Man Group Plc Full Year Update – 25 February 2015
Man Group (EMG) is one of the world’s largest hedge fund groups and is listed on the London Stock Exchange. The group is comprised of a number of different funds, each operating different strategies that are designed to produce performance across market cycles.
EMG is based in London, has offices in all major regions across the globe and employs a total of 1,115 employees worldwide. The group’s subsidiaries include Man Investments Limited, Man Investments AG, Man Investments (USA) LLC, Man Investments (CH) AG, GLG Partners LP, E D & F Man Limited and Man Investments Finance Limited.
|Index||FTSE 250||Ticker||EMG.L||Latest Close||189.10|
|52 Week High||196.60||52 Week Low||83.20||P/E (H)||11.9|
|Dividend Yield %||3.4||Dividend Cover||2.2||CEO:||Emmanuel Roman|
|CFO:||Jonathan Sorrell||Previous Price Target||70.00||Price Target||165.00|
Restructuring, acquisitions and a stronger performance from AHL drive a recovery in Man Group shares
When covering Man Group early last year our core rationale for assigning a downside price target to the shares was that we expected performance at the group’s computer driven AHL fund to remain challenged due to an anticipated uplift in market volatility during subsequent months.
While investors have certainly found themselves on the receiving end of numerous volatility spikes, with the crisis in Ukraine and the more recently emerged stop start relationship between investors and interest rate expectations taken into account; what actually transpired at Man Group for 2014 was a period of strong out-performance for AHL and a positive impact upon earnings from cost reductions.
The AHL performance was aided by some clear and defined trends across US and European financial markets becoming embedded, which have now helped to stem the flow of redemptions and support earnings at Man Group. For the full year the group reported 181 basis points of investment returns as being eligible for high watermark performance fees.
In addition to this, Man has taken the surplus regulatory capital made available earlier in the year, in addition to $150 million in new debt issued, and pushed further along the acquisition trail to boost AUM (assets under management) and investment talent within the group.
Recent acquisitions include Numeric Holdings ($14.7 billion AUM), NewSmith Llp ($1.2 billion), Silvermine Capital Management ($3.8 billion AUM), Merrill Lynch Alternative Investments Llc Fund of Hedge Funds ($1.2 billion AUM), Pine Grove Asset Management ($1 billion AUM).
A total of $21.9 billion of AUM was introduced to Man through inorganic capture in late 2013 & throughout 2014, which will be positive for both earnings and dividends (Dividend policy is to pay out 100% of management fee profit) over the medium to longer term.
This will be particularly likely if AHL performance remains strong and the group’s long only strategies (GLG) are able to profit from strong UK, European and US equity markets during the year.
However, the management at Man have sounded a cautious tone with regard to near – medium term future investment and earnings performance, which is largely the result of increased potential for volatility during the months ahead.
Nevertheless, the net effect of the above has led to an improvement in investor sentiment toward the group and a performance from the shares, which now leads us to call time on our earlier price target and update our expectations for Man Group going forward.
Man Group Plc Share Price / Daily Intervals
The road ahead for Man Group Plc
With the group restructuring and recovery now progressing toward the advanced stages, our expectations for earnings at Man going forward are markedly improved.
We see support for higher earnings expectations in the sharp increase to AUM (+$21.9 billion/ +35%) that has resulted from acquisitions and increased sales during the last 18 months, which should boost management fee income at Man by just over $200 million in future periods.
These expectations are also further supported by the potential for a continuation of the strong investment performance seen at AHL during 2014, and positive performance from developed nation equity markets, which would then make the group eligible for further high water mark performance fees during the year ahead. However, there are downsides and potential pitfalls to the outlook for Man Group.
Our downside concerns surround the computer driven performance of AHL, which is reliant upon clear and definable trends within financial markets to generate returns. The downturn in performance at the GLG unit, where returns for the recent full year were negative, is also another cause for concern.
Risks to AHL performance elaborated
To elaborate further, at present there are a whole host of risk factors that could lead to a further increase in financial market volatility during 2015. From political events in the UK and elsewhere in Europe, to the presence of ongoing geopolitical risks surrounding the crisis in Ukraine, all the way out to the potential for wide swings in interest rate expectations as the year progresses.
Any one of these, if a recurring problem throughout the year, could blind-side AHL trading systems and lead to a renewed period of under-performance. This could adversely affect investor sentiment toward the shares.
Risks to GLG and overall group performance elaborated
In addition to above, the performance of many strategies within Man Group’s GLG unit slipped markedly during the 2014 year, which has constrained the level of improvement in group earnings for the period. As a long only investment manager, this was largely the result of flat to negative returns of equity markets within the UK and Europe during the period.
Thankfully for shareholders, the financial impact of this was more than offset by an early completion of the group restructuring program (cost reductions of 17%) and the out-sized increase in performance fee income from AHL (+807%).
Going forward, we see scope for a better performance from Man’s GLG unit. This is largely the result of our expectations for equity and bond markets during 2015 which is, on the whole, quite positive.
While we do have concerns about European equity markets toward the back end of 2015, the ECB’s actions in January have seen continental indices get off to a strong start to the year, which is positive for Man Group as a whole.
In addition to this, the outlook for fixed income across much of the credit universe remains relatively positive, despite the potential for rate hikes from the BOE and Federal Reserve later in the year.
We expect the downside impact of these policy moves, to bond markets, to be partly offset by the presence of negative yields on the continent and an ongoing pivot toward easy policy from the ECB, PBOC and the BOJ. If we are right about this then it could also help to take some of the sting out of interest rate movements for equity markets as well.
UK & European Equity Markets April 2013 – Feb 2015
Balance sheet, dividend and valuation update
In relation to the balance sheet, Man Group completed its deleveraging efforts during 2013 which saw borrowings fall to zero and overall group liabilities fall by more than 50%. This is while restructuring efforts and better performance fee income have seen the group’s overall cost/income ratio fall steadily throughout recent periods.
Each of these are balance sheet positive developments which help to reduce the risks of attached to ownership of the shares.
In terms of dividends, the board has announced total dividend payments of 10.1 pence for the period, which is in line with the group policy to pay out 100% of management fee earnings. This payout was covered 2.4 X over by overall group earnings for the year and equates to a sterling payment and yield of just over 6.0 pence and 3.4% respectively (current prices).
From a valuation perspective, Man Group is close to fair valuation with all new information taken into account, in our view.
At present, the shares currently trade at 11.9 X historical EPS (adjusted diluted) and a broadly similar multiple on a forward basis, given our own expectations for earnings to remain flat in the current year.
We draw support for this earnings projection from our expectation that a larger part of the Man product mix is likely to perform better this year than in 2014 (GLG, long UK & EU markets), which should enable the group to offset most of the impact of any potential downturn in AHL performance fee income.
Nevertheless, given the risks to this outlook and group performance as a whole, we see little scope for the market to rate the shares higher than the 11.9X of the present day (11.7 @ first coverage) despite the discount attached to Man when it is compared with other asset managers.
On balance, our expectations for Man Group going forward are much better at the present time than when we initiated coverage. Key to this improving outlook has been steady financial markets which, barring some periods of increased volatility, have been characterised by clear and definable trends.
This has created a very favourable environment for the AHL fund, which experienced an out-sized improvement in performance during the year, thus helping to boost fee income for the group.
In addition, the early completion of Man’s restructuring program has led to a 17% reduction in costs for the full year, which also helped to boost earnings for the period by offsetting lower performance fee income from the GLG unit.
Turning to GLG – the long only nature of the fund, combined with flat UK and European equity markets in 2014, sparked a broad downturn in fee income from this unit for the period (-76%).
Despite this, our outlook for both GLG and Man Group as a whole during the year ahead is now markedly better. Much of this is the result of our positive expectations for equity market performance in 2015, which will be positive for GLG performance, while management fee income across the group should also experience an uplift (+$200 million) in 2015 due to the 35% increase in AUM during the last 18 months.
However, there are also downside risks to consider. Most notably, the risk factors outlined earlier in this report (political, geopolitical & monetary policy expectations) could lead to a renewed period of volatility in financial markets, which would have the potential to blind-side AHL and to cause considerable harm to the division’s performance potential.
Nevertheless, the group remains in a much improved position than at the same time last year, with increased AUM and greater diversification within its product suite.
We believe that, with all things considered, Man Group should be able to maintain earnings at their 2014 level in 2015. This places us above consensus in terms of our expectations for EPS ($0.214) and implies that the shares are close to being fairly valued at their current levels as opposed to being overvalued.
Therefore, we raise our price target today from the previous 70.0 pence per share, to 165.00 pence. This reflects our view that after strong gains in H2 2014 and considering the full valuation relative to historical levels, the shares appear vulnerable to a correction over the near term.
Our price target implies an earnings multiple of 10.5X EPS, which we feel is not unreasonable given the risks surrounding the outlook for earnings growth from here, while it also corresponds with the 23.6% retracement off from recent peaks established within the July 2012 – February 2015 long term trend.
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