestry acquisition market |
Strategic Equity – Public |
£0.9bn Sep 22 AUM |
Capacity in existing products £2.5bn |
Strategic Equity – Private |
£0.8bn Sep 22 AUM |
Capacity in VCTs £1.5bn |
Source: Gresham House, Edison Investment Research
Acquisitions have been additive historically, with those shown below delivering a return on invested capital of between 14% and 33% over the medium term. Following acquisition, each has achieved strong AUM growth as part of Gresham House.
Exhibit 5: Acquisitions adding medium-term value
£m unless stated |
Date |
AUM at acquisition |
AUM Sep 2022 |
AUM growth |
ROIC |
Aitchesse (Forestry) |
Nov-15 |
192 |
746 |
554 |
22% |
Hazel Capital (New Energy) |
Oct-17 |
169 |
1,018 |
849 |
20% |
FIM Services (Forestry) |
May-18 |
893 |
2,934 |
2,041 |
33% |
Livingbridge (Strategic Equity) |
Nov-18 |
476 |
1,093 |
617 |
16% |
TradeRisks (Real Estate) |
Mar-20 |
184 |
307 |
123 |
14% |
Source: Gresham House. Note: Return on invested capital (ROIC) calculated from acquisition to 30 June 2022.
Looking ahead, Gresham House still expects growth to be mainly organic, augmented by acquisitions. In the near term the company notes that there has been some pick up in transactions in the sustainable investment area, but that with valuations of 15–30x EBITDA being paid it would be unlikely to participate. Potential purchases are assessed against the ability to deliver a target 20% target return on capital employed (ROCE) over the medium term.
Valuation
Shares in asset managers have fallen in response to the market background and GHE shares are down 15% year to date, but this compares with a 34% reduction for its European peers, 31% for North American peers and 30% for more conventional UK-listed asset managers. At 767p the shares trade on an FY22e P/E of 14.7x, potentially falling to 13.1x for FY23e. Despite the growth and resilience shown this year, this is below the European and North American peer average P/Es; it also trades on a lower EV/EBITDA multiple (see Exhibit 6).
Exhibit 6: Asset management comparators
Price |
Market cap (£m) |
P/E 2022e |
P/E 2023e |
Dividend yield (%) |
EV/EBITDA 2022e (x) |
|
Gresham House |
767 |
293 |
14.7 |
13.1 |
1.3 |
9.6 |
Antin Infrastructure Partners |
22 |
3,364 |
46.8 |
22.6 |
0.4 |
28.0 |
Bridgepoint |
206 |
1,701 |
16.4 |
12.0 |
N/A |
15.3 |
EQT |
22 |
22,908 |
29.4 |
18.9 |
1.2 |
30.4 |
Foresight |
351 |
410 |
12.9 |
10.1 |
N/A |
9.2 |
Impax Asset Management |
736 |
980 |
19.6 |
18.9 |
2.8 |
13.9 |
Intermediate Capital |
1,172 |
3,418 |
12.1 |
10.0 |
6.5 |
18.4 |
Partners |
85,800 |
23,083 |
25.2 |
20.2 |
3.4 |
21.8 |
Petershill Partners |
194 |
2,211 |
9.8 |
7.8 |
N/A |
N/A |
Tikehau Capital |
2,127 |
3,737 |
12.1 |
12.4 |
2.5 |
10.8 |
Average |
20.5 |
14.8 |
2.8 |
18.5 |
||
North American peer average* |
16.5 |
15.2 |
1.9 |
20.6 |
||
UK asset managers average** |
11.2 |
11.9 |
8.0 |
5.9 |
Source: Refinitiv, Edison Investment Research. Note: Priced at 18 November 2022. *Ares, Brookfield, Carlyle, Hamilton Lane, KKR, StepStone. **Ashmore, City of London, Jupiter, Liontrust, Man Group, Polar Capital, Schroders.
Exhibit 7 shows the range of values implied when we put Gresham House shares on peer group multiples for 2022e, those implied by transactions involving comparator companies and finally the range indicated by our discounted cash flow (DCF) model, assuming a 3% long-term growth rate and discount rates between 8% and 17%.
Exhibit 7: Valuation ranges based on peers, transactions and DCF |
Source: Edison Investment Research, Refinitiv. Note: Peer multiples for 2022e. The markers show average values and, for the DCF valuation, the value at a discount rate of 10%. |
Exhibit 8: Financial summary
December (£'000s unless indicated) |
2018 |
2019 |
2020 |
2021 |
2022e |
2023e |
2024e |
PROFIT & LOSS |
|||||||
Asset management income |
13,717 |
31,427 |
40,304 |
62,162 |
74,311 |
82,783 |
93,712 |
Dividend, interest and other income |
781 |
357 |
1,632 |
2,038 |
2,282 |
1,882 |
1,882 |
Performance fees |
0 |
1,944 |
0 |
6,163 |
0 |
0 |
0 |
Total income |
14,498 |
33,728 |
41,936 |
70,363 |
76,593 |
84,665 |
95,594 |
Administrative overheads |
(14,608) |
(34,331) |
(42,052) |
(60,116) |
(65,328) |
(68,366) |
(73,010) |
Net operating profit/(loss) before exceptional items |
(110) |
(603) |
(116) |
10,247 |
11,265 |
16,299 |
22,584 |
Finance costs |
(42) |
(390) |
(25) |
(311) |
(478) |
(400) |
(400) |
Exceptional items |
(2,001) |
(1,063) |
(1,775) |
(3,215) |
(495) |
0 |
0 |
Share of associates’ profits/(losses) |
1,718 |
246 |
158 |
4,955 |
(203) |
0 |
0 |
Gains and losses on investments held at fair value |
(271) |
3,048 |
4,599 |
5,842 |
(945) |
0 |
0 |
Movement in fair value of contingent consideration |
(209) |
(2,065) |
(1,163) |
(1,659) |
(840) |
0 |
0 |
Other |
40 |
0 |
224 |
461 |
295 |
0 |
0 |
Operating profit/(loss) before taxation |
(875) |
(827) |
1,902 |
16,320 |
8,599 |
15,899 |
22,184 |
Taxation |
218 |
(23) |
(1,084) |
(4,107) |
(2,339) |
(3,751) |
(5,546) |
Discontinued operations and FX movements |
11 |
55 |
(12) |
(172) |
(3) |
0 |
0 |
Total comprehensive income |
(646) |
(795) |
806 |
12,041 |
6,257 |
12,148 |
16,638 |
Non-controlling interest |
(53) |
(55) |
(229) |
(264) |
(24) |
(24) |
(24) |
Net income attributable to equity holders |
(699) |
(850) |
577 |
11,777 |
6,233 |
12,124 |
16,614 |
Adjusted core operating profit |
|||||||
Net core income |
14,709 |
31,724 |
40,774 |
61,609 |
73,142 |
82,353 |
92,977 |
Operating expenses (excl. dep'n and amortisation) |
(11,705) |
(21,047) |
(28,690) |
(41,128) |
(46,733) |
(50,931) |
(55,428) |
EBITDA (adjusted) |
3,004 |
10,677 |
12,084 |
20,481 |
26,408 |
31,422 |
37,549 |
Finance costs |
(42) |
(390) |
(25) |
(311) |
(478) |
(400) |
(400) |
Adjusted operating profit/(loss) |
2,962 |
10,287 |
12,059 |
20,170 |
25,930 |
31,022 |
37,149 |
EPS - diluted (p) |
(3.9) |
(3.2) |
1.8 |
32.6 |
15.4 |
29.9 |
40.0 |
Adjusted, diluted EPS (p) |
14.7 |
31.2 |
32.9 |
49.3 |
52.1 |
58.6 |
67.1 |
Dividend per share (p) |
3.0 |
4.5 |
6.0 |
10.0 |
13.5 |
17.0 |
24.0 |
BALANCE SHEET |
|||||||
Non-current assets |
83,353 |
78,165 |
80,339 |
126,143 |
107,901 |
95,280 |
82,841 |
Intangible assets |
65,911 |
58,545 |
59,970 |
95,012 |
86,803 |
74,627 |
62,451 |
Tangible fixed assets |
332 |
813 |
1,090 |
2,927 |
2,256 |
1,811 |
1,548 |
Investments |
17,032 |
18,807 |
18,228 |
25,515 |
16,152 |
16,152 |
16,152 |
Other |
78 |
0 |
1,051 |
2,689 |
2,690 |
2,690 |
2,690 |
Current Assets |
21,703 |
46,187 |
46,767 |
94,174 |
107,656 |
125,768 |
147,250 |
Trade receivables |
2,628 |
5,334 |
3,184 |
11,135 |
11,560 |
11,560 |
11,560 |
Cash and cash equivalents |
13,958 |
19,432 |
21,886 |
40,252 |
40,600 |
58,712 |
80,194 |
Assets held for sale (property then battery storage projects) |
0 |
12,188 |
7,363 |
17,545 |
29,831 |
29,831 |
29,831 |
Other |
5,117 |
9,233 |
14,334 |
25,242 |
25,665 |
25,665 |
25,665 |
Current liabilities |
6,085 |
24,928 |
20,852 |
50,220 |
43,472 |
43,472 |
43,472 |
Trade and other payables |
4,085 |
15,210 |
18,780 |
42,721 |
32,606 |
32,606 |
32,606 |
Liabilities of disposal group held for sale |
2,000 |
9,718 |
2,072 |
7,499 |
10,866 |
10,866 |
10,866 |
Non-current liabilities |
19,231 |
8,605 |
8,976 |
22,560 |
21,552 |
16,252 |
11,352 |
Long-term borrowings |
7,840 |
5,973 |
5,749 |
0 |
0 |
0 |
0 |
Other creditors |
11,391 |
2,632 |
3,227 |
22,560 |
21,552 |
16,252 |
11,352 |
Net Assets |
79,740 |
90,819 |
97,278 |
147,537 |
150,533 |
161,323 |
175,267 |
Minority interests |
527 |
582 |
811 |
1,075 |
1,099 |
1,123 |
1,147 |
Net assets attributable to ordinary shareholders |
79,213 |
90,237 |
96,467 |
146,462 |
149,434 |
160,200 |
174,120 |
Diluted NAV per share (p) |
289.3 |
288.2 |
287.4 |
366.6 |
370.1 |
396.7 |
431.2 |
ROCE (%) |
20.6 |
14.6 |
16.0 |
34.1 |
17.0 |
20.6 |
23.0 |
CASH FLOW |
|||||||
Net operating cash flow |
905 |
9,203 |
15,711 |
19,975 |
18,309 |
30,071 |
34,403 |
Acquisitions and deferred consideration |
(11,855) |
0 |
(17,887) |
(1,736) |
(7,501) |
(5,300) |
(4,900) |
Purchase of management contracts |
(23,000) |
0 |
0 |
0 |
0 |
0 |
0 |
Net sale/(purchase) of investments |
(3,906) |
(797) |
2,025 |
(1,122) |
(3,018) |
0 |
0 |
Net proceeds of sale of investment properties |
4,685 |
0 |
0 |
0 |
0 |
0 |
0 |
Net investment in DevCo projects |
0 |
(1,510) |
4,406 |
(8,247) |
(10,835) |
0 |
0 |
Net purchase of fixed and intangible assets |
(242) |
(531) |
(736) |
(1,045) |
(1,478) |
(1,501) |
(1,526) |
Other |
(1,768) |
53 |
186 |
2,514 |
11,754 |
0 |
0 |
Cash flow from investing activities |
(36,086) |
(2,785) |
(12,006) |
(9,636) |
(11,078) |
(6,801) |
(6,426) |
Dividends |
0 |
(795) |
(1,351) |
(1,881) |
(3,815) |
(5,158) |
(6,495) |
Share issuance (net) |
25,679 |
6,487 |
7,663 |
20,487 |
0 |
0 |
0 |
Share warrants issued/exercised |
3,841 |
4,859 |
182 |
0 |
0 |
0 |
0 |
Share-based payments settled |
0 |
(833) |
(7,125) |
(9,734) |
(3,818) |
0 |
0 |
Other financing activities |
1,994 |
(8,795) |
(396) |
4,904 |
(135) |
0 |
0 |
Cash flow from financing activities |
31,514 |
923 |
(1,027) |
13,776 |
(7,768) |
(5,158) |
(6,495) |
Increase/(decrease) in net cash |
(3,667) |
7,341 |
2,678 |
24,115 |
(536) |
18,112 |
21,482 |
Closing net cash/(debt) |
6,118 |
13,459 |
16,137 |
40,252 |
39,716 |
57,828 |
79,310 |
Source: Source: company reports, Edison Investment Research. Note: *Return on capital employed (ROCE) = adjusted operating profit + net performance fees + net development gains divided by opening net assets adjusted for share issuance during the year.
|
|
Research: Healthcare
In a strategic move to support its business development plans and digitisation efforts, Ergomed has announced two senior appointments to its executive team. Michael Spiteri, a serving non-executive director at Ergomed, has been named as the chief transformation and technology officer (CTTO) and Jonathan Curtain has been appointed as deputy chief financial officer. Amid the sustainable and strong momentum in Ergomed’s business in H122 despite market softness, we see that the new additions as underscoring the management’s focus on business expansion and digital transformation.
Get access to the very latest content matched to your personal investment style.