07 January 2016
By Maynard Paton
Quick update on Record (REC).
Event: Business Update published 07 January
Summary: Not a great start to 2016 — REC has admitted a significant mandate win from last year has now been ‘suspended’. Despite a more accommodating environment for the specialist currency manager, this update just adds to the disappointing client losses of late . Funnily enough, a stronger dollar appears to sustain my earnings guess even after today’s client withdrawal. Meanwhile, the shares do not look expensive on a possible P/E of 8. I continue to hold.
Price: 25p
Shares in issue: 221,380,800
Market capitalisation: £55.3m
Click here for my previous REC posts
Statement:
Record plc (“Record” or the “Company”), the specialist currency manager, announces today that the dynamic hedging mandate announced on 29th September 2015 has been suspended pending a potential restructure. The AuME attributable to this mandate as at 31st December 2015 was $500 million (with AuME quoted by convention in US dollars), and the annualised fee rate is consistent with Record’s standard dynamic hedging management fee scales.
My thoughts:
Oh dear — the currency specialist has not enjoyed a great start to the New Year.
Today’s statement effectively means the two substantial mandates REC had won during 2015 have now both disappeared. The company refers to this particular mandate as being “suspended”, but I think it best to assume the money won’t be coming back anytime soon.
It’s obviously disappointing that REC can’t seem to keep its new client wins, but at least this $500m withdrawal is much less than the $2.8bn that vanished in August . I also note the $500m is less than the “approximately $600m” REC said the original mandate was worth.
Anyway, I’m not actually sure if REC had much time to earn any fees from this ‘suspended’ mandate. REC announced it had been selected for the mandate during late September and said at the time (my bold):
“This mandate is expected to commence, and hence revenues to start accruing, by the end of the calendar year.”
So here we are seven days into the new calendar year and the associated fees have now dried up.
For some perspective, the lost $500m compares to my $7.9bn estimate of REC’s Dynamic Hedging client money before today’s update, and the firm’s $50bn-plus of total client money. So this latest withdrawal is not a devastating blow.
Valuation
Here are my updated calculations.
I’ve reduced REC’s Dynamic Hedging client money by $500m to $7.4bn. Meanwhile, the firm’s Currency for Return money stays at $2.3bn and its Passive Hedging money stays at $42.1bn.
My potential USD management fees earned from the effective assets under management (AUMe) amounts are based on the fee rates disclosed within REC’s latest results. I’ve then converted the USD fees into GBP at £1:$1.46:
| Year to 31 December 2016 (est) | AUMe ($bn) | Fee Rate | Management fee (£k) |
| Dynamic Hedging | 7.4 | 0.15% | 7,588 |
| Passive Hedging | 42.1 | 0.03% | 8,651 |
| Currency for Return | 2.3 | 0.15% | 2,363 |
| TOTAL | 18,602 |
Staff costs, the 30% bonus pool and other charges remain as per my sums at the last results:
| Year to 31 January 2016 (est) | |
| Management fees (£k) | 18,602 |
| Less staff costs (£k) | (7,000) |
| Less other costs (£k) | (4,200) |
| Less 30% profit share (£k) | (2,221) |
| Operating and pre-tax profit (£k) | 5,181 |
After standard 20% tax, my new sums suggest earnings could be 1.87p per share. Previously I was anticipating 1.86p per share.
Somewhat amazingly, applying the stronger dollar rate (it has advanced from £1:$1.51 to £1:$1.46 since November) to my calculations looks to have offset the loss of this mandate entirely. I will just have to wait and see whether REC’s actual performance comes in anywhere close to my rough sums.
Right now, REC’s market cap at 25p is £55m. Adjusting that for net cash and investments of £30m and regulatory capital requirements of £8.8m, I make REC’s enterprise value to be roughly £34m or 15p per share.
Then dividing the enterprise value by my latest 1.87p per share earnings guess, the P/E for the underlying business comes to 8.
Meanwhile, REC’s anticipated 1.65p per share dividend supports a 6.6% income.
All told, the ratings do not look expensive… but as before, I would prefer to invest at the current price only if there were tangible signs of new client wins. That is far from being the case at present.
In fact, it is quite disconcerting that REC continues to lose clients when the wider environment for currency volatility and trends would appear to be at its strongest for some years.
It is also a tad galling for us shareholders to learn about a further mandate loss after REC’s staff were all given a 10% pay rise last year.
* Next statement — a Q3 update on 22 January.
Maynard Paton
Disclosure: Maynard owns shares in Record.
Record (REC)
Q3 Trading Update:
http://ir.recordcm.com/regulatory-news-item.asp?newsid=2131337
Not a bad statement.
REC said its effective assets under management (AUMe) gained $0.2bn to $53.5bn during the three months to December 2015.
Key features of the AUMe movement were:
i) Dynamic Hedging AUMe dropping by $0.5bn to $8.2bn, due in part probably to the net effect of these client additions and withdrawals:
http://maynardpaton.com/2015/08/25/record-ive-slashed-my-earnings-guess-by-27/#comment-8176
http://maynardpaton.com/2015/08/25/record-ive-slashed-my-earnings-guess-by-27/#comment-8198
ii) a useful (and surprise) $0.4bn of additional Currency for Return AUMe, taking that segment to $2.8bn, and;
iii) exchange-rate movements and stock-market gains enhancing AUMe by a net $0.4bn.
Note that today’s statement did not reflect the AUMe “suspension” reported in the Blog post above, nor any effect on AUMe that January’s stock-market ructions have caused.
However, I see client numbers at the end of 2015 came to 58 — the highest since June 2010. So it seems to me a handful of new smaller clients have been won. As a reminder, REC is dependent on a small number of major clients — with more than 50% of revenue in 2015 coming from just five customers.
Once again, management remained optimistic of winning further clients: “The potential consequences of diverging monetary policy and rising volatility, and their effect on currencies and clients’ portfolios, further reinforces the high levels of interest in currency hedging and return-seeking opportunities for clients and prospective clients.”
Today’s Q3 update also gave this interesting text:
Here is the announcement from WisdomTree, issued more than two weeks ago on 7 January:
http://www.wisdomtree.com/about/pdf/2016/wisdomtree-wisdomtree-launches-dynamic-currency-hedged-suite-1-7-16-final-2015.pdf
From reading that announcement, it is clear REC is purely supplying data on a licence basis and is not managing the new funds. Here is REC’s disclaimer:
What is interesting is that WisdomTree is citing gross expense ratios (before a first-year discount) of 0.40%-0.48% per annum for investors in these new funds. That compares to 0.15% that REC charges for its Dynamic Hedging and Currency for Return products.
I am not sure if WisdomTree’s funds are directly comparable to those of REC, but I guess they are similar and investors can appear to pay one-third of WisdomTree’s annual charge with REC. That seems encouraging for REC.
That said, I’d question why REC is licensing out its data. Sure, the firm will receive fees with little associated costs and perhaps a not-insubstantial boost to profits. I guess the arrangement also validates the quality of REC’s data. However, the deal has created an opportunity for somebody else to latch onto any growing interest in currency funds — and may suggest REC does have an issue trying to win clients for itself.
Onto valuation…
Updating my sums again to reflect these Q3 figures and the client “suspension” referred to in the above Blog post, and with £1 buying $1.42, I now have:
i) Currency for Return AUMe at $2.8bn giving management fees of £2,958k;
ii) Dynamic Hedging AUMe at $7.7bn giving management fees of £8,134k, and;
ii) Passive Hedging AUMe at $42.3bn giving management fees of £8,937k.
So total revenue of £20,028k, which less the same costs as noted in the original Blog post above, gives an operating profit of £6,180k and earnings after 20% tax of £4,944k or 2.23p per share.
With the shares at 26p, my EV is 17p per share and my EV-based P/E is 7.3 going on that 2.23p EPS guess.
The 1.65p trailing dividend looks covered by my EPS guess, too, and supports a 6.3% income.
Maynard
Record (REC)
Research on the WisdomTree (WT) arrangement:
There are four funds, with WT codes: DDEZ, DDJP, DDWM, and DDLS.
DDEZ: http://www.wisdomtree.com/etfs/fund-details.aspx?etfid=128
DDJP: http://www.wisdomtree.com/etfs/fund-details.aspx?etfid=129
DDWM: http://www.wisdomtree.com/etfs/fund-details.aspx?etfid=126
DDLS: http://www.wisdomtree.com/etfs/fund-details.aspx?etfid=127
Quick check shows these funds are invested in a range of equities to represent a geographical index based on certain fundamental criteria. The share prices of the investments are then currency hedged by WT, using data from REC.
So, there is a big difference between these funds and the services that REC offers.
You essentially invest in an index with WT, but with REC you (as an institution) supply your own portfolio to REC who currency hedge (via the Passive or Dynamic Hedging product) on your behalf. As such, I do not too much of an overlap between WT’s offering and that of REC.
I have quickly scanned a prospectus and other documents for one of the funds (http://hosted.rightprospectus.com/WisdomTree/Fund.aspx?cu=97717X255&dt=P) and there is sadly no reference to how much REC will be paid from this arrangement.
Maynard
Record (REC)
Q4 Trading Update:
http://ir.recordcm.com/regulatory-news-item.asp?newsid=2159542
A rather unspectacular statement.
REC said its effective assets under management (AUMe) gained $0.2bn to $53.7bn during the three months to March 2016.
Key features of the AUMe movement were:
i) Dynamic Hedging AUMe dropping by $0.3bn to $7.9bn;
ii) Currency for Return AUMe dropping by a significant $1.0bn to $1.8bn, and;
iii) exchange-rate movements and stock-market gains enhancing AUMe by a net $1.7bn.
Today’s statement should have reflected the AUMe “suspension” reported in the Blog post above. I had previously assumed the suspension would have lowered Dynamic Hedging AUMe to $7.7bn, but I will gladly take the reported $7.9bn.
However, what has occurred at Currency for Return I do not know. Although that department did add $0.4bn in the previous quarter, a $1.0bn drop during this quarter is substantial.
Indeed, Currency for Return AUMe is now at its lowest since the 12 months to June 2013, when its AUMe hovered between $1.3bn and $1.6bn. In addition, Dynamic Hedging AUMe is now at its lowest since March 2009, when its AUMe hit $4.0bn.
I must confess, these divisional AUMe lows are not that encouraging.
Overall AUMe increased in this quarter only because of favourable exchange-rate movements on REC’s non-$ mandates, and favourable stock-market movements influencing mandate sizes.
At least client numbers at the end of March remained at 58 — the highest since June 2010. As a reminder, REC is dependent on a small number of major clients, with 61% of revenue during the six months to September 2015 coming from just five customers.
It is noticeable that management was not as optimistic of winning further clients as it was before. Back in January the directors said (my bold):
“The potential consequences of diverging monetary policy and rising volatility, and their effect on currencies and clients’ portfolios, further reinforces the high levels of interest in currency hedging and return-seeking opportunities for clients and prospective clients.”
Now management is talking about a “wide divergence of views amongst investors“:
“Expectations of divergence in monetary policy, and in particular of further US interest rate rises, weakened during the quarter. In addition the effectiveness of monetary policy measures such as quantitative easing in Japan and the Eurozone on exchange rates has become less evident. This environment has led to less clear-cut trends, and consequently we are seeing a wide divergence of views amongst investors as to their preferences in managing currency risk and opportunity.”
Nonetheless, the forthcoming EU referendum might spark some client interest:
“The referendum on 23rd June as to whether the UK should remain in or leave the EU was announced during the quarter, and has contributed to the uncertainty attached to the outlook for sterling. In this respect, our focus will be to anticipate periods of market turbulence and elevated volatility and to manage the impact of these on our clients.”
Sadly there was nothing further on the WisdomTree deal that was announced in January.
Onto valuation…
Updating my sums again to reflect this Q$ update and with £1 currently buying $1.43, I now have:
i) Currency for Return AUMe at $1.8bn giving management fees of £1,888k;
ii) Dynamic Hedging AUMe at $7.9bn giving management fees of £8,287k, and;
ii) Passive Hedging AUMe at $43.8bn giving management fees of £9,189k.
So total revenue of £19,364k, which less the same costs as noted in the original Blog post above, gives an operating profit of £5,715k and earnings after 20% tax of £4,572k or 2.07p per share.
With the shares at 26p, my EV is 16p per share and my EV-based P/E is 7.9 going on that 2.07p EPS guess.
The 1.65p trailing dividend still appears to be covered by my EPS guess, too, and supports a 6.3% income.
Maynard