Interactive Investor

Stockwatch: a highly geared share and recovery play

28th April 2023 11:33

by Edmond Jackson from interactive investor

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After missing a chance to buy near last year’s low, analyst Edmond Jackson has another look at this mid-cap share. Avoid a recession and it could fly.

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Last August, I examined Jupiter Fund Management (LSE:JUP) as the stock struggled to sustain mid-cap status. It had peaked at 580p in 2017 but, despite rebounds, fell to 275p by mid-2021 and had continued down to 100p.  

I thought an averaging-in approach could potentially pay-off, and conceded I was possibly missing a chance by cautiously rating it “hold”. 

The price continued down to 88p by early October then rebounded to 151p by early March. It has since drifted to around 131p currently. 

Since asset manager equities are largely a geared play on market values, I do not fret about “missing the boat”. Without taking a negative view that it is just a rally in a bear market, I would mind how US business indicators are softening under higher interest rates, and slowdown there could spread globally. 

Why Jupiter could be a useful recovery situation  

Asset manager business models are potentially attractive due to operational gearing: once fixed costs are covered, higher fees/revenues both from net inflows and asset appreciation, translate into materially higher profits – unless managers get greedy and a board fails to check any bonus scheme siphoning off the benefits. 

This does, however, work both ways – so timing is important unless you are prepared to tuck the stock away when it looks cheap and withstand volatility.  

Jupiter has quite a chequered reputation, I would say, because since founding in 1985 it has often taken a relatively more enterprising approach to stock-picking. That hit trouble, for example, in recessions, and in the last decade had too many funds. 

When the stock is out of favour in weak markets, however, a sense it is relatively risky means that at around 130p currently the forward price/earnings (PE) is around 12 times. That compares with 14 for Schroders (LSE:SDR).  

I recall it experiencing challenges by the early 1990’s recession and it was sold to Commerzbank progressively by 2000. A management buy-out followed in 2007, then a flotation at 165p a share by mid-2010, with employees retaining over 40%. They have sold down to own a modest 4% nowadays though.  

A new CEO was appointed last October, having joined as chief investment officer in January 2022 from that role at Artemis. It raises the odds of a fresh approach, although I emphasise that a fair wind from markets is really needed for asset manager equities to rise consistently. 

2022 was another low for performance but operations are improving

The financial summary table shows net profit around £490 million was only a repeat of 2019 and 2020. 

A key reason asset manager shares were hit in 2022 was the unusual situation of equities and bonds performing badly. Such asset classes typically perform inversely – and is why consensus advice is to hold both – but last year the Ukraine war and a shift to monetary tightening disrupted that. 

Assets under management fell 17% to £50.2 billion – with £6.8 billion due to market movements and £3.5 billion, net outflows. That annual net figure remarkably included £15.1 billion inflows, but at least the net position for the second half was £0.1 billion positive, driven by institutional demand. 

It is a moot point whether individual or institutional clients stay calmer in volatile times, yet unless turbulence returns this year then it appears loose holders were flushed out, raising the odds of better performance.  

Operational gearing is shown by this 17% fall leading to a 30% decrease in net revenue and a 64% fall in underlying pre-tax profit, “despite careful cost control”. 

Jupiter Fund Management - financial summary
Year-end 31 Dec

Turnover (£ million)402460461419501618444
Operating margin (%)42.641.938.936.527.530.814.5
Operating profit (£m)17119317915313819164.3
Net profit (£m)13615514312310515047.9
Reported EPS (p)29.633.731.126.820.826.98.9
Normalised EPS (p)29.733.831.528.923.529.09.5
Earnings per share growth (%)3.914.1-6.9-8.3-18.723.5-67.2
Return on capital (%)27.729.728.022.213.317.96.5
Operating cashflow/share (p)32.042.337.132.720.734.030.1
Capex/share (p)
Free cashflow/share (p)
Dividend per share (p)14.717.
Covered by earnings (x)
Cash (£m)331368390391441497445
Net debt (£m)-317-332-316-333-337-397-349
Net assets (£m)610640624612886901843
Net assets/share (p)133140136134160163154

Source: historic company REFS and company accounts

New CEO objectives are welcome but what will be his impact? 

The new chief executive declared at February’s prelims: “We instigated a restructuring of our fund range, recognising we had too many sub-scale, non-differentiated funds that were diluting our active proposition...changes made to almost a third of the fund range...once completed later in 2023, we will have around 25% fewer funds.” 

This does make sense and from a revenue growth perspective, interesting how a second objective is “scaling up business in selected geographies”. A dilemma is the UK market being intensely competitive: last year and by way of client location, it represented 75% of revenue versus Europe, Middle East and Africa at 18%, Asia 4% and rest-of-world 3%. 

Two further strategic objectives strike me as wishy-washy: funds are to be “curated” to broaden their appeal to clients, although it’s unclear quite what this means. I say performance is all. 

And forgive my cynicism but “deepening all relations with stakeholders” sounds another woke tick in the workplace. 

I still respect a new broom approach and said tight control of costs, should be net-beneficial.  

A ‘strong pipeline’ despite uncertain year ahead 

A 25 April update cites first-quarter 2023 assets under administration up 1% to £50.8 billion, albeit chiefly reflecting £1.5 billion positive market movements. It’s a reminder how asset managers are substantially hostage to fortune.  

This offset £1.0 billion net outflows from retail and wholesale, while institutional clients saw modest £0.1 billion inflows driven by global equity funds.  

Yet the company says: “Our pipeline of late-stage opportunities remains strong and we look forward to increasing scale in this channel over the medium term.”

This is encouraging for existing holders, which you could say affirms what I should have done last August: follow through a sense to average in, with a “buy” not “hold” rating. 

It’s unclear quite whether consensus forecasts involve guidance from the company, yet to me they do not logically connect.  

Revenue is targeted to fall 18% this year to £363 million, net profit to rise 42% to £68 million, albeit with earnings per share (EPS) trailing up 28% to 12.2p – hence a December 2023 PE under 11 times. 

What may significantly square them, however, is an operating margin recovery after it halved to 14.5% last year; where a new approach on costs could restore it to historic levels twice this (see table). 

Dividend expectations belie a sense of recovery: after the pay-out fell from a consistent 17.1p a share to 8.4p in respect of last year, only 6p is targeted – and to be maintained in 2024. Covered twice by projected EPS, that implies a moderate 4.6% prospective yield, but Liontrust Asset Management (LSE:LIO) currently offers 8.5% with around 1.5 times cover at 848p.   

Hinges on interest rate/inflation conundrum 

I have made this essential macro point regarding consumer discretionary spending stocks, and it is even more pertinent here. 

If inflation falls without materially higher interest rates, and recession is averted, it will affirm last autumn as a market low – from which investor confidence will continue to rise. 

But a US recession sometime from the second half of this year, with effects spreading wider, would pull the rug from corporate earnings projections. Markets would drop again. 

Short-selling reflects this scope for contrasting views 

Last August, two hedge funds were disclosed with a short position of over 0.5%, with 1.76% of Jupiter’s issued share capital out on loan. 

That has actually risen to 2.24% due to a third fund – Phase 2 Partners – appearing over 0.5%, with a 0.13% increase to 0.8% as of 18 April.  

Otherwise, GLG Partners trimmed its short 0.12% to 0.77% last March and Tellworth Investments, 0.10% to 0.67% earlier this month. 

It reflects polar views according to whether inflation gets slain without recession. 

So, while I was over-cautious on the basis of the last six months, the next six are anyone’s guess. I therefore remain with: Hold. 

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

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