Brokers Laud Henderson’s Potential

-Moves to capital surplus
-Costs rise but so does revenue
-Capital initiatives likely
 

By Eva Brocklehurst

Asset manager Henderson Group’s ((HGG)) flow momentum accelerated in 2014 and performance fees were stronger. The outlook is particularly encouraging in JP Morgan’s view, with management indicating retail flows are already ahead of the average for last year. Surplus capital is rebuilding faster and without recourse to the waiver. The business appears on track to double assets under management and achieve its target of a 40% operating margin by 2018.

The institutional business experienced net outflows during the fourth quarter but this included redemptions from the recent acquisition of Geneva, which principally related to one client. Excluding this amount the flows would have been positive. Geneva contributed GBP2m in earnings for its first quarter under Henderson. Henderson also flagged the fact it will now be sole manager of a mandate that was co-managed previously, although revenue impact is expected to be neutral as the company has agreed to a lower fee for exclusive management.

Brokers laud the fact that Henderson has rebuilt its capital position to where it provides increased flexibility in the medium term. A capital surplus has been achieved ahead of schedule, despite the recent Geneva acquisition. This allows the company to stop issuing shares as part of compensation, repay debt from cash and commit to a progressive dividend.

Macquarie likes the outlook, retaining an Outperform rating, as the company continues to perform well against key benchmarks. Henderson has demonstrated consistency and this suggests to the broker it has the capacity to deliver for shareholders. Henderson has noted an increased appetite in Australia for its global equity income product in the low cash rate environment. It is also broadening the US client offer as funds reach their three-year track records.

Still, Macquarie observes part of the positive performance was the FX impact in the second half which may not be maintained, while fixed staff costs are rising in the current environment. Tax rates are expected to rise too, with some risk around tax rate harmonisation globally.

UBS considers the drivers should remain positive over the short term but there is now reduced potential for a positive earnings surprise, given persistent high cost growth. Hence, UBS has downgraded to Neutral from Buy.

Henderson still trades at a modest discount to its closest UK peers on Citi’s FY16 estimates. The broker’s Australian equity strategists continue to call the equity market higher and European equities are also seen benefitting from quantitative easing. This supports the broker’s valuation and Buy rating. Citi believes an attractive opportunity exists to access a solid medium-term growth story, provided equity markets are supportive. Citi also cites fixed cost increases as a negative but, given the company is flagging an improvement in its operating margin, this suggests strong revenue growth and higher performance fees will outrun the cost increases.

The company has reiterated its strategy, targeting global growth over five years and building out its presence in North America and Asia Pacific. Citi continues to believe the strategy is feasible, albeit small bolt-on acquisitions will be required to reach the 2018 targets. There are also several elements in the result that make Citi optimistic about future dividends. As the company does not expect to need any capital above its target – although not sharing the actual figure with the broker – it suggests to Citi that any excess will be distributed to shareholders. Further capital initiatives, in addition to an ordinary dividend, are suspected to be on the cards no later than the second half of 2016.

 In sum, there are now three Buy ratings and one Hold for Henderson on the FNArena database. Consensus target is $5.48, suggesting 8% upside.
 

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