Man Group PLC (LON: EMG): Operating with Highly Liquid Balance Sheet

Man Group PLC is a FTSE-250 listed Investment Management Company, which focuses on generating attractive performance and client portfolio solutions. It diversifies the portfolio by investing in commodities, equity, currency, and credit markets. The Company bifurcates the business into five investment capabilities, namely Man Numeric, Man AHL, Man GPM, Man GLG, and Man FRM. The Group was established in 1783, and presently, it has over US$ 117 billion of funds under management (FUM). It serves in over 60 countries with around 1,436 employees across 15 offices. It has more than 600 institutional clients to serve with over 80 investment strategies.

On 30 July 2020, the Company is expected to release the interim results for the six months ended 30 June 2020.

Key Fundamental Statistics



Segment Analysis

The Company segregates the revenue based on the registered domicile of the fund entity paying Man fees. The major countries/regions of operations include Cayman Islands, Ireland, United States of America, United Kingdom and the Channel Islands, and Other Countries.

 
(Source: Annual Report, Company Website)

Recent Developments – Constant Return to the Shareholders

21 May 2020: The Company announced the share repurchase of 89,000 equity shares at a weighted average price of 141.0415 pence per share. Following the transaction, the Company has repurchased 60,723,644 equity shares since the commencement of the share repurchase programme.

1 May 2020: The Company announced a final dividend of 5.1 cents per share, which was paid to shareholders on 15 May 2020.

Corporate Reorganisation – Repaid Debt Obligations

The Company’s organisation structure is consistent with other global asset managers after the recent reorganisation. It has repaid the Tier 2 notes of $150 million and now will be saving around US$ 5 million in annualised interest. It has also completed the final payment of Man Numeric earn out of US$ 154 million. The Company has returned around US$ 1.5 billion over the past 5 years via share repurchases or dividends. The Group has also recognised a net liability position of US$ 98 million at the end of FY19, due to the adoption of IFRS 16. In 2019, the fixed cash costs also stood lower (as US$ 324 million) than the full-year guidance (of US$ 330 million).

Operational Key Performing Indicators in 2019

During the FY19, the Company could not achieve the KPI target for investment performance, and net flows despite the strong absolute performance. It was due to a challenging fundraising environment for long-equity strategy in 2019. However, the Company had a positive employee engagement score of 77%, while it had reduced the total carbon emission by 19% in FY19 from FY18.

Top Shareholders Statistics

 

Trading Update for the quarter ended 31st March 2020 - Reflecting Resilient Performance During Unprecedented Crisis

The Company’s FUM (Funds under management) stood at $104.20 billion for the period as against FUM of $117.7 billion as on 31st December 2019. The Net inflows for the quarter stood at $0.5 billion, while FX impacted negatively by $3.3 billion for the period. Man Group has shown robust balance sheet and liquidity position, with $570 million of net financial assets (including $253 million of cash) at 31st March 2020 and $500 million revolving credit facility (which matures in 2024). As per the overall strength of the liquidity position and balance sheet, the Group is proceeding with the share repurchase programme and the final dividend of 2019, as announced in October 2019.

Financial Highlights (for the year ended 31 December 2019) - Strong Absolute Performance in 2019


(Source: Company Website)

FUM grew by $9.2 billion to $117.7 billion in 2019, largely due to the absolute positive performance for the clients of around $10.1 billion in investment gains. It was partially offset by net outflows of $1.3 billion driven by the long-only strategies off the back of weaker relative performance in the short term. Net management fee revenue stood at $753 million for 2019, a decrease of 5% from prior year despite average FUM remaining flat. This was largely driven by margin compression due to the change in the mix during the year. Statutory profit before tax surged by $29 million from 2018 due to the higher performance fee profits in 2019. Core profit before tax, which excludes legacy business profits, reached a ten-year peak in 2019. In 2019, the Group had completed the $100 million of share repurchase as announced in October 2018.

Financial Ratios – Strong Profitability Margins versus the Industry Median

 

Reported profitability metrics for the financial year 2019 were higher against the industry median, reflecting higher revenue generated and better control over expenses. In FY19, ROE (Return on Equity) stood at 17.7%, which was higher as compared to the industry median of 13.6%, reflecting a good utilization of equity capital. On leverage front, the debt-equity ratio was 0.21x, which was higher as compared to the industry median of 0.14x.

Share Price Performance


Daily Chart as on 6 July 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On July 6, 2020, at the time of writing (before the market close, at 9:00 AM GMT+1), Man Group Plc shares were trading at GBX 130.65, up by 1.28% against the previous day closing price. Stock 52 week High and Low were GBX 177.10 and GBX 84.72, respectively. The outstanding market capitalisation was around £1.91 billion, with a dividend yield of 6.18%.

Bullish Technical Indicator

From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.The Company’s stock has delivered a positive return of around 4.25% in the last three months.

Valuation Methodology

Price/Earnings Approach (NTM)



To compare Man Group Plc with peers, Price/Earnings multiple has been used. The peers are Ashmore Group Plc (Price/ NTM Earnings was 13.96), Schroders Plc (Price/ NTM Earnings was 16.84), Standard Life Aberdeen Plc (Price/ NTM Earnings was 35.07), Jupiter Fund Management Plc (Price/ NTM Earnings was 9.61), Hargreaves Lansdown Plc (Price/NTM Earnings was 28.32) and DWS Group GmbH & Co KgaA (Price/NTM Earnings was 12.87). The Median of Price/NTM Earnings of the Company’s peers was 15.39x (approx.).

Industry Outlook Dynamics

As per the PwC report, the global assets under management is estimated to grow from US$ 84.9 trillion in 2016 to US$ 145.4 trillion in 2025. The key drivers of growth are changes in technology, products, regulation, and people skills.

Key Trends: 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.

Growth Prospects and Risk Assessment

The Group serves with diverse investment styles to manage a varied class of assets. It has generated an attractive shareholders return over the past three years. In 2019, the Group delivered a strong performance, with continued growth in total return. Moreover, the Group has taken several initiatives to reorganise the business, such as the implementation of new cloud-based finance and HR system and refinancing of the revolving credit facility in December 2019. The Company has a strong and liquid balance sheet with net tangible assets of $739 million at 31 December 2019. Also, the Group has entered 2020 with higher run rate management fee revenues of US$ 771 million as compared to US$ 751 million in 2019. The Company is a market leader in providing reliable solutions related to the hedge fund market with the use of advanced technologies and machine learning techniques. Man Group keeps on launching new platforms for providing solutions related to investment management services, to cater to the needs of the existing and new clients.

However, the lower relative performance could reduce FUM and subscriptions, which can further lead to reputational damage, dissatisfied clients. Moreover, the market volatility can impose liquidity risk. 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 Company’s operations may be impacted due to the uncertainty created due to Brexit, as it would result in customer loss and negatively impact the financial performance of the Group. The ongoing Covid-19 mayhem may also impact the business growth trajectory in the near term.

Business Outlook Scenario

Given the elevated global volatility in all markets, the Group has outperformed peers on an asset-weighted basis across the firm in the first quarter of 2020 and witnessed the absolute return strategies, which will make gains for clients. The Company continues to win mandates and witnessed net inflows in the first quarter of the financial year 2020, but EMG has seen a recent surge in redemptions as customers adjust their allocations in response to the heightened market moves and economic uncertainty. However, the liquidity position and balance sheet remain robust. Going forward, the Group has been reliably investing in talent acquisition and new technology to expand their client’s portfolio and investments, which should support them in yielding progressive returns for their shareholders. Man Group stays focused on the highest quality service to the clients and delivering long-term investment performance.

 
(Source: Presentation, Company Website)
 
Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “Buy” recommendation at the current market price of GBX 130.65 (as on 6 July 2020, before the market close at 9:00 AM GMT+1), with lower-double digit upside potential based on 15.39x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted data and peer information have taken from Refinitiv (Thomson Reuters).

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