Analysts at Morgan Stanley Research Europe noted that the slowing growth in emerging markets (EM) and the recent concerns on tapering quantitative easing (QE), and the associated impact on risk assets led into a de-rating of ~1 to 1.5 PE points. The analysts estimated that the asset management sector declined from 14.5x to ~13x in 2013e and from 12.5x to 11.5x 2014e.
The week ending in June 12 recorded the worst emerging market fund flows since 2011. The net redemption for that week totaled $6.4 billion, 4 times 12 month average due to concerns that a correction will occur from tapering the QE program.
Morgan Stanley analysts Bruce Hamilton, Anil Sharma and Hubert Lam suggested that the PE multiples show value or opportunities in a number of asset managers such as Aberdeen Asset Management plc (LON:ADN) and Schroders plc (LON:SDR).
Hamilton and his fellow analysts noted that their analysis on previous sell downs in emerging markets (2008 and 2011) indicated that EM flows remained positive for Aberdeen Asset Management plc (LON:ADN). The company experienced inflows during the stress periods.
Aberdeen’s Cost Growth
Over the past two years, Aberdeen Asset Management plc (LON:ADN) experienced cost growth CAGR of >10 percent despite a ~44 percent operating margins in H213 in the top quartile among peers. The analysts believe that it has the flexibility to manage its cost base in the event of a more challenging market, and flow environment put pressure on its top line.The management of the company indicated that its operating efficiency and distribution offer additional support.
The analysts recommended an overweight rating for the shares of Aberdeen Asset Management plc (LON:ADN) with a price target of 471p. Hamilton and his colleagues explained that the overweight rating for the company is based on the perception that concerns of assets risks are over done given the institutional skew of business and strength of historical performance across equity franchise. Its distribution potential is growing (70-75 percent in FY 14e or ~6 percent FY 14e) yield to support.
Aberdeen Asset Management’s Performance:
In addition, Aberdeen Asset Management plc (LON:ADN) has strong capabilities performance across Global/GEM/APAC equity. The analysts anticipate that it would experience strong client demand in these areas, which they consider as the “6 axes of growth.” The recovery of its fixed income performance lowers earnings drag from redemption pressure. Furthermore, the analysts noted they see further potential upside on operating margins; (assumption of ~500bps expansion FY12-14e implies >15 percent cost CAGR).
On the other hand, Hamilton and his colleagues noted that Schroders plc (LON:SDR) will enjoy a continued opportunity for outsized growth versus peers due to its capabilities in multi-assets and broader income product. Its Cazenove Capital deal expected to close in the third quarter of 2013 will also provide 8 percent accretion on conservative assumption.
The analysts estimated that combination of the growth drivers for Schroders plc (LON:SDR) would result to a ~22 percent CARG in EPS 2012-15e, which significantly above the sector average of ~10 percent to 15 percent.
According to the analysts, the multi-asset income product has been the best-selling European mutual fund range of Schroders plc (LON:SDR). They added, “Although we expect that increased uncertainty will drive a hiatus in institutional business funding, leading to lower flow momentum Q213, we continue to view Schroders’ product set as well positioned relative to peers for a number of critical growth themes. This continues to support a healthy pipeline of institutional demand which management confirmed as robust…”
The analysts recommended an overweight rating for the stock of Schroders with £25.25 price target. Hamilton and his fellow analysts explained that the overweight rating for the stock was based on their perception that consensus underestimates the company’s growth given its product strength in key structural demand areas, global distribution potential, and improving mix shift on sales mix. They see the biggest delta in MSe compared with consensus ~10 percent despite their EPS cuts.
They also believe that consensus underestimates Casenove deal accretion (~6 percent base case model), which could be doubled. In addition, they noted that near-term revenue margin stability as sales mix offsets structural pressures, strong performance of funds, and its balance sheet provides opportunities for accretive M&A and supports institutional sales with further excess to regulatory minimum in operating divisions.