Cenkos report22 Nov 2019 07:58
A sound recovery with more to come
Record has delivered interim results in-line with forecasts, despite not recognising high margin performance fees. The business has recovered AUME through client extensions following the outflows of H2/19A, driving management fees upward. By investing in new products, IT and client service, AUME growth should continue overcoming any long-term
fee pressures. With a healthy pipeline, momentum is building.
H1/20A results - in-line despite no performance fees: Record achieved H1/20A revenues of £11.4m, in-line with forecasts, despite not recognising performance fees per our FY20E forecast. Revenues were 10% lower YoY as H1/19A comp
included £1.0m of performance fee and the results of mandates which ceased during H2/19A. Underlying management fees are now moving upward, with a +2% rise on H2/19A as AUME levels have recovered, also aided by weaker sterling. Interim profits were similarly in-line with forecasts, with adj EBIT of £3.1m, despite not recognising high margin performance fees, as cost control was exercised and should continue.
Performance fees – high margin, but low visibility: Record offers clients a reduction in management fees in order to share in the spoils of its investment success via performance fees. While no such fees were recognised in H1/20A, the accrual of
positive investment performance may be ongoing, awaiting recognition once the agreed timescale lapses. Upon recognition, the fees incur no incremental costs save for GPS charges (25-35% EBIT), thus achieving high EBIT margins of 65%+. Should any crystallise in H2/20E beyond our £1.3m FY20E forecast, we would expect them to have a notable impact on profits and a potential upward revision to forecasts.
AUME: As per the recent Q2/20A update, AUME currently stands at $59.9bn. This includes recently announced new extensions to existing client mandates, which are yet to be fully reflected as annualised management fees. Thus, we see positive revenue momentum ahead when combined alongside the current healthy pipeline.
EPS forecasts unchanged: In our view, today’s update represents in-line trading. We update FY20E and FY21E forecasts predominantly for the effect of IFRS16, adopted for the first time this period. Our adj EPS forecasts remain unchanged.
Valuation multiples now reflect defensive attributes: With a long-established track record, longstanding customer relationships (40% of clients engaged for 6+ years) and operating in a specialist niche of a global market, Record can be seen as a longterm defensive play. An FY20E ex-cash P/E of 15.0x, or 12.1x excl money market deposits, is yet to fully reflect this despite the shares recent impressive rise.
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