Schroders PLC (LON: SDR) – Continued strong momentum despite market uncertainties.

Schroders PLC (LON: SDR) is a British-based multinational asset manager Company, which is based in London, United Kingdom. The Company operates from 35 countries across Europe, the Americas, Asia & Australia, and the Middle East. It provides advisory and consultancy services to high net worth clients, financial institutions, large corporate, and other institutions. It manages around £536 billion of client assets and aims to deliver sustainable returns. In FY19, the Company acquired the wealth management business of Thirdrock Group Asia and German real estate specialist, Blue Asset Management.

It operates through three business segments: Asset Management, Wealth Management and Group Segment. The asset management segment is principally involved in advisory services pertinent to equity, multi-asset solutions, fixed income, private assets and alternatives products. The Wealth Management segment is engaged in investment management, platform services and banking services, planning and financial advice. The Group segment mainly comprises the Group’s investment capital and treasury management activities.

On 4 March 2021, the Company expects to announce the annual results for FY20. 

  (Source: Presentation, Company Website)

Recent Trend of Dividend Payments

SDR has a policy of providing a progressive and sustainable dividend to shareholders and maintaining a pay-out ratio of around 50%. In FY19, the total dividend per share was 114 pence, which included 79 pence of final dividend per share. The final dividend was paid on 7 May 2020. The pay-out ratio was 57% in FY19 against 53% in FY18. While setting the dividend, the Board considers the Group strategy, capital requirements, liquidity, and profitability.

In H1 FY20, despite the macroeconomic uncertainties amid Covid-19 crisis, the Company kept the interim dividend intact at 35.0 pence per share, which was at par with FY19. The unchanged dividend reflected a strong capital position, which shall allow investments for future growth. The interim dividend was paid on 24 September 2020 to shareholders. The total amount paid as a dividend for H1 FY20 was £216.1 million. SDR also offers a dividend reinvestment plan (DRIP). The last date for enrolment in the DRIP for H1 FY20 interim dividend was 3 September 2020.

(Source: Company Website, chart created by Kalkine Group)

 (Source: Company Website)

Growth Prospects and Risk Assessment

The Company manages investments actively and responsibly for a wide range of institutions and individuals. For the Asset Management segment, it has 42 investment teams in 35 global locations actively manage investments across a range of asset classes. For Wealth Management, it targets to provide wealth management services in the UK and for high net worth clients in the Channel Islands, Switzerland, and Asia. It has strengthened its international presence with the acquisition of the wealth management business of ThirdRock. The Company believes in providing consistent investment performance as 71% of assets outperformed over the past five years. The Group is also pursuing market opportunities in asset management through partnerships with Bank of Communications in China and Axis Bank in India. The Group is further diversifying the service portfolio with Private Assets & Alternatives since the number of companies publicly listed on Western exchanges continues to decrease. In FY19, Private Assets & Alternatives represented 9% of the total assets under management (AUM) and 13% of net operating revenue.

(Source: Refinitiv, chart created by Kalkine Group)

(Source: Refinitiv, chart created by Kalkine Group)

However, there are uncertainties and number of potential risks that could have a material impact over the business, such as uncertainties around Brexit could impact the general confidence in the economy and equity markets of the UK. Moreover, the ongoing uncertainties arising from Covid-19 pandemic and widen macro-economic factors could impact the M&A activity, investment rates, quality of new investments, earnings growth and exit plans. Moreover, 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. 

Peers Benchmarking

 (Source: LSE data, chart created by Kalkine Group) 

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.

Key Trends: 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.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Schroders PLC 

Recent Developments

9 October 2020: Santander Asset Management was appointed by Schroders to manage six UK Equities mandates. The mandates amount to £1.2 billion of assets, comprising £200 million of UK Income assets and £1 billion of UK Growth assets.

25 September 2020: Andy Chorlton was named as the Head of Fixed Income since Philippe Lespinard decided to step down. 

Financial Highlights (for Q3 FY20 and H1 FY20 Results)

On 15 October 2020, the Company unveiled its AUM position at the end of 30 September 2020, which showed better performance across Asset Management and Wealth Management segment, as compared to the position at 1 July 2020.

(Source: Company Website)

As on 30 July 2020, the Company reported its H1 FY20 results for the half-year ended on 30 June 2020. The key highlights were as follows:

• The technological investments made in operating platform over the recent years facilitated an efficient transition to remote working.
• The diversified business model underpinned resilient performance despite the exceptionally challenging market environment. As a result, the profit before tax and exceptional items stood at £306.2 million (H1 FY19: £340.4 million).
• With continued momentum across segments, AUM grew to £525.8 billion.
• The Company generated net inflows of £38.1 billion against the net outflows of £1.2 billion in H1 FY19, driven by continued client demand for Solutions strategies.
• The net operating revenue declined by 2% to £971.6 million (H1 FY19: £993.3 million) and net income declined by 3% to £1,003.9 million (H1 FY19: £1,032.6 million). However, it was partially offset by robust performance from joint ventures and associates, which contributed net income of £27.6 million in H1 FY20 (H1 2019 net income: £14.1 million).
• Due to resilience performance and robust capital position, interim dividend remained unchanged at 35.0 pence per share. 

 

Financial Ratios

Share Price Performance Analysis

 (Source: Refinitiv, chart created by Kalkine Group) 

On 23 October 2020, at the time of writing (before the market close, at 8.00 AM GMT+1), Schroders Plc shares were trading at GBX 2,772.00, down by 0.57% against the previous day closing price. Stock 52-week High was GBX 3,465.00 and Low of GBX 1,711.00, respectively.

From the technical standpoint, 20-day SMA (2789.05) and 90-day RSI (49.23) are currently supporting an upside move, which means the stock price could increase in the short term.

In the past six months, SDR’s stock price has delivered ~9.19% return as compared to ~0.39% of FTSE-100 index and ~13.67% return of FTSE All Share General Financial, which shows that the stock has outperformed the benchmark index and underperformed the sector during the last year.

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

Peers used in the valuation methodology

 Business Outlook Scenario

SDR is confident about its growth in the long term as it has performed quite resiliently despite challenging scenario and holds a strong balance sheet position. The year 2020 started at a good note with the trade deal between the US and China, and it is expected to bring capital investments. On the other hand, the outbreak of Covid-19 has brought unprecedented uncertainty in the market. The H1 FY20 period was dominated by the social and economic impacts of Covid-19. However, the current trading environment is more balanced, and markets are relatively less volatile. Notwithstanding, the ongoing impact on economies is likely to continue for some time, and the recovery would be dependent upon on the effectiveness of measures taken by governments globally.

Adjacently, the Company continued to witness growth across its business lines, and there are substantial opportunities for geographical expansion. The diverse business model shall provide resilience through these challenging periods and deliver long-term value for its clients and shareholders. Under Private Assets & Alternatives strategies, the Company targets to grow the revenue contribution to 20% over the longer term. Invariably, there are some uncertainties in the near-term market. However, the risk assets would get benefit from the low-interest rates scenario. Moreover, the Group is quite diversified with international footprints and well-positioned for long-term opportunities.

 (Source: Presentation, Company Website) 

Over the past three years (H1 FY17 – H1 FY20), the gross profit surged from GBP 940.1 million in H1 FY17 to GBP 971.6 million in H1 FY20. Compounded annual growth rate (CAGR) stood at 1.10 per cent.

Considering the decent fundamental performance in H1 FY20, robust balance sheet, strong cash returns, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Schroders at the current price of GBX 2,772.00 (as on 23 October 2020, before the market close at 8:00 AM GMT+1), with lower-double digit upside potential based on 19.94x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

 

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

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

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