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Bargain Shares: On the hunt for earnings upgrade candidates

A currency manager to asset managers is launching new high-margin products, winning new clients and is delivering robust earnings growth, too
Bargain Shares: On the hunt for earnings upgrade candidates
  • Pre-tax profit rises 76 per cent to £10.9mn on 38 per cent higher revenue of £35.1mn in 12 months to 31 March 2022
  • AUMe increases from $80.1bn to $83.1bn in financial year
  • Dividend per share up 64 per cent to 4.52p and covered 100 per cent by earnings
  • Closing net cash of £17.2mn (8.6p a share)
  • 2025 target to boost revenue to £60mn, implying doubling of pre-tax profit over three-year forecast period

Currency manager Record (REC: 73p) is reaping the benefits of multiple organic growth initiatives, diversifying its product mix into higher-margin scalable products and acting as currency manager to asset managers. Its clients are benefiting, too.

For example, Record launched a Dublin-based emerging market sustainable finance fund last summer in partnership with global investment bank UBS. By 31 March 2022, the fund had assets under management equivalent (AUMe) of $1.2bn (£0.98bn), making a significant contribution to the 175 per cent higher management fees of £5.5mn earned from Record’s high-margin currency for return hedging mandates. Moreover, despite the turmoil in global financial markets, the fund has returned a miniscule loss of less than 1 per cent since inception, outperforming its benchmark by over 11 percentage points. Sensibly, Record chief executive Leslie Hill plans to roll-out the product given its impressive track record.

Record has also recently launched a Luxembourg based Municipal Loan Fund with Universal Investment as fund manager, and made four asset management client acquisitions in the financial year, highlighting the strategic move to focus on client-led development opportunities. Other exciting launches in the pipeline include a Sharia product that is "close to fruition", said Hill.

Interestingly, Record is far more insulated from the impact of declining equity markets even though hedging mandates on clients’ equity holdings account for a quarter of Record’s AUMe. Finance director Steve Cullen said that clients' underlying equity portfolios have fared far better than the wider market, as was the case during the March 2020 stock market crash. In fact, AUMe at the end of the current quarter could be potentially unchanged after factoring in some fund inflows.

That’s well worth noting because although house broker Panmure Gordon forecasts current year pre-tax profit of £12.5m on revenue of £40.3mn, earnings per share (EPS) of 5.4p and a 5.04p per share payout, analyst Rae Maile has only embedded closing AUMe of $80.7bn into his estimates. This looks too conservative, especially as Hill outlined a new growth strategy that aims to increase revenue to £60mn by 2025. Higher-margin product launches will be a key driver, the implication being that Record could be making pre-tax profit of £21mn and EPS of 9p that year if all goes to plan. That’s a huge upgrade on Panmure’s current estimates (pre-tax profit of £13.6mn, EPS of 5.5p on revenue of £43.8mn).

Record’s shares have delivered a 91.5 per cent total return (TR) since I included them in my 2018 Bargain Shares Portfolio, during which time the FTSE Aim All-Share TR index has shed 11.5 per cent of its value and the FTSE All-Share TR index has returned only 13 per cent. Record’s share price has also moved sideways since the half-year results (‘Bargain Shares: Targeting value plays’, 23 November 2021), highlighting strong relative outperformance during the small-cap stock market rout. My 105p target is conservative. Buy.


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