Business Overview
Schroders PLC (SDR) is a financial service holding company based in the United Kingdom. It was founded in the year 1804 by Johann Heinrich Schröder. It has since grown rapidly to establish itself as the asset management and wealth management company, with around £407.2 billion AUM as on 31st December 2018. It has started its operations from around 40 offices in over 20 different countries across the Middle East, Asia, Africa, and Europe. Peter Harrison joined the company in April 2016 and appointed to the Board. He was appointed as the Chief Executive Officer (CEO) in April 2016.

Key Statistics


Segments Overview
The company provides asset and wealth management advice and related services to businesses and individuals across the world. Asset Management segment engages in investment management including equity products, multi-asset investments, fixed income securities, real estate, advisory services, and other alternative asset classes, such as commodities. Wealth Management principally comprises investment management, banking services and wealth planning provided to high net worth individuals. It invests in various asset classes across real estate, fixed income, alternatives, equities, and alternatives.
 

Top Shareholders

(Source: TR)

Key Management: Peter Harrison, Group Chief Executive; and Richard Keers, Chief Financial Officer.

Financial Highlights (FY 2018, £million)

(Source: Annual Report, Company Website)

Financial Commentary

Revenue, Net income and Operating Expenses
In the year 2018, asset management revenue increased by 4.25 per cent to £2,317.6 million due to the stronger management fees of £2,224.3 million reported in FY18. Wealth management revenue surged by 7 per cent to £308.8 million, due to the strong performance of the management fees & wealth management interest earned which generated a revenue of £227.3 million & £42.6 million. However, Group revenue increased by 4.6 per cent to £2,626.4 million, primarily because of the increase in all the segments. In FY18, the company reported net income of £2,139.9 million for the year ending December 2018 as compared to £2,068.9 million in 2017 for the same period. There was an increase of 2.7 per cent in the net income of the company due to the stronger growth in private and alternatives assets. The company’s reported operating expenses had also increased marginally in comparison with the last year data mainly due to a surge in salaries, wages and other remuneration.
 
Profit before tax, EPS and DPS
The group profit before tax and exceptional items for the full year of FY2018 amounted to £761.2 million, down by 5 per cent from £800.3 million in FY2017, because of the accounting advantage in FY17 of the treatment of deferred compensation partially reversed in FY18 and performance fees were also lower than the high levels generated in the previous year.The company’s profit before tax was decreased to £649.9 million in FY2018 as compared to £760.2 million in FY2017. The reported basic earnings per share before exceptional items declined by 4.9 per cent from the last year to 215.8 pence and basic earnings per share dropped by 15 per cent to 183.1 pence. The total dividend per share was up by 1 pence in FY18 to 114 pence (2017: 113 pence).

Others
The company’s total assets under management and administration dipped by 6 per cent to £421.4 billion as compared with the prior year. The company’s net outflows were £9.5 billion in FY2018 as compared to the net inflows of £9.6 billion in 2017. On 31^st December 2018, the company has notified net new inflows of over £85 billion.

Financial Ratios

(Source: TR)

Ratios Commentary
Gross margin reported was 78.7 per cent in H1 FY18, reflecting a decrease of 1 per cent when compared with the corresponding period of the last year data. EBITDA margin of 28.6 per cent for H1 FY18 stood considerably lower than the industry median of 31.5 per cent. Net margin of 21.9 per cent for H1 FY18 slightlyhigher than the industry median of 21.8 per cent. Return on equity stood at 8.4 per cent which was slightly higher than the industry median of 8.3 per cent. On leverage front, the debt-equity ratio was higher as compared to the industry median, reflecting the company is high leveragedas compared to its peers. Schroders Asset-to-Equity for H1 FY18 stood at 6.04% as compared to the industry median of 4.0% which indicates that the company had more equity contribution to fund its assets.

Stock Performance

Daily Chart as at Mar-08-19, before the market close (Source: Thomson Reuters)

On March 08, 2019, shares of Schroders PLC were trading at GBX 2,545 (before market close), down by 1.927 per cent against its previous day closing price. Stock’s 52 weeks High and Low is GBX 3,511.00/GBX 2,289.00. At the time of writing, shares were trading 27.51 per cent lower than its 52w High and 11.18 per cent higher than its 52w low. Schroders Plc share price increased significantly by 9.26 per cent in the last three months (as at March 8, 2019), and in the last one year, the stock was down by 22.61 per cent returns. Stock’s average traded volume for 5 days was 384,376.80; 30 days - 279,278.47 and 90 days - 334,534.37. The average traded volume for 5 days was up by 37.63 per cent as compared to 30 days average traded volume. The company’s stock beta was 1.18, reflecting high volatility as compared to the benchmark index. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 12.3x as compared to the industry median of 12.5x. Total outstanding market capitalisation was around £7.04 billion.

Recent News
On 7^th March 2019, the company has announced the appointment of two new directors, Leonie Schroder and Deborah Waterhouse. It will be effective from 11^th March 2019.

Growth Perspective and Risk Assessments
The company offers a differentiated model where the services are vertically integrated, strongly backed by its distribution system. There are concerns about the near-term market volatility, primarily driven by Chinese economic growth, US trade wars and fund inflows. Company’s clients are not immune to external market factors. Volatility across assets due to political uncertainty may lead to put pressure on the business growth and margins. Political changes can adversely affect the present business model.

Valuation Methodology

Method 1: Price/Earnings Multiple Approach (NTM) (EPS (FY19E approx.))


Method 2: Price/Cash Flow Multiple Approach (NTM) 


To compare Schroders PLC with its peers, Price/Cash Flow value has been used. The peers are Ashmore Group PLC (NTM P/CF was 14.05x), Man Group PLC (NTM P/CF was 11.32x), Amundi SA (NTM P/CF was 11.73x) and Deutsche Boerse AG (NTM P/CF was 16.91x). The average of Price/Cash Flow (NTM) of the company’s peers was 13.8x
.
* All forecasted figures and peers have been taken from Thomson Reuters.

Conclusion
Broad-based challenges can be seen ahead of the group as Brexit induced uncertainty can creep into the business of the company, affecting the financials. However, the company’s differentiated business model can provide some respite from the harsh market conditions. Based on strong fundamental performance and the valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 2,595 (as on 7th March 2019) with single-digit upside potential based on 13.77x NTM Price/Earnings on FY19E earnings per share and 13.8x NTM Price/Cash Flow on FY19E Cash flow per share.

*The buy recommendation is valid for the current price as covered in the report as on (8th March 2019).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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