Does the failure to buy Switzerland-based Global Asset Management – typically known as GAM – actually create a “buy” case for unloved Liontrust Asset Management (LSE:LIO)?
Some in the market think so, given Liontrust’s 10% rise to 660p in response to 24 August news that only a third of GAM shareholders had accepted the offer relative to just over two thirds required.
The context is a near-persistent decline from a 2,455p high exactly two years ago, coinciding with the shift in expectations towards interest rates to tackle inflation. It’s a reminder how this simple macro relation can be so influential on stock values, compounded here because asset managers tend to be a geared play, rising and falling more than the market.
I thus became intrigued in May at 825p but was not convinced to rate the shares a “buy” at 825p – chiefly due to concerns about how interest rate rises could yet bear down on economies, leading to profit warnings and undermining equities.
Perhaps a lesser factor in Liontrust’s fall is a mainly UK private investor client base, which may help explain fund outflows – as people panic to protect wealth and/or cope with the higher cost of living. It is by no means a UK equities specialist, but this asset class’s relatively weak performance globally will not have helped either.
But unless consensus forecasts are over-optimistic, you have to wonder if a price/earnings (PE) multiple slipping below eight times – assuming £52 million net profit expected in the year to 31 March 2024, then £54 million – (over) prices in uncertainty.
A 72p per share dividend and yield near 11% implies the market does not believe management will achieve this “target” pay-out. Yet the business is strongly cash generative, so it would take a recession and further dents to investor confidence to see it slashed rather than possibly trimmed.
The stock could simply be in value territory, hence is sensitive to any perception of a better risk profile.
|Liontrust Asset Management - financial summary|
|year end 31 Mar|
|Turnover (£ million)||36.8||45.0||51.5||85.8||97.6||113||175||246||243|
|Net profit (£ million)||6.2||7.3||6.8||8.7||20.1||13.2||27.7||59.2||39.3|
|Operating margin (%)||19.7||20.9||17.7||14.3||22.7||14.7||20.0||32.3||20.1|
|Reported earnings/share (p)||13.6||16.1||14.8||16.8||38.6||24.3||46.3||96.6||61.2|
|Normalised earnings/share (p)||16.8||19.3||17.2||26.7||40.2||38.4||66.1||106||73.8|
|Operational cashflow/share (p)||9.5||17.3||23.6||47.3||33.5||37.1||72.9||153||67.6|
|Capital expenditure/share (p)||1.7||0.7||0.4||0.3||1.2||0.3||0.4||0.8||0.4|
|Free cashflow/share (p)||7.8||16.6||23.2||47.0||32.3||36.8||72.5||162||67.2|
|Dividend per share (p)||8.0||12.0||15.0||21.0||27.0||33.0||47.0||72.0||72.0|
|Covered by earnings (x)||1.7||1.3||1.0||0.8||1.4||0.7||1.0||1.3||0.9|
|Net debt (£m)||-16.6||-19.1||-18.4||-32.9||-38.7||-35.5||-69.1||-121||-127|
|Net assets (£m)||23.7||26.2||26.6||48.4||55.6||90.0||163||184||221|
|Net assets per share (p)||52.2||57.6||58.4||97.6||163||162||268||301||340|
|Source: historic Company REFS and company accounts|
GAM: a missed opportunity or dodged bullet?
I had actually also been intrigued by the potential merger by way of a radical re-rating of Liontrust’s global reach and asset class exposure. For over 20 years I have been aware of GAM’s history in Switzerland, also with offices in Asia and the US, and its capabilities in bonds and other assets, despite recently running into difficulties. Seven of its 13 largest investment strategies were ranked in the top decile over the last three years.
For 2022 it posted a remarkable £273 million loss - up from £21 million in 2021 – as assets under management (AUM) fell 24%, currently around £61 billion relative to £29 billion for Liontrust.
Liontrust’s offer of £96 million equivalent for GAM compared with its own capitalisation of around £430 million, hence despite arguing this was a fair offer in the circumstances, only a third of GAM shareholders were in favour.
Yet Silchester International Investors, GAM’s largest shareholder with over 17%, had been in favour of a deal, so effectively encouraged Liontrust to pursue it.
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Liontrust CEO John Ions said: “GAM presented the opportunity to accelerate Liontrust’s strategic objectives. While this is not the result we wanted, our strategy will not change, with a continued focus on expanding distribution and the client base, diversifying the product range, attracting talent and enhancing the investor experience.”
A contrary view, however, is that all takeovers are risky – especially so, where “people” businesses are involved and there have been financial losses. Exceptional costs and share dilution needed to achieve it all are mere inconveniences.
Liontrust will not now add another nine million shares to 65 million issued, but another £9 million of exceptional charges – for professional fees – will hit the March 2024 accounts after £2 million last year.
Strategically I find it quite disappointing the deal has not happened given asset management is highly competitive. If you are going to hold their equity, there needs to be some distinctive factor for growth – takeovers being one option.
Crux remains: can a global slowdown be avoided?
I would acknowledge to sceptics: if the macro context was to deteriorate further, this would add to the challenges of a big integration.
More economists are saying that central banks will not even get near restoring 2% inflation without some extent of recession, given tight labour markets.
US stocks fell yesterday because enough people are being paid well enough to increase consumer spending, which puts the Federal Reserve in a dilemma over interest rates.
Their stocks have fallen despite a quite rash assumption in markets that interest rates have peaked and that there will be an economic soft landing and rates will ease again.
More realistically, I suspect rates will stay where there are, but we are yet to see the full effects on company earnings. The question is what extent this reflects “muddling through” versus a recession.
The sceptic’s case would continue: how the riskiest stocks can actually be those on cheap PE’s and high yields ahead of a downturn.
But at some point – and as the approach for GAM shows – stocks become takeover targets.
Intention to grow dividend in line with underlying earnings
I pick out the “target” for a (held) dividend of at least 72p per share this financial year, from a 24 August announcement on the GAM deal failing. “Thereafter, the intention [my italics] remains to grow the dividend in line with our view of underlying earnings per share...” Mind, this is justifiably non-committal in case of exceptional events.
But what is the probability of recession that is already not priced into stocks? On a long-term view it is hard to argue that asset manager stocks are not in value territory.
The end-March balance sheet had stable cash of £121 million versus the cash flow statement showing £46 million going out in support of the 72p dividend, although mind how regulators will require a cash buffer.
When will falls in AUM actually end?
I respect it is hard to see asset manager stocks definitively turning up while disappointing updates persist.
Liontrust’s year to March 2023 had shown a 6% decrease in assets under management to £30.5 billion, with £2.5 billion of inflows failing to match a £4.8 billion outflow. Even so, it represented the seventh-largest gross retail sales in the UK.
The three months to 30 June then showed a 6% decline to £29.5 billion, net outflows of £1.6 billion showing this not chiefly due to weak markets. Even as of 12 July, AUM had declined a further £0.5 billion – the CEO citing a “risk-off environment”, with equities having had net negative UK retail sales in 10 of the 12 months to May 2023.
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It goes somewhat against recent past experience where falls in equity markets did not discourage people investing. Indeed, a “drip-feed” long-term approach appeared to become consensus, helped by financial education. Long-term data shows equities offering good protection against inflation.
So is it a speculative or investment-grade “buy”?
There is definitely a speculative element given you are taking a view on markets; asset managers being a geared play. It is hard to assert a “margin of safety” in a people business. An initial drop to 652p this morning, then recovery, underlines how this stock pegs markets. Yet the dividend could be cut by a third and still represent a yield over 7%. A case therefore exists to average in. Buy.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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