Australia | Jul 01 2014
-Compelling revenue growth profile
-Raises exposure to US institutions
-Diversification factored into price?
By Eva Brocklehurst
Wealth manager Henderson Group ((HGG)) has fulfilled a long-held desire to acquire a US institutional equities business, obtaining Geneva Capital Management for US$130m up front and propelling its strategy to become a diversified global asset manager.
Goldman Sachs' calculations suggest possible earnings accretion between 3% and 4% and the broker will adjust estimates when the deal receives the necessary approvals. The business has an average management fee margin of 48 basis points and its funds do not generate performance fees. Goldman notes the recent performance of Henderson funds, which have outperformed since inception, has been less convincing, with the mid caps underperforming benchmark on a one, three and five year basis to March 31 2014 and the small caps underperforming on a one year basis. Goldman retains a Neutral rating.
The company scooped at least two ratings upgrades on the back of the news. Citi upgraded to Buy from Neutral, citing the recent pull back in the share price. The broker thinks Henderson's revenue growth is too compelling to ignore. Taking the acquisition into forecasts and marking to market for the first half means Citi upgrades FY15 and FY16 forecasts by 1%. The stock may not be that cheap compared to its UK peer group but its growth profile has extra value, in Citi's opinion. The broker thinks the deal marries strong US retail distribution with Geneva's US institutional presence and Henderson brings a global presence to the table.
Credit Suisse has upgraded to Outperform from Neutral. The broker notes the stock is currently trading at a discount to Australian peers and in line with UK fund managers and this looks conservative, given the growth trajectory of funds under management and higher performance fees. Credit Suisse's rating and positive view on the stock are underpinned by the valuation, strong growth prospects and upside earnings risk. The important aspect, in UBS' view, is that this is not a transforming acquisition that would be associated with significant execution risk. With earnings accretion providing some impetus to an already compelling growth profile, Henderson remains the broker's preferred exposure to the wealth/funds management space. UBS retains a Buy rating and thinks the stock is well positioned for an extended earnings upgrade cycle, assuming stable equity markets.
Added to the up-front price is 5-year earn-outs in the form of deferred and earn-out consideration, giving Henderson some protection against an adverse market performance. The deferred consideration is US$45m and earn-out consideration is US$25m.
BA-Merrill Lynch thinks the deal will bring a new investment style to Henderson as well as improve exposure to US institutions. Henderson has paid 7.2 times the earnings run rate and this is an attractive multiple, in the broker's view. The broker notes extra payments could add another 2.5 times earnings to the price, although admittedly these are payable over the next five years. Merrills thinks the US market is strategically important for those firms aspiring to be end-game players in asset management. A Neutral rating is retained as the broker thinks the company's recent diversification, while lending considerable strength to the business, is fully reflected in valuation. The company needs more time to demonstrate an enhanced growth profile, which could lead to a higher rating
Henderson will fund the consideration from existing cash and now expects to meet its capital requirements without recourse to the regulatory capital waiver during 2015. Geneva was founded in 1987 and has Assets Under Management of US$6.3bn in mid and small cap US equities. On the FNArena database Henderson has three Buy ratings and two Hold. The consensus target is $4.80, suggesting 9.0% upside to the last share price, and has risen from $4.75 ahead of the announcement.
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