Interactive Investor

Stockwatch: rationalisation at this City firm prompts upgrade to buy

28th July 2023 10:41

by Edmond Jackson from interactive investor

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This company is slicker after management action and, with the share price still not far off a record low, analyst Edmond Jackson is moved to raise his rating on the stock.

Share upgrading 600

I keep asset manager stocks in the frame – attuned to their updates – as a potentially useful “buy” when markets are weak and sentiment is against. 

Since their business models are operationally geared (changes in revenue magnified in profits) the stocks are typically now on single-figure price/earnings (PE) multiples and high single-digit yields. 

Picking the bottom is tricky given a recession would further impact investment confidence, but assuming economies muddle through then ratings are already cheap. 

Relatively smaller Jupiter Fund Management (LSE:JUP) and Liontrust Asset Management (LSE:LIO) offer spicier risk/reward than the multi-billion-pound M&G (LSE:MNG) and Legal & General (LSE:LGEN). Yet all merit attention for what their updates imply for the sector.  

Special dividends are warranted by a £284 million cash position 

Yesterday’s interim results from Jupiter saw a 20% leap in the share price from 108p in early dealings as buyers reacted to a 3.5p ordinary dividend plus a 2.9p special dividend – implying a near 6% yield simply in respect of the first half-year. The rally eased to a 6% gain to 115p by the close, however, showing sentiment remains cautious.

A total interim payout of 6.4p compares with recent consensus for slightly less than 6.0p for 2023 as a whole. It shows sentiment has become cautious to an extent that stocks are sensitive to any whiff of a beat. 

Mind how the interim 2022 payout was 7.9p, which rose only to 8.4p for the full-year, nearly half the recent years’ total dividend of 17.1p. 

Understandably, the board is returning capital given the end-June balance sheet had cash up a third like-for-like to £284 million – although it is tricky for outsiders to decipher what extent of this is truly “available” versus required cash reserves when managing over £51 billion of financial assets. 

Otherwise, the interim cash flow statement was a bit perturbing – by way of a 61% fall in net cash from operations to £43 million. Note 17 to the accounts clarifies this as wholly due to an adverse movement in trade and other receivables, in a generally lumpy set of “adjustments” both this year and last.  

It seems to me this is another reason – besides a relatively cyclical business – why the board operates an ordinary/special dividend split. Yes, it is a cash-generative business, but flows might be variable, hence a “special” aspect to dividends can be dropped as necessary, avoiding the harshness of a cut in the ordinary payout. 

Mind the “old chestnut” dilemma with people businesses, manifest on the financing side of the interim cash flow statement: a whopping £24 million purchase of shares for the employee benefit trust versus below £3 million going out as dividends and £2 million buying shares for cancellation. They will say “we have to attract and retain the best people” but is such a contrast satisfactory? 

Jupiter Fund Management - financial summary
Year-end 31 Dec

2016201720182019202020212022
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)0.81.10.70.80.50.61.0
Free cashflow/share (p)31.241.236.431.920.233.429.1
Dividend per share (p)14.717.117.117.117.117.18.4
Covered by earnings (x)2.02.01.81.61.21.61.1
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.

Robust performance despite muted investor appetite

Despite a few concerns about the dividends context, I like Jupiter’s overall resilience through a recent time of uncertainty – with interest rates rising and concerns about the economy.  

Gross inflows remained strong at £7.7 billion and management cites £2 billion net inflows from overseas clients, with international assets under management (AUM) up from 28% to 36% like-for-like. It implies plenty of UK individuals sold investment funds, whether out of fear or to cope with higher cost-of-living, which accords with media reports. 

Yet gross retail outflow is not quantified beyond citing £1.7 billion net redemptions from funds, with UK retail the majority source. Overall “small positive net inflows” were achieved, which is the first 12-month period of net inflows since 2017. 

The figure for institutional funds AUM did not appear disclosed in the 2022 interim report, but management cites “continued momentum,” with last June’s total at 18% of group assets.  

The value of AUM edged up 2% to £51.4 billion “predominantly driven by positive market movements.” Average AUM was however lower for the comparable period, hence net revenue down 11% to £181 million.  

But a “continued rigorous focus on cost control” meant that despite an 11% fall in net revenue to £181 million, underlying pre-tax profit jumped 56% to over £46 million.  

This was helped by bonuses to fund managers slumping to £3.5 million from nearly £25 million in the first half of 2022, chiefly due to a slide in equity values as the monetary policy screw has tightened.   

It also benefited from a rationalisation of funds, where “identifying higher-than-expected cost savings” sounds as if further benefits are due. Management still intends to launch five new thematic funds in the fourth quarter to be run by Jupiter’s “systematic” team. 

Essentials of Jupiter’s narrative sound like the group has tilted positively for underlying performance; it just needs the context for asset-gathering to improve. 

Other notable issues from the interim accounts 

Cost-cutting talk is backed by administrative expenses as a percentage of turnover reducing materially from 71.4% to 67.1%. 

Even so, staff compensation (before performance fees) has risen to 41% of net revenues – with the regular excuse asset managers give - “to ensure we attract and retain key talent”. It will apply also to £24 million spent by the employee benefit trust on acquiring shares, which meant the total net outflow from financing tested £36 million and whittled down the improvement in cash over the period to just £5 million. 

But one shouldn’t disregard this key point for value - a £284 million cash position is very strong relative to Jupiter’s £627 million market value. It is a key reason for comfort to hold the stock through another downturn and add on weakness. A 12-year market low of 84p was made last October. 

A 45% reduction in net finance costs to £1.8 million took just 5% of operating profit but, ironically, long-term financial debt remained near-constant at around £49 million. A similar amount of financial liabilities is denoted under current liabilities.  

A 24% reduction in trade payables to £364 million is welcome but they continue to outweigh £206 million trade receivables. Of £849 million net assets, 70% constituted goodwill/intangibles, which is to be expected of a “people business.”   

I just wish note 12 (on balance sheet cash) clarified what extent might be insisted on by regulators, as a buffer.  

Is there a future for actively managed funds? 

If you believe people will increasingly buy index or exchange-traded funds (ETFs) – according broadly to what asset criteria they seek – then artificial intelligence (AI) will take over from fund managers.  

Yet the active/passive debate has persisted for decades. I would be surprised if active human management goes by the wayside. The passive fund universe is shorn of hope that something extra can be added.  

Meanwhile, AI has yet to establish convincing track records for active funds, and there is still a faint overhang of the 1998 debacle of Long-Term Capital Management. This leveraged hedge fund boasted high returns, using quantitative models to exploit “mis-valuation”, with leverage to juice returns. 

Perhaps asset manager CEO’s will take a pragmatic view of AI, bringing the technology on board, selectively and steadily. 

The crux for asset manager equities currently remains the fear element in markets. Understandably, it is distilled in this financial sub-sector, yet the likes of Jupiter are now slicker after a rationalisation. 

Having rated the stock “hold” in April at 131p, I upgrade at 115p with my regular caveat about averaging in. Buy. 

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

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