Australia | Apr 12 2016
-Structural growth intact
-UK referendum uncertainty
-Upside catalyst in US funds
By Eva Brocklehurst
BT Investment Management ((BTT)) is poised to deliver further diversified growth in its funds under management (FUM), suggesting to brokers the business is resilient in the face of volatile markets.
Inflows to the company's UK business, JO Hambro, offset the minor outflows that occurred from local operations in the March quarter. Net inflows for BT Investment Management totalled $1.0bn, exceeding the $500m raised in the December quarter. Australian inflows in the wholesale channel were more than offset by outflows in legacy retail products.
Hence, JO Hambro remains a meaningful driver of earnings for the stock. Given this, the declining British pound has undermined recent share price performance, Ord Minnett observes, along with volatile equity markets and the pending regulatory reviews in the UK.
JO Hambro performance fees were $73.2m for 2015, generated by 11 funds and the 50% of the FUM in this division that generates such performance fees. This is materially higher than the $37.6m in the prior year. Also, the broker notes a global shift in asset allocation to value stocks from growth stocks has weighed on the performance generally.
While the stock has de-rated for several reasons over the past couple of months and is trading around 10% below a target of $10.50, Ord Minnett finds better value elsewhere in the sector and maintains a Hold rating.
While mindful of the risks to industry flows, Morgan Stanley considers the company well placed to manage the challenges given its earnings diversity, global distribution and cost flexibility. JO Hambro funds are considered well able to win share in higher margin US mutual funds.
Revenue margins are strong and the broker targets expansion to 54 basis points in FY18, supported by flows into the higher margin JO Hambro products and a positive mix shift in Australia.
The main attraction for Morgan Stanley, who has an Overweight rating, is product diversity – around 70 – and global distribution. Upside catalysts are a successful move into the US and greater-than-expected margin expansion.
Macquarie downgrades earnings estimates for FY16 by 8.9%, largely because of the FX impact, but retains an Outperform rating, finding the capacity and performance attractive from an operational perspective.
The main uncertainty for BT Investment is the issue over Britain's exit or otherwise from the European Union. Predominantly, the risks lie with the currency, Morgans maintains. The upcoming referendum in Britain on whether to leave the EU poses a short-term uncertainty, especially for the direction of the GBP.
That said, the broker believes that JO Hambro will not be materially affected from an operational perspective regardless of the outcome. Longer term, the momentum in FUM, despite a very volatile quarter, confirms the structural growth path is intact.
Once the referendum is out of the way on June 23, the stock can re-rate towards its price target of $10.95. Morgans upgrades to Add from Hold, taking a 12-month view. Upside risks include higher realised performance fees, favourable currency movements and a meaningful acquisition, in the broker's opinion.
Currency may have been a headwind but Credit Suisse was encouraged by the continuation of positive flows. While suggesting it deserves a premium, the broker is cautious about paying too much for the stock because of the skew to earnings from the UK, as well as the FY16 cycling of high performance fees and the less recurring transactional revenue.
Nevertheless, the stock deserves its 27% price/earnings premium to UK peers given strong fund flows, margin expansion and innovative products. The UK market experienced net outflows from equity products in both retail and institutional markets in January and February 2016 and Credit Suisse notes commentary from peer Henderson Group ((HGG)) also indicated European flows were weak.
The broker suspects both BT Investment and Henderson benefitted from inflows into US products, as the US market rotated into active equity strategies in Jan-Feb 2016 and into global equities from US equities.
There are three Buy ratings, two Hold and one Sell (UBS) on FNArena's database. The consensus target is $10.11, suggesting 4.6% upside to the last share price. The dividend yield on FY16 and FY17 estimates is 4.3% and 4.9% respectively.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
