Interactive Investor

Stockwatch: director buys and record low share price is interesting combo

30th August 2022 12:04

Edmond Jackson from interactive investor

This share is a geared play on markets, so companies analyst Edmond Jackson investigates whether recent volatility caused by inflation and high interest rates has created a buying opportunity here.

Shares in Jupiter Fund Management (LSE:JUP) are struggling to retain mid-cap status as their valuation plunges towards just £500 million. The peak was 580p in late 2017 but, despite rebounds, it fell to 275p a year ago, which valued this asset manager at around £1.5 billion.  

With equity and bond markets suffering a torrid year, however, the price has now reached 100p. Consensus forecast is for net 2022 profit to fall from £150 million to as low as £59 million this year, constituting earnings per share (EPS) of around 11p.  

This partly reflects the operational gearing of any fund management business, where changes in revenue get amplified at the profit level. 

The market clearly doubts a 13p consensus dividend forecast, despite an unchanged 7.9p interim dividend due to be paid 1 September, in context of a total 17p having been paid since 2017.  

This would cost around £72 million versus last June’s balance sheet having £114 million net cash. I cannot say exactly what extent of capital base Jupiter may require for regulatory reasons, but a 13p dividend would whittle down reserves – hence it does look exposed.  

I would not respect a £857 million net asset value - or 155p a share – as a reliable prop, given 72% of this constitutes goodwill/intangibles, such as premium to book value paid for acquisitions.  

Asset management is a people business where reputation is critical, so unless the stock trades say at a discount to net cash, there is no genuine margin of safety. 

Jupiter Fund Management
Year-end 31 Dec

 201620172018201920202021
Turnover (£ million)402460461419501618
Operating margin (%)42.641.938.936.527.530.8
Operating profit (£m)171193179153138191
Net profit (£m)136155143123105150
Reported EPS (p)29.633.731.126.820.826.9
Normalised EPS (p)29.733.831.528.923.529.0
Earnings per share growth (%)3.914.1-6.9-8.3-18.723.5
Return on capital (%)27.729.728.022.213.317.9
Operating cashflow/share (p)32.042.337.132.720.734.0
Capex/share (p)0.81.10.70.80.50.6
Free cashflow/share (p)31.241.236.431.920.233.4
Dividend per share (p)14.717.117.117.117.117.1
Covered by earnings (x)2.02.01.81.61.21.6
Cash (£m)331368390391441497
Net debt (£m)-317-332-316-333-337-397
Net assets (£m)610640624612886901
Net assets/share (p)133140136134160163

Source: historic company REFS and company accounts

Can a new CEO stabilise the operation amid multiple challenges?  

The current chief investment officer – already in a deputy CEO role – is due to fully assume this role from 1 October, albeit retaining CIO responsibilities and with no previous Plc boardroom experience. 

It partly explains why the current CEO of three years will continue “in the business” until the end of next June, despite shareholders tending to regard him as responsible for where the business is today. Jupiter is estimated to have incurred a cumulative £20.5 billion of net outflows since 2018. 

I would not pin all the blame on the incumbent. Listing back in 1985, Jupiter has always been a generalist “active” fund manager and it is not possible to tear up long-term investment mandates. It has however meant that Jupiter has fallen between two stools as the industry polarised between specialist funds and passive index funds.  

That is some strategic challenge to rectify, yet asset management is cannibalistic and, if enough of the funds remain worthwhile on a long-term view, with bear market redemptions stabilising, it raises the odds of a takeover approach. 

At the end of last year, Jupiter reportedly appointed an adviser to fortify its defences against any bid – although no approaches appear to have been made. Highly uncertain times for financial markets may stall predators for the time being, as their boards could regard a takeover as raising risks too far in the short term.  

It could also pay to let a bear market take further effect as higher interest rates and recession lead to more company profit warnings – with lower financial asset prices continuing to weigh on asset manager valuations. 

But, in the medium term, an opportunity point is likely to arise - with Jupiter shareholders screaming for relief - before the market starts to price equities for recovery.   

Capital outflows and a controversial investment trust    

The 29 July interim result cited a near 20% fall in assets under management (AUM) to £49 billion over the first half of 2022. For context, and looking back to past 30 June numbers: in 2019 AUM was £46 billion, reducing to £39 billion in 2020 and then jumped to a record high at over £60 billion in 2021. 

While this counters criticism, Jupiter is not well-positioned strategically and it likely reflects financial asset valuation changes – also fund buying and redemptions – around key macro events such as the onset of Covid during the first half of 2020, then assets reaching peak value by late summer 2021, helped by monetary/fiscal stimulus.  

The latest slump in AUM was substantially affected by the Ukraine crisis elevating energy prices and inflation triggering monetary tightening. This appeared to hit “our unconstrained fixed-income strategy as well as several growth-focused funds, against a backdrop of increased risk-aversion...”

Actions continue to reduce costs, including staff, which is typical procedure for asset managers during downturns.  

The CEO cited net outflows: “concentrated in a small number of strategies and driven primarily by a shift in asset allocations. The medium to long-term investment performance of these funds remains strong.” 

It is also possible that redemptions reflect edgy private investors. Jupiter is extending its marketing to institutions, which generated £0.2 billion net inflows during the first half, although re-balancing will take a long time.  

Virtues of acquiring Merian Global Investors two years ago were proclaimed by way of underlying pre-tax profit up 38% over £78 million and underlying EPS up 15% to 11.5p.  

Yet this also introduced what is now quite an albatross – by way of a 23% stake in Chrysalis Investments (LSE:CHRY) – where there is a parallel with how Woodford Asset Management went up the risk curve into unlisted technology and other stocks, then got whip-sawed. 

The chart for Chrysalis is a roller coaster from 76p in March 2020 to over 260p a year ago – effectively, a proxy for growth stock mania, now back to 78p.  

Jupiter’s 2021 annual report cited £113 million performance fees within £190 million of operating profit, but such fees will now be crimped by falling asset prices and after criticism that the generous fee structure at Chrysalis is also being reviewed after Jupiter received £50 million from it in respect of last year. 

Such a dent, and the possibility of an ongoing bear market, make projections for Jupiter hazardous. A key question is the extent to which the board cuts – or even omits – the final dividend. If the bear market persists, payouts may be axed to conserve cash.  

Jupiter directors buy nearly £300K worth of equity 

As soon as directors were free to deal after the interim results, the CEO designate bought £48,400 worth of equity at 119p, the chair just over £50,000 at 126p, a second non-executive director £125,000 at 125p, a third £25,000 at 124p, and a fourth nearly £40,000 at 132p.  

On 17 August, however, Ascential Plc, which may be a custodian for institutional shareholders, reduced its stake from just below 13% to 12%, then on 19 August slightly lower to 11.9%. A dilemma can be institutions selling towards a low point simply to not have to explain a poor performer to trustees.  

Nevertheless, further downside is possible given asset manager equities are quite a geared play on markets. 

Two hedge funds remain short of the stock 

Within 1.76% of Jupiter’s issued capital out on loan, BennBridge raised its position 0.10% to 0.80% on 8 August, although GLG Partners reduced its position by 0.23% to 0.96% on 22 July. 

Such funds may be using asset manager short trades as a wider hedge against equity positions. 

In conclusion, I think an averaging-in approach could potentially pay off on a multi-year view. Perhaps I am missing a chance, being cautious for now. Hold. 

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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