FX, inflow and mix changes prompt earnings upgrade

Record 25 July 2019 Update
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Record

FX, inflow and mix changes prompt earnings upgrade

Q120 trading update

Financial services

25 July 2019

Price

32.00p

Market cap

£63m

Net cash (£m) at 31 March 2019

23.7

Shares in issue

199.1m

Free float

32%

Code

REC

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(6.6)

4.9

(22.6)

Rel (local)

(7.8)

4.8

(20.1)

52-week high/low

42.05p

27.30p

Business description

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

Next events

AGM

25 July 2019

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

After three quarters with outflows in assets under management equivalent (AUME), Record reported a modest inflow in its first quarter ($0.3bn) and the number of clients also ticked up. Competitive pressures remain a feature but the group is countering this with its focus on innovation and service enhancement. The breadth of new business opportunities is encouraging. A combination of sterling weakness and mix changes has led us to revise estimates, with EPS increases of 9% and 8% for this year and next.

Year end

Revenue (£m)

PBT
(£m)

EPS*
(p)

DPS**
(p)

P/E
(x)

Yield
(%)

03/18

23.8

7.3

2.98

2.30

10.8

7.2

03/19

25.0

8.0

3.25

2.30

9.9

7.2

03/20e

22.2

5.8

2.38

2.32

13.5

7.3

03/21e

23.0

6.0

2.46

2.34

13.0

7.3

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

Q120 update

Record reported AUME of $58.3bn at the end of Q120 (30 June), an increase of 1.7% or 4.0% in dollar and sterling terms respectively in the quarter. Market-related movements were neutral, while FX and volatility targeting related moves added $0.7bn. The $0.3bn inflow mainly arose from the partial reversal of an earlier $1.1bn reduction when Record took a tactical profit on behalf of certain dynamically hedged mandates. The number of clients increased from 65 to 68, with the flow movements implying that the new mandates are relatively small. However, where these are new relationships or for funds, there is the scope for growth over time. There were no performance fees crystallised during the period and fee rates were broadly unchanged. For further details see overleaf.

Outlook

The macro backdrop, with significant tail risks, continues to provide a favourable background for Record’s discussions with potential clients and it reports an encouraging range of new business opportunities diversified by geography and product. Our estimates exclude potential AUME inflows (or outflows) and do not include performance fees until crystallised. For FY19, performance fees of £2.3m were earned (9% of revenue or 0.5bp of average AUME compared with the 5bp average management fee rate). Weakness in sterling, together with the inflow reported and mix changes, have resulted in increases in our estimates with EPS up by 9% for FY20 and 8% for FY21.

Valuation: Multiples below asset manager peers

The shares bounced following the full year figures, but have been stable subsequently and, following our forecast increases, the P/E and EV/EBITDA multiples for calendar 2019 (12.3x and 7.6x respectively) are clearly below the asset manager comparators that we show in Exhibit 3 (15.6x and 11.0x).

Q120 trading update

The quarterly update to the end of June 2019 showed AUME of $58.3bn, an increase of 1.7% in dollar terms, as noted above. AUME and net flow details for Q120 are shown in Exhibit 1.

Exhibit 1: AUME changes

Year-end March

Q118

Q418

Q119

FY19

Q119

$bn

AUME

AUME

AUME

Net flows

Net flows

Dynamic Hedging

4.3

3.1

3.4

(0.7)

0.3

Passive Hedging

52.0

48.2

48.9

(4.6)

0.1

Currency for Return

2.3

2.7

2.6

0.9

(0.1)

Multi-product

3.0

3.0

3.1

0.0

0.0

Cash and futures

0.3

0.3

0.3

(0.1)

0.0

Total

61.9

57.3

58.3

(4.5)

0.3

Markets

2.3

0.0

FX and scaling effect (for mandates with volatility targets)

(2.7)

0.7

Total change

(4.9)

1.0

Source: Record, Edison Investment Research

Investment performance was broadly positive. While the FTSE Currency FRB index excess return was negative (-0.61%) in the quarter, the Emerging Market product (ungeared) generated a return of +3.04% and the Multi-Strategy composite, targeting 4% volatility, recorded a three-month return of +0.90% and has an annualised performance since inception of +1.37% per annum.

Estimate changes

Exhibit 2 shows the changes in key figures from our forecasts following the trading update. As mentioned, sterling weakness was the main driver, augmented by the inflow to Dynamic Hedging and modest mix changes. Exhibit 4 shows a full financial summary with our new estimates.

Exhibit 2: Estimate changes

 

Revenue (£m)

% chg.

PBT (£m)

% chg.

EPS (p)

% chg.

DPS* (p)

% chg.

 

Old

New

 

Old

New

 

Old

New

 

Old

New

 

03/20e

21.6

22.2

3%

5.3

5.8

9%

2.19

2.38

9%

2.32

2.32

0%

03/21e

22.3

23.0

3%

5.5

6.0

8%

2.28

2.46

8%

2.34

2.34

0%

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

Valuation

We have updated the table showing Record’s valuation in the context of a group of UK asset managers. While Record is differentiated by its role as a specialist currency manager, it does earn fees largely based on the size of AUME so, like the asset managers, is exposed to movements in underlying equity and fixed income markets as well as flows.

Record trades on below average P/E and EV/EBITDA ratios (calendar 2019) and an above average yield. The calendarised P/E figure shown here does include a portion of FY19 earnings which benefited from a performance fee, but even on our FY20 estimate (no performance fee assumed) the multiple would be 13.5x: still below average.

Exhibit 3: Comparing valuation with UK fund managers

Price
(p)

Market cap
(£m)

P/E 2019e
(x)

EV/EBITDA
2019e (x)

Dividend yield
(%)

Ashmore

529

3,778

19.9

13.7

3.1

City of London Investment Group

436

116

12.1

9.5

6.2

Impax Asset Management

260

340

22.1

17.3

1.6

Jupiter

379

1,736

13.7

8.8

4.5

Liontrust

790

402

15.3

10.5

3.4

Man Group

170

3,258

12.8

8.6

5.4

Polar Capital

584

565

13.7

8.2

5.7

Schroders

2,978

8,107

15.1

11.3

3.8

Average

15.6

11.0

4.2

Record

32

64

12.3

7.6

7.2

Source: Refinitiv, Edison Investment Research. Note: P/Es and EV/EBITDA on a calendar year basis. REC dividend yield excludes special dividend (0.69p) and including this the FY19 dividend was 2.99p. Priced as at 23 July 2019.

Exhibit 4: Financial Summary

Year end March

£'000s 

 

2017

2018

2019

2020e

2021e

PROFIT & LOSS

 

 

 

 

 

 

 

Revenue

 

 

22,952

23,834

24,973

22,231

22,962

Operating expenses

 

 

(15,365)

(16,735)

(17,089)

(16,547)

(17,067)

Other income/(expense)

 

 

157

173

(8)

0

0

Operating Profit (before amort. and except.)

 

 

7,744

7,272

7,876

5,684

5,895

Finance income

 

 

112

56

113

114

108

Profit Before Tax

 

 

7,856

7,328

7,989

5,798

6,003

Taxation

(1,540)

(1,182)

(1,559)

(1,102)

(1,141)

Minority interests

 

 

0

0

0

0

0

Attributable profit

 

 

6,316

6,146

6,430

4,696

4,862

 

 

 

 

 

 

 

 

Revenue/AuME (excl. perf fees) bps

 

 

5.2

5.1

4.9

4.8

4.7

Operating margin (%)

 

 

33.7

30.5

31.5

25.6

25.7

 

 

 

 

 

 

 

 

Average Number of Shares Outstanding (m)

 

 

218.0

206.5

198.1

197.5

197.5

Basic EPS (p)

 

 

2.91

3.03

3.27

2.40

2.48

EPS - diluted (p)

 

 

2.90

2.98

3.25

2.38

2.46

Dividend per share (p)

 

 

2.00

2.30

2.30

2.32

2.34

Special dividend per share (p)

 

 

0.91

0.50

0.69

0.00

0.00

Total dividend (p)

 

 

2.91

2.80

2.99

2.32

2.34

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

Fixed Assets

 

 

1,228

2,339

2,161

2,156

2,151

Intangible Assets

 

 

245

228

288

363

438

Tangible Assets

 

 

881

910

761

681

601

Investments

 

 

0

1,115

1,112

1,112

1,112

Deferred tax assets

 

 

102

86

0

0

0

Current Assets

 

 

44,247

29,737

31,427

29,940

30,205

Debtors

 

 

6,972

6,775

7,562

6,963

7,063

Cash

 

 

19,120

12,498

12,966

12,078

12,244

Money market instruments

 

 

18,102

10,198

10,735

10,735

10,735

Other

 

 

53

266

164

164

164

Current Liabilities

 

 

(8,644)

(5,525)

(6,187)

(5,970)

(6,006)

Creditors

 

 

(3,013)

(2,630)

(2,736)

(2,519)

(2,555)

Financial liabilities

 

 

(4,779)

(2,467)

(2,621)

(2,621)

(2,621)

Other

 

 

(852)

(428)

(830)

(830)

(830)

Net Assets

 

 

36,831

26,551

27,401

26,126

26,350

Minority interests

 

 

0

0

60

60

60

Net assets attributable to ordinary shareholders

 

36,831

26,551

27,341

26,066

26,290

 

 

 

 

 

 

 

 

No of shares at year end

 

 

221.4

199.1

199.1

199.1

199.1

NAV per share p

16.6

13.3

13.7

13.1

13.2

CASH FLOW

 

 

 

 

 

 

 

Operating Cash Flow

 

 

7,107

2,746

7,026

5,260

4,986

Capex

 

 

(899)

(236)

(72)

(140)

(140)

Cash flow from investing activities

 

 

(189)

(82)

(134)

(150)

(150)

Dividends

 

 

(3,592)

(6,810)

(5,517)

(5,972)

(4,638)

Other financing activities

 

 

(5,163)

(2,386)

(1,040)

114

108

Other

 

 

136

146

205

0

0

Net Cash Flow

 

 

(2,600)

(6,622)

468

(888)

166

Opening cash/(net debt)

 

 

21,720

19,120

12,498

12,966

12,078

Other

 

 

0

0

0

0

0

Closing net (debt)/cash

 

 

19,120

12,498

12,966

12,078

12,244

Closing net debt/(cash) inc money market instruments

37,222

22,696

23,701

22,813

22,979

 

 

 

 

 

 

 

 

AUME

 

 

 

 

 

 

 

Opening ($'bn)

 

 

52.9

58.2

62.2

57.3

58.6

Net new money flows

 

 

3.1

(1.2)

(4.5)

0.3

0.0

Market/other

 

 

2.2

5.2

(0.4)

1.0

1.1

Closing ($'bn)

 

 

58.2

62.2

57.3

58.6

59.7

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 £49,500 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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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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

1,185 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

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 £49,500 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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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.

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

1,185 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

1,185 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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