Net client inflows on their way
Record PLC (LONDON:RECL) has reported that assets under management equivalent (AUME) in dollar terms were broadly flat in the quarter to December 2014, with net inflows amounting to just $0.1bn. However, management has announced it expects $2bn of net inflows in the current quarter. We estimate that these will produce a small uplift in profits despite a further shift from highermargin dynamic mandates to lower-margin passive ones. We do not expect any impact from the Swiss franc currency turmoil as Record uses high-quality bank counterparties for its clients’ business and not retail brokers. Unlike most other asset managers, Record should benefit from increased market (especially currency) volatility, which should increase demand for its hedging services and offer more scope for its currency for return strategies to perform. When allowance is made for the high element of cash in its balance sheet, the shares are modestly rated compared with other asset managers.
Q3 trading update
AUME at 31 December was $52.7bn (30 September $52.6bn), though there was a rise in sterling terms to £33.8bn (£32.4bn) as a result of the strength of the US dollar vs sterling. There were inflows across the product range, but profit taking in the dynamic hedging mandates resulted in net outflows in that area, which meant that net new client AUME amounted to $0.1bn. During the quarter, average fee rates were broadly unchanged from the previous quarter across all product types.
New client inflows for the next quarter
Record has been notified by its clients that in aggregate it will have an additional $2bn of AUME to manage in the next quarter, though there will be a further shift from higher-margin dynamic hedging business to lower-margin passive activities. Even so, the inflows should be modestly accretive to revenues and earnings. This marks a welcome return to growth and Record hopes that recent currency turmoil will show the benefits of its hedging services.
Valuation: Discount to peers if cash is included
Record is trading at a P/E ratio of 14.3x for its current financial year according to our forecasts, in line with the rating of 14.5x for US and UK asset managers, but there is a wide range of 10x to 18x. However, Record has a large amount of free cash resources in its balance sheet, which account for a third of its market capitalisation. On an EV/EBITDA basis, it is trading at a near 30% discount to other asset managers.
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