Interactive Investor

Stockwatch: A momentum play in asset management

3rd July 2018 09:27

Edmond Jackson from interactive investor

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This company is in rude health and is already a hugely successful recommendation, but Edmond Jackson thinks earnings estimates still look conservative.

Does fast-growing fund manager Liontrust Asset Management offer further upside due to the momentum manifest in its latest annual results, or is its stock becoming toppy as equities get challenged by trade tensions and a net tightening of monetary policy?  

Liontrust is quite a study as to weighing "bottom up" company signals versus "top-down" macro, especially after results reflect a good few years of financial prosperity, yet with change now apparent.  

A relatively small but respected asset manager can be an excellent long-term growth business, as people live longer and need to plan for more financial self-sufficiency, although it is prone to cyclicality as markets/sentiment change, hence the ability to gather assets on which management fees are based.

Liontrust remains interesting given it has established a good track record but, with its shares at around 630p, still has a modest size of £320 million thus scope to boost earnings.  Data tables like the one shown suggest it trades on a prospective price/earnings (PE) multiple of around 14 times and yields 3.5%. That appears modest given the 43% earnings per share (EPS) uplift the company proclaims, but mind the extent of costs written back such that the PE on latest statutory results is 38 times.

Outperforms even the CEO's cautionary stance

I've drawn attention to Liontrust annually since October 2012 at 112p, when a ninth successive quarter of positive inflows affirmed its marketing and investment skills – in a context where equities were benefiting from QE and low interest rates.  

A year ago, at 460p, I thought Liontrust was well-positioned long-term in the industry, but noted the chief executive selling 23% of his holding - 211,157 shares at 450p - which looked like hedging his bets as regards how long this equities bull market can last.  

Yet for so long as dividend yields are materially in excess of interest rates and equities experience corrections not a crash/recession, the environment remains benign for asset-gatherers. 

Liontrust is well-established in terms of management and infrastructure, hence revenue growth can drop through rather well to profits unless competition cuts into fees and extra commissions are required to achieve fund-sales.  Thus, the consensus estimate (representing three brokers) only for about 5% earnings growth this current financial year – according to a “normalised” view – is most likely a conservative guess.

Variations in a normalised earnings view

Latest prelims to 31 March 2018 proclaim adjusted pre-tax profit of £27.4 million, up from £17.2 million, and adjusted diluted EPS of 42.7p versus 29.8p in 2017.  The Company REFS table shows much lower historic figures e.g. £9.3 million pre-tax profit in 2017 with EPS of 15.3p, roughly half of what Liontrust presents.  

Note 5 to the accounts "adjusted profit before tax" shows costs totaling £15.1 million added back to £12.3 million pre-tax profit to derive the £27.4 million "normalised" view.  These include a £4.2 million share incentivisation expense and £5.8 million for services relating to acquisitions and restructuring; and, while they detract from a sense of underlying business performance, nevertheless they are costs.  

Meanwhile, depreciation and intangible asset amortisation – the only charge I’d be inclined to add back for a true sense of earnings – is just £2.5 million.

Assets expansion generates strong cash flow profile

For the financial year to end-March, assets under management have expanded 61% to £10.5 billion, and the new financial year has started well - raising £214 million with the launch of three funds managed by the global fixed income team, taking assets under management up to £11.3 billion versus £6.5 billion in April 2017.  

This is predominantly organic growth and represents an eighth successive year of positive net sales, if correlating broadly with monetary stimulus boosting financial asset values and sentiment since the 2009 recession.

Note 3 to the accounts clarifies revenue as £72.4 million from investment management fees, initial charges and commissions versus £4.5 million performance fees. Both would likely suffer in a "risk-off" financial climate, although the more variable performance fee element is insubstantive at 5.8% of total revenue.  

The cash flow statement profile is strong, with net cash from operations doubled to £27.3 million, reflecting a quality business model and enabling financial year-end cash to nearly double also to £30.8 million, even after paying out £7.9 million as dividends and also nearly £1 million spent buying back shares.  Liontrust, therefore, does not need to employ any debt, so is immune to interest rate rises save their effect on equities (demand) generally.

Liontrust Asset Management - financial summary             Estimates
year ended 31 Mar 2013 2014 2015 2016 2017 2018 2019
               
Turnover (£ million) 20.4 28.5 36.8 45.0 51.5 76.9  
IFRS3 pre-tax profit (£m) -3.9 3.2 7.3 9.4 9.1 12.3  
Normalised pre-tax profit (£m) -0.3 3.7 7.3 9.5 9.3 27.4 14.7
Operating margin (%) -0.5 13.1 19.8 21.1 17.8 16.0  
IFRS3 earnings/share (p) -11.2 4.6 13.6 16.1 14.8 16.9  
Normalised earnings/share (p) -0.9 5.8 13.6 16.3 15.3 42.7 45.0
Price/earnings multiple (x)           14.8 14.0
Annual average historic P/E (x)   46.8 28.5 18.6 28.3 23.0  
Cash flow/share (p) 11.7 18.7 10.2 17.8 24.2    
Capex/share (p) 0.3 0.4 0.2 0.2 9.2    
Dividend per share (p)   2.0 4.0 9.0 13.0 21.0 22.2
Yield (%)           3.3 3.5
Covered by earnings (x)   3.6 3.6 1.9 1.2 2.0 2.0
Net tangible assets per share (p) 17.7 30.0 41.2 52.0 50.4 46.4  

Source: Company REFS              Past performance is not a guide to future performance

40% increase in the total dividend reflects confidence

The re-rating to a dividend of 21p is significant and also relative to the point I make about accounting for earnings: the board effectively distributing statutory earnings in full plus the aspect of writing back amortisation, before the other costs weigh.  

But it still shows strong confidence in Liontrust’s momentum, to raise the dividend to this extent rather than allow a margin of safety for dividend growth to continue say if the financial environment gets tougher.  Time will tell, as to the ultimate wisdom of this, with the Bank of England lately warning how financial risks have increased globally in the last six months.

As for development prospects, the arrival of a "sustainable investment" team from April 2017 has helped position Liontrust in a new area of investment demand e.g. for companies/stocks countering the extent of plastic globally; and five out of seven fund awards Liontrust has received over the past year have been for "sustainable" funds, also the "economic advantage" theme.  The addition of a global fixed income team early this year is similarly hoped to broaden the client base and deepen relationships.  

Mind how the funds' ownership profile is still largely UK private clients at 78% versus 11% institutional, 7% multi-asset and 4%% offshore funds – i.e. demand remains geared to them retaining faith in funds investment through uncertain times.  

Notional evidence suggests people do nowadays tend to eschew market timing and use setbacks to commit fresh capital rather than get out of stocks/funds, as if financial planning advice has sunk in.  

Net inflows to funds breached £1 billion in the last financial year compared with £482 million in 2017, as optimism ran high.  Industry performance quartiles applying to the funds are generally good, with many 1 and 2 scores, except mainly for two European equity income funds.

Near-term market risk, long-term opportunity

Liontrust is, therefore, in rude health with a promising long-term future; the near-term question being whether fund management stocks especially could get hit in thin summertime markets as international trade tensions fester. 

I'd be disinclined to lock in gains unless the stock is in a tax-free wrapper, it being impossible to call as yet whether a healthy market correction is underway or more companies start to warn on profits.  With fresh money, however, pricing could get more attractive, even if it is hard to specify an exact entry level given the contrasts in views on earnings.  The broad tactical stance is: Buy on weakness
 

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

Disclosure

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.

 

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.

Disclosure

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.

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