Ashmore Group PLC (LON: ASHM) – Sustainable business model with a long term growth trajectory

Ashmore Group PLC is a FTSE 250 Index listed Investment Manager, which provides investment opportunities to participate in Emerging Markets. It offers a wide range of different debt, equity, and regional strategies. It serves with various themes for investments, such as external debt, local currency, corporate debt, blended debt, alternatives, equities, liquidity, and multi-asset. As of 30 June 2020, the Company had US$83.6 billion in assets under management, and investment performance was positive in all the equities, multi-asset, and fixed-income themes. The Company has won two awards from Institutional Investors in the US and Europe as it was named Emerging Markets Local Debt Manager of the Year and Emerging Markets Fixed Income Manager of the Year. It employs around 310 employees in 11 countries.

 (Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

Ashmore’s investment processes and business model are designed to manage severe market dislocations, which is reflected in their 27-year track record and specialism. As developed economies continue to introduce debt-funded fiscal stimulus and unconventional monetary policies, the interest rates will remain low for a prolonged period, and hence, it will continue to favour Emerging Markets' high real yields.

Moreover, Ashmore operates in a large, diverse, and liquid investment universe of Emerging Markets. It has an active, value-based investment philosophy which provides them significant opportunities even in inefficient markets. It has quite a diversified client base in terms of investment themes and location, which provides substantial resilience to the business. Moreover, the disciplined cost control delivers a high-profit margin, which is reflected in the high conversion of operating profits to cash (110% cumulative conversions since IPO). Also, the Company has a progressive dividend policy as it has returned £1.2 billion to shareholders through ordinary dividends since 2007, which is equivalent to 68% of attributable profits over the period. The balance sheet strength is reflected in their high-quality financial resources and no debt position.

However, the Company faces several operational, market and credit risks. The dampened investor sentiment amid market volatility can reduce investor appetite for their assets. In such a scenario, even debt markets are less supportive of leveraged buyouts. Furthermore, the Company is exposed to the risk of an unplanned increase in the cost base with a change in legal and regulatory policies. Also, the AUM (assets under management) can further underperform with unfavourable exchange rate movements. Also, the risk of cybercrime and dependence on technology continues to grow. The changes in regulations and laws after the Brexit can materially impact the Group’s performance. The ongoing Covid-19 mayhem may also impact the business growth trajectory in the near term.

Industry Outlook Dynamics

As per the recent publication from Research and Markets, the global asset management market was valued at approximately US$598.9 billion in 2020, and it is projected to reach US$788.8 billion by 2023. In 2019, the market size was $656.9 billion, and it declined in 2020 due to the Covid-19 outbreak and the measures to contain it. Emerging Markets are relatively less impacted than developed markets in terms of equity performance. The industry has been facing margin pressure as clients allocating towards cheaper products and seeking to renegotiate fees. Moreover, the asset management firms have been slower than other financial services sector to adopt technological advancements. Also, the clients reduced exposure to hedge fund and active equity in 2019. The capital markets rallied in the calendar year 2019 despite political and economic uncertainty driven by the US-China trade war, Brexit, and signs of slowing growth in major economies such as China and Germany. However, the outbreak of the coronavirus pandemic and the resultant economic impact due to social distancing triggered sharp falls in pricing across global markets.

(Source: Company Website)

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Ashmore Group Plc

Business Segment Analysis

Key Performing Indicators (FY20)

(Source: Company Website)

Q1 Assets Under Management Update (for the quarter ended 30 September 2020, as on 14 October 2020)

(Source: Company Website)

• Assets under management surged by 2.3% quarter-on-quarter to US$85.5 billion (30 June 2020: US$83.6 billion), with net outflows of US$0.8 billion and positive investment performance of US$2.7 billion. This improving trend reflects diversified gross sales and a further decline in redemptions.
• Over the three months, the Company delivered broad-based positive investment performance in the fixed income and equities themes, with the highest absolute performance in the external debt, corporate debt, blended debt and equities themes.
• The positive trends evident in the previous quarter were sustained in Q1 FY21 period.
• ASHM's active investment processes generated robust outperformance, client flows continue to stabilise, and momentum in equities accelerated.

Financial and Operational Highlights (for the year ended 30 June 2020 (FY20), as on 11 September 2020)

(Source: Company Website)

• The Company delivered a solid financial performance in FY20, with an increase in net revenue of 5% year-on-year, adjusted EBITDA of 10% year-on-year and diluted EPS of 3% year-on-year.
• In FY20, AuM fell by 9% year-on-year driven by a negative market performance of US$8.1 billion. However, the average assets under management increased by 11% year-on-year.
• Gross subscriptions stood at US$24.3 billion, which were slightly higher than in the previous year and represent 26% of opening AuM.
• Gross redemptions surged to US$24.4 billion year-on-year (or 27% of opening AuM).
• Over the period, there was good demand across the broad range of investment themes, but with particular strength in the local currency, corporate debt, blended debt and equities themes.
• The Company has a strong balance sheet, with financial resources of approximately £700 million and around £500 million of cash. Ashmore has no debt.
• On 30 June 2020, the Company has total capital resources of £702.5 million, which was equivalent to 99 pence per share, giving an excess regulatory capital of £555.2 million and solvency ratio of 377%. Therefore, the Board is satisfied that Ashmore Group is adequately capitalised.
• The Boards has proposed a final dividend per share of 12.10 pence, reflecting the total dividends paid and recommended for the year were 16.90 pence, which are covered 1.5x by diluted earnings per share.
• Despite the COVID-19 crisis over the quarter, valuations across equity markets and fixed income still offer significant upside and opportunities for further outperformance.
• The flows and AuM are expected to increase in the near to medium term.

Share Price Performance Analysis

On 4 January 2021, at the time of writing (before the market close, at 8:30 AM GMT), Ashmore Group Plc shares were trading at GBX 430.80, down by 0.09% against the previous day closing price. Stock 52-week High was GBX 581.50 and Low of GBX 281.80, respectively.

From the technical standpoint, 14-day RSI (48.94), 100-day SMA (397.70), and 100-day EMA (408.00) are currently supporting an upside potential, which means the stock price could increase in the short term.

In the past two years, ASHM’s share price has delivered ~20.48% return as compared to the ~16.28% return of FTSE Mid 250 index, and a negative ~2.46% return of FTSE All Share Financial index, which shows that the stock has outperformed the benchmark index and the sector.

In the last five years, Ashmore Plc share price has delivered around 74% return as compared to approximately 21% return of FTSE 250 index, which shows that the stock has outperformed the index during the last five years.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

The lockdown easing combined with fiscal and monetary stimulus have improved the trading from the levels experienced in March 2020. Although the global macroeconomic outlook is still uncertain; however, Emerging Markets are relatively less likely to suffer than the developed economies. Therefore, Emerging Markets continue to provide clear opportunity to enhance returns as assets are trading at significantly more attractive levels than the equivalent developed world bond and equity markets. Moreover, interest rates will remain low for a prolonged period due to debt-funded fiscal stimulus and unconventional monetary policies, which will continue to favour Emerging Markets’ high real yields.

(Source: Presentation, Company Website) 

Considering the positive trends, decent business growth rate trajectory, sound financial position, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Ashmore Group at the current market price of GBX 430.80 (as on 4 January 2021, before the market close at 8:30 AM GMT) with lower double-digit upside potential based on 21.50x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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