25 August 2015
By Maynard Paton
Quick update on Record (REC).
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 A major client has withdrawn $2.8bn from REC’s administration and I’ve had to slash my earnings guess by 27%.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.
Shares in issue: 221,380,800
Market capitalisation: £64.2m
Click here for my previous REC posts.
“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.”
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mandate to disappear —after all, this mandate was always deemed “temporary” — I was not expecting a further $1bn to be withdrawn as well by the same client.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.
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)|
|Currency for Return||2.1||0.16%||2,127|
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.
Disclosure: Maynard owns shares in Record.