07 January 2016
By Maynard Paton
Quick update on Record (REC).
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.
Shares in issue: 221,380,800
Market capitalisation: £55.3m
Click here for my previous REC posts
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.
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.
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)|
|Currency for Return||2.3||0.15%||2,363|
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.
Disclosure: Maynard owns shares in Record.