Change at Record’s helm, but not its investment case

Record’s (REC:65.3p) well-regarded chief executive Leslie Hills is retiring after four years at the helm, ending a 31-year career with the currency manager. However, Hills will be leaving the business in safe hands as her successor, Dr Jan Witte, is chief executive of the group's two regulated subsidiaries: Record Currency Management Limited and EU-based Record Asset Management GmbH.

Importantly, the board will continue targeting multiple organic growth initiatives, diversifying the product mix into higher-margin scalable products and acting as currency manager to asset managers. In the first half, Record launched two new funds: Record Diversified GP Stakes, which takes minority stakes in alternative asset managers; and Record Protected Equities, which adds downside tail-risk protection to an international equity portfolio. A third fund, which focuses on infrastructure assets, is scheduled to launch in the first quarter of 2024.

By partnering with high calibre specialists that have expertise in specific asset classes, the new offerings ensure that clients have access to non-currency related investment strategies, as part of the group’s strategy to grow business through diversification, with the added benefit of fostering deeper client relationships. At period end, Record had $205mn of assets under management on its Luxembourg fund platform.

Moreover, Record is in the process of launching a Luxembourg-based digital asset fund structure in partnership with Dair Capital. It aims to deliver an institutionally recognised operation, so clients can take investment risk in this new asset class without unnecessary operational risk. The plan is to launch three funds, designed and managed by Darren Dineen, chief executive of Dair Capital, and make his Five Seasons fund the first regulated crypto-currency fund in Luxembourg. It should not only attract the Ultra High Net Worth clients that Dineen has worked with in the past, but new institutional monies which Record will help to bring in.

Earnings expectations unchanged

In the six months to 30 September 2023, group adjusted pre-tax profit declined from £7.5mn to £6.6mn. This was not unexpected given that assets under management equivalent (AUME) slipped from $87.7bn to $84.5bn and Record has been investing in personnel, infrastructure and new funds launches. More than two-thirds of the decline in AUME resulted from weaker stock and other markets, which impacts the size of client mandates being hedged, and negative foreign exchange movements on client hedges.

Of far more importance is that the board are maintaining full-year guidance, having previously re-based earnings expectations to factor in a more hostile market environment (‘Record offers an 8 per cent dividend yield’, 30 October 2023). Factoring in slightly lower annual revenue of £44.1mn, house broker Panmure Gordon expects adjusted pre-tax profits of £13.6mn and earnings per share (EPS) of 5.3p, down from £14.9mn and 5.9p in 2022-23.

However, analyst Rae Maile notes that his forecast includes no other new business wins apart from a benefit from the planned infrastructure fund. Also, equity markets have rallied strongly since the half-year end, so his AUME estimate of $86.3bn could prove conservative with positive implications for fee income. In any case, with the full benefit of the new fund launches, analysts expect pre-tax profit to increase 11 per cent to £15.1mn in the 2024-25 financial year. On this basis, expect a rebound in EPS to 5.8p, implying the shares are rated on forward price/earnings (PE) ratios of 12.2 (2023-24) and 11.2 (2024-25).

Furthermore, the board has a policy of paying out a high proportion of net earnings to shareholders. That’s because the capital light business retains net cash of £14.8mn (7.4p) which more than meets regulatory requirements. So, not only are the shares modestly rated, but they offer prospective dividend yields of 8.1 per cent and 8.9 per cent, respectively.

Post results, Record’s share price slipped back to the level of last month’s buy call, albeit the holding has delivered a 98 per cent total return in my 2018 Bargain Shares Portfolio. It’s a harsh reaction given that there is scope for outperformance on earnings guidance and the internal appointment of Witte adds continuity. Buy.

<boxout>

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £4.95, or £25 plus P&P of £5.75 for both books.

<boxout?