Gresham House — Resilient near-term and set for secular growth

Gresham House (LSE: GHE)

Currency in GBP

Last close As at 03/02/2023

GBP7.55

−2.00 (−0.26%)

Market capitalisation

GBP287m

Research: Financials

Gresham House — Resilient near-term and set for secular growth

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.

Andrew Mitchell

Written by

Andrew Mitchell

Director, Financials

Financials

Gresham House

Resilient near-term and set for secular growth

Capital markets day

Financial services

21 November 2022

Price

767p

Market cap

£293m

Net cash at end June 2022

28.1

Shares in issue

38.3m

Free float

90%

Code

GHE

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.7

(8.5)

(12.3)

Rel (local)

(2.8)

(5.9)

(9.5)

52-week high/low

1,005p

710p

Business description

Gresham House is a specialist alternative asset manager focused on sustainable investments with strategies in public and private equity and real assets including forestry, renewable energy, battery storage, housing and sustainable infrastructure. At end-September 2022 AUM stood at £7.5bn.

Next events

FY22 results

March 2023

Analyst

Andrew Mitchell

+44 (0)20 3681 2500

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
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

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***
(bp)

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
(p)

Market cap (£m)

P/E 2022e
(x)

P/E 2023e
(x)

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.

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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

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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Australia

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United Kingdom

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United States

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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

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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