Currency manager Record (REC:33p) has delivered an earnings beat for the 2018/19 financial year and rewarded shareholders with a bumper dividend per share of 2.99p including a special payout of 0.69p. Pre-tax profit rose from £7.3m to £8m, around £500,000 ahead of Cenkos Securities’ forecast, to lift earnings per share (EPS) by 8 per cent to 3.27p.
The board’s policy is to declare almost all of net profits as a dividend after adjusting for regulatory capital requirements as the business grows. The 7 per cent hike in the total payout also highlights the highly cash generative nature of the business, which generated a net cash inflow of £7m in the 12-month trading period, and the fact that Record holds net cash and money market securities worth £23.7m, a sum worth almost 12p a share.
The decision to offer passive hedging clients the opportunity to change their mandates from management fee-only to a lower management fee and a performance fee basis had the effect of lowering management fee income from £23.5m to £22.3m, but it paid dividends as Record booked £2.3m of performance fees too. Passive mandates account for 84 per cent of Record’s assets under management equivalent (AUMe) of $57.3bn and three quarters of its 65 clients.
Although AUMe declined from a record high of $62.2bn 12 months earlier, mainly reflecting $10bn of inflows from new and existing clients and $14.5bn net outflows, it’s worth noting that $1.1bn of net outflows in the final quarter relate to dynamic hedging mandates after Record’s managers decided it was in their clients best interest to crystallise strong gains made on the underlying assets the hedges were being used to protect. The fact that 40 per cent of clients have been with the company for more than six years highlights the general stickiness of mandates, while the addition of 13 new clients in the financial year clearly demonstrate the appeal of Record’s hedging strategies.
Regards Brexit planning, the company is able to service the needs of all existing clients under its existing corporate structure, but would look to create an authorised subsidiary in Ireland to protect “passporting permissions” in the event of a hard Brexit. Around 87 per cent of AUMe is non-US dollar denominated and 71 per cent of revenue is generated from clients based in Switzerland and US.
Admittedly, the shares have posted a negative total return of 17 per cent since I included them in my 2018 Bargain Shares Portfolio, perhaps a reflection of the the change in fee structure which introduces greater earnings risk due to performance fees in the company’s profits. However, Record has clearly delivered. Priced on a cash adjusted price/earnings (PE) ratio of 6, and offering a 7 per cent ordinary dividend yield which rises to 9 per cent including the special payout, I maintain my view that there is value on offer here. Buy.
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