Record PLC upside

Is there more upside from Record PLC after rising by 400%?

Record PLC has seen recovered from the lows in 2012 as the shares have appreciated by more than 400% since.

With continuing risk from further regulation and clients unwilling to put their money into Record other products, is there more upside to their share price?

 

Half-year Report

Share Price: £0.47 (up 1%)

Market Capitalisation: £97m.

 

What to make of today results?

Let’s start with some with basic numbers, and then we go into depth on these numbers.

Here are the highlights: –

1). AUME increased to $61.2bn / £45.6bn;

2). Revenue of £12.2m was in line with the second half of last year;

3). Operating margin fell to 31% from 33%;

4). Profit before tax increased by 6% to £3.8m (six months to 30 September 2016: £3.6m);

5). The group repurchased for cash 22.3 million shares for cancellation via Tender Offer during the period, representing approximately 10% of the then issued share capital.

 

Now, we need to make sense of these results in detail.

Interpretation of Interim Results

Asset under management increasing to $61.2bn is another record high, as Record (no pun intended) continues their recovery for the fifth year in a row. However, 85% of this fund is allocated to “Passive Hedging”, a product that earns Record the lowest amounts, in terms of basis points. That is 3 basis points or 0.03% of allocation fund size., down from 4 basis points. This compares to their dynamic hedging (14 basis points), Multi-product (18 basis points) and Currency for Return (17 basis points).

All these other products earn 4 times more than passive hedging. But, their fund sizes compared to passive is 20 times smaller!

Which is why passive hedging has contributed 53% of the management fee.

 

Revenue performance

Despite the increase in revenue from last year, it is still well below their revenue generated before the financial crisis when it was making up to £66m per year in 2008, but that was a one-off.

The 14% increase in revenue is correlated to the growth in fund size which grew from $55bn to $61.2bn, an increase of 11.3%.

 

Profit performance

Profit before tax might have grown to £3.8m from £3.6m, but operating margin fell to 31%. You can thank administrative expenses rising from £6.97m to £8.33m, a 20% increase.

 

Balance Sheet Position

The fall in equity to £25.8m from £35m a year ago was down to the company’s tender offer to cancel 22.5m shares at a cost of £10.8m. This is also the reason behind the fall in cash and cash equivalent (including their money market instruments) to £26.3m from £36.1m.

 

Outlook

Management has pointed out their concerns about new regulations affecting their business but says the company is working hard on maintaining client relationships. They also point to clients switching to their lower-margin passive hedging or terminating their mandates.

 

 

Historical Performance

 

History of AUME

Looking at Record PLC historical data. We see the company went from hell and back when assets under management fell from $55.7bn in 2008 to a low of $30.9bn in 2012 to $58.2bn in 2017.

 

Profit didn’t recover

However, operating profit didn’t recover because in 2008 Record made £39m, but 2017 saw only £8.6m. What could be the cause?

First, you can attribute this to the company cutting the percentage it charges client because of increasing competition.

Secondly, the changing dynamics of the composition of how the fund is getting allocated.

 

Explanation

Back in 2008, the company can make 28 basis points in fee from its absolute return asset management fund, the size of this fund was $29bn. Now, their highest fee product is called “multi-product”, where management gets 20 basis points in fee, but the size of $2.5bn is ten times smaller. Their passive hedging dominates the overall fund with $48.3bn (83% of total funds), but it only earns them 4 basis points in fees.

 

 

Also, there is a performance fee back in 2008, when it made £22.2m. Now, it no longer earns these fees.

 

Another thing that management needs to cut is staff pay. Excluding directors pay, the average salary per employee back in 2008 was £295,000, also the average pay per director was over £1m. Now, staff pay has more than half to £120,000 with the average director pay coming at £300,000.

Fun Fact: Remuneration payback in 2008 of £21.9m would have exceeded Record’s revenue in 2012, 2013, 2014, 2015 and 2016!

 

 

Why has Record PLC struggle?

Simply the fall in active management in favour of stability. This is the reason why Record PLC saw passive funds rose from 32% in 2008 to over 80% in 2017 and is the main reason behind the fall in management fee (See passive funds earn the lowest fee).

But is the table turning back towards active management? According to Macquarie, it looks like it as the economy becomes sterner and interest rates begin to rise.

 

 

Putting it all together

At £94m in market capitalisation, I see Record being fairly-valued.

 

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 DISCLAIMER

 

The above analysis is based on my opinion and nobody else. It does not constitute professional investment advice. Data is correct on at the time of availability.  I don’t hold the company’s shares unless stated.