Merged Janus Henderson Off And Running

This story features JANUS HENDERSON GROUP PLC. For more info SHARE ANALYSIS: JHG

Janus Henderson has made a strong start in its inaugural first half as a merged company and brokers are upbeat about the outlook.

-Integration exceeds expectations while investment performance is improving
-Increase in pre-tax cost synergies largely from a reduction in personnel
-Company flags potential to return some cash to shareholders
 

By Eva Brocklehurst

Janus Henderson ((JHG)) made a strong start in its inaugural first half as a merged company. The integration task of consolidating global asset managers has exceeded broker expectations and the investment performance is improving.

Assets under management (AUM) of $344.9bn at June 2017 was up over the quarter and supported by moderating net outflows. Net outflows slowed materially, by -$1bn in the June quarter versus -$7bn in the March quarter, with a -20% reduction in redemptions.

The result was boosted by both higher performance fees, and sustainable components such as lower cost ratios. First half assets under management finished higher and there was a more rapid realisation of cost synergies versus the pro forma earnings outlook. Pre-tax cost synergies realised at the end of the half year were largely because of savings from a reduction in personnel.

The company has updated its expected realisation of synergies to US$85m, from $80m, by the end of the first 12 months post the merger. The company wants to examine the extent of likely expenditure before considering any revision to its overall US$110m target, but Citi is confident and forecasts a higher US$130m target.

Citi believes the merged entity has made a good start and synergies are running ahead of expectations. Yet, the broker considers the share fairly valued and retains a Neutral rating. Macquarie upgrades FY17 estimates for earnings per share by 17.8%, largely on the back of performance fees. FY18 estimates are upgraded by 3.7%.

The broker considers the recovery at Intech was outstanding, with 71% of assets under management outperforming respective benchmarks on a three-year basis. The one aspect the broker believed is less than ideal is the fact that US mutual fund flows continue to be dominated by passive funds, and active equity flows in the June quarter incurred an annualised organic loss of -2%.

The results came in for high praise from Bell Potter. Now the company has provided increased disclosure the broker calculates reported and underlying estimates for operating earnings (EBITDA) and net profit. Net, there is a real increase to forecasts and the price target is revised to $60.00 from $57.50. Bell Potter, not one of the eight stockbrokers monitored daily on the FNArena database, maintains a Buy rating.

Margins

A net operating margin of around 41% was well ahead of broker estimates. Bell Potter points out that at the current levels of funds, the company expects operating margins will revert back to a more appropriate level in the mid to high 30% range. This reflects a normalisation of expected performance fees and a more normal cost base.

UBS, too, suggests that second half operating margins should remain in the high 30% range and the stock has upside risk for cost reductions and fund flows. Citi notes changes in mix drove the improved management fee margins but this was mainly because the greatest outflows in FY17 were from the lower-margin Intech.

Shareholder Returns?

The company has flagged the possibility of returning some of its strong net cash position to shareholders but will await further developments on the integration front to assess when the right opportunity presents. The balance sheet was net cash of US$245m at the end of June, retaining a further US$659m in investment assets.

Morgan Stanley was impressed, as the result beat its forecasts by 30%, and even adjusting for stronger performance fees it was still ahead by 15%. The main beat on forecasts came with higher margin equities, as Henderson retail funds returned to positive flows. Nevertheless, alternatives also rose more than Morgan Stanley expected.

The broker believes the result bodes well for future flows, as 69% of assets are ahead of benchmark on a one-year basis versus 50% in the March quarter, and agrees better flow and margin trends, as well as faster realisation of synergies, coupled with higher funds under management, all create upside risk.

There are three Buy and one Hold (Citi) ratings on the database. The consensus target is $50.11, suggesting 12.1% upside to the last share price.
 

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