Henderson’s 2015 Result
Several weeks ago we blogged on the prospects of Henderson Group PLC (ASX: HGG). Since that time, the firm reported its 2015 result and it seems timely to review the result and check its prospects.
Brief results summary below:
- FUM: Growth of 13% from £81.2b in FY14 to £92b in FY15. Strong result given industry FUM growth of circa 2%, largely driven by retail (higher margin) flows. Firm achieved net flows of £8.5b.
- Net revenues from continuing operations grew by 16% from £518.8m in FY14 to £601.8m in FY15. Revenue was bolstered by a large amount of performance fees (£98.7m).
- EBITDA: Growth of 15.1% to £213.6m.
Despite the great set of numbers, the stock fell circa 7 per cent on the day continuing its downtrend since the beginning of 2016.
Based on our valuation of HGG given its potential future earnings, it appears to be trading at a fairly attractive discount. This has been readily observed by others investors/analysts in the market so given this, it’s worth asking as to why would the shares would be trading at such a low price? It’s usually difficult to answer this question but in this case, it seems reasonably evident. Brexit.
Brexit would involve Britain leaving the European Union, a move which may cause a contraction in both economies and disruption for fund managers such as Henderson. It notably has support from some high profile individuals in British politics including London Mayor Boris Johnson.
Based on this and perhaps also the decline in stock markets around the globe since the start of 2016 (stock markets of which fund manager earnings are linked to) led to its shares trading down.
Returns variability is well within the expected norms of investing in a funds management firm hence, it’s prudent not to bake in too much on the returns front into the valuation. Issues such as Brexit however are more difficult. In short, this is because even though it’s likely that Britain will remain in the EU, it can’t be counted on as a certainty.
The upside that Henderson shares offer however relative to the downside appears attractive enough for a position in the Montgomery portfolios. And of course, downside exposure for the portfolio is mitigated through diversification.
In terms of prospects going forward, Henderson is achieving strong results out of the United States. Flows are continuing to increase on the back of demand for European/offshore investments and further penetration of US broker/dealer channels.
It’s also worth noting as well that Henderson has a target of 40 per cent operating margins by 2018. In our recent conference call with the representatives from the firm, they expressed confidence in hitting this target – one which would add a fair clip to the firm’s valuation. This is based on operating leverage coming from the firm’s US based funds and the normalisation of operating expenditures in the recently acquired Perennial.
We remain cautious but happy holders.
Scott Shuttleworth is an analyst at Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Joe
:
I think there were a few reasons for the de-rate post-result, above the risk of brexit.
1) The euro retail products and to a lesser extent, the UK retail products are in outflow. This may turn around before the end of the year.
2) Performance fees look challenging in the short term, particularly in the SICAV range, where there is a double-barreled hurdle.
3) Compliance costs remain elevated.
Roger Montgomery
:
Hi Joe, in response our Henderson Analyst notes…
i) Outflows were in some credit funds so effect on revenues is disproportionately low.
ii) Most analysts (including myself) bake in rather conservative forecasts for performance fees so unlikely to have been the cause (since relatively low expectations were already present).
iii) Known prior to result and factored in.
Guy Davis
:
I agree that HGG, along with PTM, is a high quality business and appears cheap, however if you believe that global markets are very richly valued and may be severely challenged at some point then this would be a strong coming headwind for these managers. Irrespective of a Brexit, shares prices in Europe and the US have much more to do with QE and interest rates and these heady prices themselves are a risk for any company so highly leveraged to share prices.
And please let me pre-empt what I know you will say- that you don’t invest according to macro forecasting- by countering that I have put no timeframe or figures on any potential future correction and am not forecasting. I am merely noting what is currently discernible using tried and tested valuation methods and the knowledge that eventually markets will correct previous excesses. Surely the bargain point of entry for a fund manager is when there is blood on the floor of the exchanges.
Regards,
Guy
Andrew Longden
:
What is the likelihood (in %) of Brexit occurring, if you were to put a have a rough stab at it?
Secondly, if it was to occur, how material would the impact be to HGG in the short term, medium term and also long term?
Roger Montgomery
:
Its a very long but fat tail. Low probability but big consequences.
fred dragicevic
:
Hi Scott, i did hold HGG in the past and would love to jump in again but in the annual report the comment of the ( start of 2016 being challenging ) is keeping me well clear for now! All the best
Roger Montgomery
:
OK Fred. Thanks fo your thoughts. More generally, keep in mind that if you wait for the swallow to sing, spring will be over.