Schroders revival continues

Schroders has continued to recover from a tough two years that saw profits and assets under management (AUM) fall sharply. The situation is so improved that pre-tax profits in the nine months to the end of September jumped from £79.9m a year earlier to £282m. Net inflows of £5.4bn in the third quarter, and a positive investment return of £12.1bn, have helped to boost AUM by £17.5bn to £181.5bn since the end of June and by £33.1bn since the start of this year.

Operating expenses rose in the first nine months from £441m a year earlier to £555m, but the rise was more than compensated for by a sharp increase in net revenue from £499m to £819m. On the private banking side, investment in the front office is starting to pay dividends, with net inflows rising from £0.1bn to £2.1bn, although profits remain subdued because costs have yet to be matched by increased revenue as a result of low interest rates squeezing margins. However, rising inflows are expected to improve margins next year.

Numis Securities says...

Add. Pre-tax profits for the first nine months were ahead of our estimates by around £15.5m. Of this, £4m came from higher performance fees, £7m on a better return on group capital as a result of a bigger allocation to risky assets, and £4.5m from improved margins. We expect around 75 per cent of this improvement to constitute recurring revenue and this has led to an upward revision in our estimates. For the current financial year we have upgraded estimates by 9 per cent and now expect pre-tax profits of £403m and EPS of 101p, rising to £502m (an upgrade of 14 per cent) and 126.9p, respectively, in 2011. This makes Schroders look relatively cheap compared with its peers given the strong growth momentum.

Evolution Securities says...

Neutral. We expect a further £5.6bn of net inflows in the fourth quarter, bringing the total inflow to £27.7bn for the year. The pipeline for institutional business remains healthy, with a number of mandates not yet funded as well as plenty of opportunities to win new mandates. However, while management currently point to increasing risk appetite as the catalyst for further equity sales, the unclear macroeconomic outlook may actually reduce investors' appetite for risk. So, despite continued good investment performance, we are factoring in a slowdown in net inflows to around £14.7bn in 2011. Expect 2010 pre-tax profits of £372m and EPS of 96.1p, rising to £439m and 111p, respectively, in 2011.