Australia | Apr 30 2015
-Equity markets remain supportive
-QE underpins flows into Europe
-Is there better value elsewhere?
By Eva Brocklehurst
Asset manager Henderson Group ((HGG)) continues to inspire brokers as the wealth manager’s growth story goes from strength to strength. The company sustained strong retail inflows in the March quarter, benefitting from currency and market movements and the exit of an underperforming joint venture.
Value may not be as compelling as it once was but Citi still considers there to be further upside potential, provided equity markets remain supportive. First quarter retail net flows were very strong while some concerns regarding the FY14 management fee exit margin were removed. The sale of the 40% stake in the TH Real Estate fund to partner TIAA-CREF will add GBP100m to the company’s capital base. While the company is yet to disclose its target surplus, Citi doubts whether this will be more than GBP100m, suggesting Henderson may be soon in a position to return excess capital to shareholders.
Quantitative easing in Europe underpinned the impressive outcome and given favourable conditions and strengthened investment performance, revenue and emerging capital management potential are key positives for UBS. Still, with the dual cost burden of growth and regulatory change ongoing the broker finds it difficult to envisage more significant upside for the share price, given conditions will normalise over the medium term.
Macquarie also observes the company has been a beneficiary of the shift in global liquidity to Europe from the US. Rate hikes in the US are likely to accelerate this movement in global equity flows in the near term as well. The company has stressed that it has no idea how long the positive impact will last and efforts are being made to broaden product range and distribution.
Investors are probably expecting a capital return after de-gearing in the first quarter of FY16, via a special dividend or a buy-back, Macquarie suspects. However, given management’s conservative tone around the outlook for the market, in addition to regulatory concerns and the company’s growth targets, the broker is not so sure a capital return is on the cards. Capital is more likely, in Macquarie’s view, to be deployed for growth purposes.
Assets under management of GBP89.4bn were up 10% since the end of December and exceeded JP Morgan’s estimates. The March quarter update reflects a strong start to the year and the broker observes Henderson now has 75% of funds outperforming over one year and 86% over three years. The company’s fixed income and multi-asset performance also improved significantly. JP Morgan highlights the improved cash position which it expects could accelerate expectations for capital returns.
Margin performance at round 55 basis points was in line with Credit Suisse’s expectations but the company has flagged upside risk because of stronger growth in its higher-margin retail business, although compliance costs continue to be a headwind. The broker factors in an improvement in the compensation ratio and operating margin but believes earnings growth remains muted in FY15 with further benefits more likely to flow through in FY16. Credit Suisse believes the valuation is full and there is better value elsewhere in the sector, retaining an Underperform rating.
Goldman Sachs found the sale of the TH Real Estate stake a surprise, given the joint venture was only established 12 months ago. It appears that Henderson became less enthusiastic about the near-term outlook while TIAA-CREF was eager to integrate the business with its broader operations. Goldman expects the transaction will enhance the capital management opportunities that Henderson outlined at the time of its FY14 results.
FNArena’s database contains three Buy ratings, one Hold and one Sell. Consensus target is $6.13, suggesting 12.5% upside to the last share price. Targets range from $5.65 to $6.60.
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