Interactive Investor

Stockwatch: is it time to buy this share on a 9% yield?

5th May 2023 12:00

by Edmond Jackson from interactive investor

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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.

Investor studying data

After recently examining Jupiter Fund Management (LSE:JUP), another relative special situation – ostensibly cheap – is mid-cap Liontrust Asset Management (LSE:LIO).  

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)36.845.051.585.897.6113175246
Net profit (£ million)
Operating margin (%)19.720.917.714.322.714.720.032.3
Reported earnings/share (p)13.616.114.816.838.624.346.397.6
Normalised earnings/share (p)16.819.317.226.740.238.480.1128
Operational cashflow/share (p)9.517.323.647.333.537.172.9163
Capital expenditure/share (p)
Free cashflow/share (p)7.816.623.247.032.336.872.5162
Dividend per share (p)
Covered by earnings (x)
Cash (£m)16.619.118.432.938.743.171.9121
Net debt (£m)-16.6-19.1-18.4-32.9-38.7-35.5-68.5118
Net assets (£m)23.726.226.648.455.690.0163184
Net assets per share (p)52.257.658.497.6163162251284

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. 

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. 

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.

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