For investors who appreciate the risks, this £500 million company has just become interesting. Here’s what analyst Edmond Jackson thinks of this possible opportunity.
From 275p seven years ago, the shares climbed to a 2,350p all-time high in September 2021, as financial assets broadly also peaked at the turn of (expectations towards) the interest rate cycle. Liontrust has since seen a substantial mean-reversion back to around 800p, capitalising the business at £520 million.
Respecting how asset manager equities are often a geared play on markets has proved effective here. At around 1,300p in January 2021, after Liontrust had reported a 43% rise in assets under management in just three months, I suggested taking profits on the basis inflation would rise and monetary policy tighten; only a modest price/earnings (PE) ratio was justified, rather than a mid-teens multiple.
Last July at 920p, I thought it premature to buy, given recession risks.
If recent forecasts are fair – for a consolidation year to 31 March 2023, with 3% earnings per share (EPS) growth based on £62 million net profit, the PE multiple is just 7.4 times. Since asset management is strongly cash generative, with few capital expenditure needs beyond IT, it appears analysts have been guided towards the 72p a share dividend being maintained, hence a 9% yield.
Why is this a ‘distress’ yield rating?
When yields rise, even only into high-single-digits, you need to consider carefully why the market fears it might not be fully paid out. Over the last year, for example, the market correctly priced housebuilding equities for dividend cuts despite guidance being maintained.
The table shows a strong record of dividend growth, with plenty of headroom from cash flow per share. This has likely been helped by a series of acquisitions, and also in the context of broadly rising asset prices under loose monetary policy.
Liontrust Asset Management - financial summary
Year end 31 Mar
|Turnover (£ million)||36.8||45.0||51.5||85.8||97.6||113||175||246|
|Net profit (£ million)||6.2||7.3||6.8||8.7||20.1||13.2||27.7||59.2|
|Operating margin (%)||19.7||20.9||17.7||14.3||22.7||14.7||20.0||32.3|
|Reported earnings/share (p)||13.6||16.1||14.8||16.8||38.6||24.3||46.3||97.6|
|Normalised earnings/share (p)||16.8||19.3||17.2||26.7||40.2||38.4||80.1||128|
|Operational cashflow/share (p)||9.5||17.3||23.6||47.3||33.5||37.1||72.9||163|
|Capital expenditure/share (p)||1.7||0.7||0.4||0.3||1.2||0.3||0.4||0.8|
|Free cashflow/share (p)||7.8||16.6||23.2||47.0||32.3||36.8||72.5||162|
|Dividend per share (p)||8.0||12.0||15.0||21.0||27.0||33.0||47.0||72.0|
|Covered by earnings (x)||1.7||1.3||1.0||0.8||1.4||0.7||1.7||1.8|
|Net debt (£m)||-16.6||-19.1||-18.4||-32.9||-38.7||-35.5||-68.5||118|
|Net assets (£m)||23.7||26.2||26.6||48.4||55.6||90.0||163||184|
|Net assets per share (p)||52.2||57.6||58.4||97.6||163||162||251||284|
Source: historic company REFS and company accounts
Coincidental with central banks changing tack to raise interest rates, hence worries as to recession risks, Liontrust is currently making an audacious takeover of Global Asset Management, or GAM – based in Switzerland albeit with a strong UK client base. This could potentially be very rewarding, but if markets take another turn for the worse, then it may equally prove a “deal too far” in difficult conditions.
This, I believe, is why Liontrust equity fell 8% at one stage yesterday, after the conditional takeover of GAM was declared, amid weaker markets generally.
If things do start to unravel, in a people business the key talent will move elsewhere, exacerbating problems.
I think it essential to be aware of marmite prospects here, which probably hinge on whether financial asset values can muddle through 2023 – or another setback happens, linked to a recession.
Recent years’ performance bolstered by acquisitions
It is an understandable strategy given asset management is highly competitive. Assuming talented fund managers stay on, various costs can be cut and profits quickly benefit.
Over 13 years, assets under management have soared over 3,000% to £31.4 billion – helped by the acquisition of Alliance Trust, the UK operations of Architas, Neptune Asset Management in 2019 and Majedie Investments just a year ago.
A concern is whether they have all been integrated, with a distinctive investment process, before taking on the more ambitious restructuring likely required at GAM – especially if markets turn jittery again.
For example, of 38 retail funds, 16 have achieved first-quartile performance since launch or manager appointment, with only three in the fourth quartile.
- The highest yielding money market funds to park your cash in
- Insider: betting on a FTSE 250 bargain and FTSE 100 growth play
- 8 quality growth shares trading at cheaper prices
A financial year-end update cited adjusted pre-tax profit of £86 million, ahead of market expectations, although assets under management slipped 3.6% to £31.4 billion in a context of the UK retail investor industry anyway seeing net outflows in 10 of 12 months to end-March.
The Liontrust brand has, however, risen to sixth position in UK rankings, as well as across the rest of Europe, based on a March 2023 annual survey. While weak performance in a few funds may have contributed to outflows, it appears investors are less interested in UK assets as an investment class – hence the GAM acquisition, offering more diversified bond and global funds, helps re-balance.
Majedie also brought in alternative investment funds and global equity, plus the £1.1 billion Edinburgh Investment Trust. For £80 million initially plus £40 million deferred consideration, its team contributed £12 million performance fees last year out of Liontrust’s circa £17 million total.
As of 31 March, UK retail funds constituted 82% of £31.4 billion under management, with 37% themed as “sustainable investment”, 25% “economic advantage”, 16% “multi-asset”, 15% “global fundamental” and 5% “cashflow solution”, the remainder spilt between “global innovation” and “global fixed income”.
If all that sounds opaque, at least it is clear Liontrust remains significantly a play on UK investor confidence besides the value of investment assets.
Why the GAM acquisition is potentially a winner
A consideration of £96 million equivalent clinches GAM at 0.5% of its assets under management, taking Liontrust’s total to £53 billion.
This reflects GAM’s relatively distressed status, having posted a £273 million loss last year, up from £21 million in 2021, its assets under management down 24%. It saw outflows but noted seven of its 13 largest strategies were ranked in the top decile over the last three years. Significantly as to near-term reputation, one of its star fund managers became entangled in the UK Greensill scandal.
- Shares for the future: how I would set up a new portfolio step by step
- Stockwatch: remarkable collapse not the end for this AIM share
Liontrust is to issue 9.4 million new shares as funding, which may also help explain an 8% priced drop in response. According to the price agreed, I do fret about dilution, yet the deal (before transaction and re-organisation costs) is presented as “significantly earnings enhancing”.
Said benefits are to create a platform for growth, with wider funds and asset classes, and expand distribution globally with 62% of GAM’s assets sourced from continental Europe. GAM has a long history in Switzerland, and offices in Asia and the US offer scope for expansion there.
Tactically attractive albeit at a time of rising macro risk
Liontrust is going out on a limb, but I respect what it is trying to achieve, integrating GAM.
A cynical view is these two companies propping each other up at the bar, when time has been called on the global financial asset boom.
You know I am wary how inflation may prove stubborn and central banks keep interest rates higher than markets are pricing for, hence a possibly messy second-half-year. If my fears are justified, it is premature to buy asset manager equities, especially anything higher risk/reward like Liontrust.
Yet broadly, it is time to be aware of asset managers when markets are pressured. Equities turn up before the depth of any recession.
Liontrust is up over 20p this morning to around 825p. It is possible loose holders have substantially sold. In the short term, a dip relating to any share placing could provide an opportunity; there might even be a rise once funding is confirmed.
For investors who appreciate the risks, Liontrust is therefore becoming interesting. On a medium-term view and if you share my macro concerns, it is still timely to get to know the situation – setting you up to trade confidently. Watch to see any extent management buy into the equity-raising. Hold.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.
Please note that our article on this investment should not be considered to be a regular publication.
Details of all recommendations issued by ii during the previous 12-month period can be found here.
ii adheres to a strict code of conduct. Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.
In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.