It hasn't helped sentiment that a client reduced the size of its tactical bespoke currency return mandate by $2.8bn (£1.8bn) at the end of August which explains why the firm's assets under management equivalent declined from US$55.4bn to €53.3bn between March and September this year ('Running bumper profits', 27 August 2015).
True, Record had previously announced that the mandate could prove volatile as the company was effectively managing currency positions on behalf of a client who could at any time alter their size and direction. Record's other currency for return mandates are less transactional than this mandate, and are therefore far less volatile. The first-half results were actually better than house broker Cenkos had expected as a 3 per cent rise in revenue in the six months to end September 2015 helped underlying pre-tax profit increase by 9 per cent to £3.7bn.
But clearly the loss of a sizeable mandate which contributed the majority of the £1.3m increase in the company's first-half management fees will be felt even though Record has since won a new dynamic hedging mandate of $600m. Cenkos estimate that the company's revenues will decline from £20.9m to £20.3m for the 12 months to end March 2016 and lead to pre-tax profits falling from £7.7m to £6.4m. On this basis, expect adjusted EPS of 2.3p, down from 2.6p in the prior year.
That said, there are positives, the most obvious of which is the likely imminent tightening of monetary policy by the world's most powerful central bank, the US Federal Reserve, at next month's meeting of its Federal Open Market Committee on Wednesday 16 December, albeit this is far later than most observers, myself included, had predicted at the start of the year. Moreover, with the European Central Bank likely to step up its monetary easing programmes at next week's monthly meeting, then the stage is set for a marked divergence in the monetary policy being adopted by these leading central banks.
My own take is that this divergence will lead to greater volatility in currency markets in the first half of next year and be highly supportive of the US dollar, especially against the euro. It's only reasonable to expect this to buoy interest in currency hedging strategies amongst US investors wishing to protect the value of their non-US dollar denominated assets as the use of dynamic hedging strategies will reap positive returns when the dollar is in the ascent. It should also be positive for momentum currency strategies too.
So although shares in Record have yet to reap the returns I had envisaged when I included them in my 2015 Bargain share portfolio, I feel that any upside from increased currency volatility is not factored into the current valuation. Indeed, Record had net funds of £34.5m on its balance sheet at the end of September, a sum worth 15.5p a share, or more than half of its share price. Analysts estimate that unencumbered cash is in the region of £25m and well in excess of £22m assuming a generous allowance for regulatory capital.
Or put it another way, based on 221m shares in issue, valuing Record's equity at £64m, a business that is forecast to report pre-tax profits of £6.4m is in effect being valued at £42m after stripping out unencumbered cash of £22m. There is a decent payout too as the full-year dividend is likely to be maintained at 1.65p a share, implying a dividend yield of 5.7 per cent. The half-year dividend of 0.825p goes ex-dividend next week.
So with the US Federal Reserve on the brink of starting an interest rate upcycle, I believe that belatedly the uptick in demand for Record's range of currency hedging strategies I predicted when I advised buying the shares in the first place could materialise in the next six months. The important point being that this factor is not reflected in a share price rated on 8 times cash adjusted earnings after stripping out unencumbered cash. In the circumstances, I am comfortable recommending that you hold onto Record's shares if you followed my previous advice. Hold.
MORE FROM SIMON THOMPSON...
I have published articles on the following companiesince the start of last week:
■ Bioquell: Buy at 137p, target range 170p to 185p ('Bug busting potential for short-term gains', 16 Nov 2015)
■ Communisis: Hold at 45p ('Communisis slammed for earnings miss', 16 Nov 2015)
■ AB Dynamics: Run profits at 320p; Stanley Gibbons: Hold at 90p; Pittards: Hold at 94p ('Bargain shares updates', 17 Nov 2015)
■ Bilby: Run profits at 133p ('Bilby's share price sparked alight', 18 Nov 2015)
■ GLI Finance: Buy at 45.25p ('High yield P2P play', 18 Nov 2015)
■ LMS Capital: Buy at 72p; Cenkos Securities: Buy at 180p ('Capitalising on tender offers', 19 Nov 2015)
■ Ensor: Buy at 99p, target 125p ('Bid watch', 23 Nov 2015)
■ Marwyn Value Investors: Buy at 216p ('Cashing in on a top performer', 23 Nov 2015)
■ Trakm8: Run profits at 262p ('On track for record earnings', 24 Nov 2015)
■ Walker Crips Group: Buy at 49p, target 60p ('Profit from a profit surge', 24 Nov 2015)
■ Renew Holdings: Buy at 362p, new target range 390p to 400p; Cambria Automobiles: Buy at 73p, new target 90p; Tristel: Run profits at 142p; Pure Wafer: Sit tight at 165p and await details of capital distribution ('Running small cap winners', 25 November 2015)
■ Cohort: Run profits at 418p; Inland Homes: Run profits at 70p ('Riding momentum stocks', 26 November 2015)
■ Record: Hold at 28.75p ('Record awaits the Fed decision', 26 November 2015)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
