- Active equity businesses consolidated
- Loss-making funds sold
- £2mn-£3mn of additional cost savings planned
- Net cash of £24.6mn (17.3p)
- Parmenion stake valued at £75-90mn
AssetCo (ASTO:35p) reported a flat underlying operating loss of £7.7mn in its 2022-23 financial year, but the asset management group has been making solid progress in navigating a path towards profitability.
Faced by persistent net flows across the industry, and large retail outflows, the directors cut £2.3mn from the cost base in the 12 months to 30 September 2023 and are targeting £2mn-£3mn of additional annual cost savings in the coming months. The number of funds managed has been reduced from 25 to 20 by winding up or merging smaller, uneconomic funds, and the plan is to cut the total to 16 funds this year. All fund management activities have been consolidated into the group’s River Global Investors brand (formerly River & Mercantile) to simplify the operating model.
Post period-end, the group’s 70 per cent stake in Rize, a thematic ETF specialist, was sold to US group Ark Invest, and AssetCo is in the process of offloading its nascent UK infrastructure fund, River & Mercantile Infrastructure LLP. The disposals contributed to a below-the-line £14mn loss booked on discontinued operations, but the flipside is that that they have eliminated operating losses of £2.8mn.
Taken together with the well-timed £3.8mn earnings-enhancing acquisition of Ocean Dial Asset Management, the investment manager of India Capital Growth Fund, and the slimmer cost base, the group’s underlying operating losses should dramatically narrow in the 2023-24 financial year. Based on current assets under management of £2.4bn, analysts at Panmure Gordon believe that the adjusted operating loss on the active equities business will more than halve from £9.4mn to £4.2mn in the current financial year, ahead of a move into run rate profitability next year.
Hidden value in the balance sheet
The fact that Panmure forecasts a lower group pre-tax loss of £3mn, and a pre-tax profit of £0.7mn in the 2024-25 financial year, reflects the increasing contribution from Parmenion, a B2B fund investment and advisory platform for the UK wealth and IFA sector. Parmenion works with more than 1,500 adviser firms to help them deliver investment solutions to more than 70,000 underlying customers. It is benefiting from the digital transformation taking place within the asset and wealth management industry. AssetCo booked interest income of £2.2mn from its investment in the group’s 2022-23 accounts.
Moreover, following press speculation that Parmenion’s majority shareholder, Preservation Capital, is looking to sell, AssetCo’s 30 per cent stake has been independently valued at £75mn-£90mn (52.6p to 63.2p per share). This implies a conservative-looking cash profit to enterprise valuation multiple of 12 to 13 times. The investment is held in the group’s accounts at £24.6mn.
True, AssetCo’s share price has drifted since I analysed the investment case (Alpha Research: 'Target recovery upside from a deep value asset manager’, 30 November 2023), but the stake in Parmenion and its cash pile are easily worth more than double the group’s market capitalisation, and potentially far more. It leaves a fund management business that is operationally geared to any improvement in market sentiment in the price for free. Buy.
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