25 August 2015
By Maynard Paton
Quick update on Record (REC).
Event: Business update published 25 August
Summary: A very disappointing statement. A major client has withdrawn $2.8bn from REC’s administration and I’ve had to slash my earnings guess by 27%. The shares have dropped significantly, though at 29p they remain valued at 10x possible profits and yield 5.7%. The business remains high margin and cash rich, but sadly still dependent on a small number of customers. I continue to hold.
Price: 29p.
Shares in issue: 221,380,800
Market capitalisation: £64.2m
Click here for my previous REC posts.
Statement:
“Record plc (“Record” or the “Company”), the specialist currency manager, announces today that the size of the tactical bespoke mandate which had increased by $1.75 billion in the first calendar quarter of 2015, has reduced by approximately $2.8 billion with immediate effect. This decrease is a consequence of currency market movements, and the size of this mandate may continue to be volatile. Fee rates for this mandate are consistent with previously published average fee rates for return-seeking strategies.”
My thoughts:
This news was very disappointing for a number of reasons:
1) The size of the reduction
While I could expect part (or even all) of this $1.75bn tactical bespoke mandate to disappear —after all, this mandate was always deemed “temporary” — I was not expecting a further $1bn to be withdrawn as well by the same client.
2) REC stated the mandate was reduced due to “currency market movements”
I am not clear of the logic here.
You see, for years REC has bemoaned a lack of new clients due to quantitative easing and the absence of strong currency trends.
But now there’s greater volatility with the devaluation of the Chinese yuan… and yet all of a sudden a major client jumps ship.
I can only presume REC’s services have not performed as expected of late — which is generally why customers leave — and the firm used the euphemism “currency market movements” as the reason for the client’s withdrawal.
3) REC’s latest results had shown some promise
In particular, those results revealed the dividend had been lifted by 10% following a few years of stagnation.
Furthermore, the figures displayed consistent profit progress between H1 and H2, while management had issued positive comments about the group’s near-term prospects.
All told, the situation at REC had been looking quite positive considering the group’s chequered history.
Valuation
Here are my updated calculations.
To start off, I’ve reduced REC’s Currency for Return AUMe by $2.8bn to $2.1b. The other two categories of client money remain the same.
My potential USD management fees earned from the AUMe amounts are based on the fee rates disclosed within the latest results. I’ve then converted the USD fees into GBP at £1:$1.58:
| Year to 31 August 2016 (est) | AUMe ($bn) | Fee Rate | Management fee (£k) |
| Dynamic Hedging | 9.3 | 0.15% | 8,829 |
| Passive Hedging | 42.1 | 0.03% | 7,994 |
| Currency for Return | 2.1 | 0.16% | 2,127 |
| TOTAL | 18,949 |
Staff and other costs remain the same as before, while the 30% bonus pool has been reduced by about £500k:
| Year to 31 August 2016 (est) | |
| Management fees (£k) | 18.949 |
| Less staff costs (£k) | (6,600) |
| Less other costs (£k) | (4,200) |
| Less 30% profit share (£k) | (2,445) |
| Operating and pre-tax profit (£k) | 5,705 |
I note my possible operating profit of £5.7m equates to 30% of my £19m revenue guess — not a bad margin for a business that has just suffered a significant client setback.
Anyway, after standard 20% tax, my new sums suggest earnings could be 2.06p per share. Previously I was looking for 2.81p.
REC’s market cap at 29p is £64m. Adjusting that for net cash and investments of £29m and regulatory capital requirements of £8.8m, I make REC’s enterprise value to be £44m or 20p per share.
Then dividing the enterprise value by my new 2.06p per share earnings guess, the P/E for the underlying business comes to 10.
Meanwhile, the trailing 1.65p per share dividend supports a 5.7% income.
* Next update — a Q2 update on 16 October.
Maynard Paton
Disclosure: Maynard owns shares in Record.
REC:
Edison broker note out:
http://www.edisoninvestmentresearch.com/research/report/record16
The summary of downgraded forecasts:
A snippet of hope:
“Currency volatility is a positive
Record continues to report that it has experienced elevated levels of engagement with existing and potential clients on its hedging and currency for return products duet increased currency volatility. We share management’s optimism that new mandates are likely, but our base case forecasts do not include these and management cautions that lead times between engagement and new contracts are frequently long. Its multi-strategycurrency for return product had a three-year track record in July 2015, which is the time period that many consultants require before recommending products to clients. Record hopes that it will prove attractive to clients seeking positive returns in a market not so closely correlated with equities.”
Maynard
REC:
Business Update:
http://www.investegate.co.uk/record-plc–rec-/rns/business-update/201509290841325134A/
Ah, some positive news :-)
“Record plc (“Record” or the “Company”), the specialist currency manager, announces today that it has, subject to contract, been selected for a dynamic hedging mandate of approximately $600 million in size (with AuME quoted by convention in US Dollars). The annualised fee rate for this mandate is expected to be consistent with Record’s standard dynamic hedging management fee scales. Assuming contract negotiations conclude successfully, this mandate is expected to commence, and hence revenues to start accruing, by the end of the calendar year.”
An extra $600m in the higher-margin Dynamic Hedging division.
Updating my sums in the Blog post above, Dynamic Hedging AUMe now comes to $9.9bn to give annual management fees of £9.8m with £1 buying $1.52. My EPS guess is now 2.40p, which with a 37p share price supports a P/E of 11.7 with my EV per share of 28p.
Just so you know, I sold 26% of my REC shareholding during September at 37.0p following the disappointing statement referred to in the Blog post above — not least because the client withdrew $1bn more than the value of the original ‘tactical mandate’. Essentially I sold most of the shares I bought earlier in the year when that ‘tactical mandate’ was announced (and amazingly banking a very small profit). Also, I wanted to have some more spare cash on hand for what is becoming a more pessimistic market.
Maynard
REC:
Business Update:
http://www.investegate.co.uk/record-plc–rec-/rns/business-update/201510010700128225A/
Ah, quickly back to negative news :-(
“Record plc (“Record” or the “Company”), the specialist currency manager, announces today that it has been advised by a UK dynamic hedging client of its intention to terminate its approximately £900 million mandate, likely by the end of the current financial year. This mandate generates revenues consistent with Record’s standard dynamic hedging management fee scales.”
A loss of £900m (about $1,359m) from the higher-margin Dynamic Hedging division.
Updating my sums again from the comment above, Dynamic Hedging AUMe now comes to $8.5bn to give annual management fees of £8.5m with £1 buying $1.51. My EPS guess is now 2.09p, which with a 36p share price supports a P/E of 12.9 with my EV per share of 27p.
REC’s latest results (http://maynardpaton.com/2015/06/16/record-the-dividends-up-10-and-i-have-bought-more/) talked of ‘high levels of engagement with potential clients’ as currency markets became more volatile. So far such volatility has seen the $1.75bn tactical bespoke mandate come and go (with an extra $1bn going), $600m being added, and now £900m leaving. It’s all a bit disappointing really. Attracting new clients is proving quite difficult it seems, and retaining existing ones may be proving harder as well.
Anyway, I have decided to trim further my REC holding and have sold 17% of my holding today at 36p.
Maynard
Record (REC):
Q2 trading update:
http://www.investegate.co.uk/record-plc–rec-/rns/second-quarter-trading-update/201510160700144463C/
Nothing too surprising here. Client AUMe during the 3 months ending 30 September 2015 fell $3.3bn to $53.3bn.
The decline was due to:
i) a net $1.2bn outflow of client AUMe (mostly the $2.8bn withdrawal of a “tactical bespoke mandate” referred to in the initial Blog post above, offset by $1.3bn of new money for the lower-margin Passive Hedging division), and;
ii) exchange-rate movements devaluing non-$-based AUMe by $2.1bn.
I was pleasantly surprised that rocky stock markets during this 3-month period did not affect the value of AUMe (client portfolios are mainly invested in equities).
Management gave the now-usual outlook of “We continue to make progress in engaging with current and potential clients across a broad range of currency issues and geographies and we are hopeful that further progress can be made in the current financial year.” Seems like the company is still trying to persuade fresh clients about the benefits of its currency services.
Updating my sums again to reflect the two post-Q2 Business Updates referred to in the above comments, and with £1 buying $1.55, I now have:
i) Currency for Return AUMe at $2.3bn giving management fees of £2,374k;
ii) Dynamic Hedging AUMe at $7.9bn giving management fees of £7,650k, and;
ii) Passive Hedging AUMe at $42.1bn giving management fees of £8,148k.
So total revenue of £18,174k, which less the same costs as noted in the original Blog post above, gives an operating profit of £5,161k and earnings after 20% tax of £4,129k or 1.86p per share.
With the shares at 34p, my EV is 25p per share and my EV-based P/E is 13.4 going on that 1.86p EPS guess.
The 1.65p trailing dividend looks just about covered by my EPS guess, too.
All told, REC really could do with winning some new client mandates soon.
Maynard