F&C Asset Management FCAM LN
July 10, 2009 - 9:44am EST by
cgnlm995
2009 2010
Price: 64.00 EPS $7.11 $7.67
Shares Out. (in M): 494 P/E 9.0x 8.0x
Market Cap (in $M): 316 P/FCF 8.7x 8.1x
Net Debt (in $M): 68 EBIT 58 61
TEV ($): 434 TEV/EBIT 7.4x 7.1x

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Description

Investment Thesis:

F&C Asset Management ("FCAM" or the "Company") is a good business with £92.7B assets under management ("AUM") that offers a large margin safety to intrinsic value with a catalyst. FCAM is undergoing a demerger (spin-off) as Friends Provident ("FP") will distribute its 52% ownership in FCAM to its shareholder on July 3rd. This should create a large supply/demand imbalance from FP's forced selling and top of an attractive business and current valuation. FCAM trades at a discount to its peers and is cheap on an absolute basis at 0.5% EV/AUM, 9.0x 2009E EPS, 6.9x 2009E EBITDA and a 9.4% dividend yield.

Business Overview:

FCAM is diversified investment management group that manages £92.7B of assets (as of March 31, 2009) for a combination of insurance (59% of AUM), institutional (28%) and retail clients (13%). FCAM primary focuses on distribution of its funds in the UK and Continental Europe. FCAM was formed through the merger of F&C Group and ISIS Asset Management (FP's in-house investment manager) in 2004. FCAM maintains a diversified and defensive asset base which includes: fixed income (62% of AUM), equities (21%), real estate (9%), money markets (6%), and alternatives (2%). FCAM manages FP's insurance assets (as well as Eureka's) under a long-term contract (until 2014) which guarantee that the Company is at least EBITDA breakeven. FCAM does suffer from a low average revenue fee margin (22.9 bps) due to its high percentage of insurance assets. Its average fee margin has grown at ~3% CAGR since 2005 as its fees on new business are 30% higher than those that outflow.

New Management

New CEO Alain Grisay is an impressive, action-oriented change agent from Belgium who now has an unfettered mandate to grow assets and create value for shareholders.  Since joining F&C three years ago, he has shaken up the structure of the company by removing six layers of management and instating critical autonomy to fund level managers. His actions have influenced material improvement in F&C's relative performance versus peers (the majority of F&C's funds are performing better than the 75th percentile, and all are above the 50th percentile).

Spin-off Dynamics:

On July 6th, 2009 Friends Provident exited its 52% stake in F&C through a tax-free distribution to existing shareholders. The months preceding the demerger witnessed tremendous uncertainty and the shares suffered from the overhang of the impending share sale (F&C shares have declined more than 20% from when the equity markets reached their lows in early March, while, in contrast, its peers have rallied more than 20%).  The markets concerns over flowback stemmed from the fact the FP life-insurance focused shareholder base would likely have no apparent interest in owning a pureplay asset manager with a market capitalization less than one fifth the size of the parent (the shareholders of FP received a distribution of less than $10 for every $100 invested in FP).

The most powerful dynamic at play by far since FP announced its intention to either sell or demerge its investment in F&C was the inability of important third party consultants to recommend the firm to its institutional and pension clients, due to the uncertainty over F&C's ability to retain key fund managers in a change of control event.  Management has estimated this dynamic cost F&C at least ~£2B in new institutional mandates. Our diligence has suggested that third party consultant approval is absolutely critical to asset gathering. Last year every one of the twelve large consultants in the UK took F&C funds off of their 'Buy' lists.  Since the March 2009 announcement that the F&C sale process had been terminated and the shares would be distributed in the form of a spinoff, six of the twelve leading firms of investment consultants have reinstated their 'Buy' recommendations, and we expect others to follow suit in the coming months.  We anticipate the reinstatements will lead to better-than-peer asset growth, which should support a convergence of multiples as FCAM trades at a 40-80% discount on virtually every valuation metric.

Investment Merits:

  • Equity Valuation: Trades at forward multiples of 7.1x EBITDA, 9.3x EPS, and 9.1% dividend yield.
  • o EBITDA margins have been in the 25-30% range and over 70% of the Company's costs are fixed which should boost margins as revenues grow.
  • o Earnings have been clouded by large non-cash amortization and impairment expenses. We value FCAM on its underlying earning which strips out non-cash costs (similar to FCF with expensing options and not counting changes in working capital).
  • o AUM should reach at least a steady state as most "fast money" outflows have already occurred.
  • o Competitors (Aberdeen, Henderson, and Schroders) trade at an average of 16.8x EPS, 9.9x EBITDA and 5.2% dividend yield (~40%+ discounts). FCAM's 9.1% dividend yield is highest of any comp. and management stated that they want to pay down 2/3 of underlying earnings as a dividend (1.5x coverage).
  • o FCAM is a possible takeover target as FP received two offers (both turned down at the time) which occurred when FCAM traded above 100p. In a merger, an asset manager should be able to take out a lot of redundant overhead costs. Therefore deals are usually done on EV/Sales multiple which would be very accretive to the acquirer even at 3.0x (this implies an 115p price for FCAM).
  • Defensive: FCAM is diversified by asset class, client type and geography. Fixed income is its largest asset class, which should be more resilient in an economic downturn.
  • Cost Reduction: FCAM decreased costs in 2008 (compared to 2007) and has a cost cutting and rationalization plan that could save ~£12M in annual expenses.
  • Ownership Clarity: Management estimated that FCAM lost at least ~£2B of new institutional assets because of ownership uncertainty. UK institutional assets usually have a 3rd party consultant's approval before they invest with any fund manager. Last year numerous consultants took FCAM funds off their buys lists because of the corporate uncertainty. Since the announcement of the spin-off in March, six leading firms of investment consultants have reinstated their buy recommendations that had previously been on hold
  • Fund Performance: FCAM stated that 76% of its equity assets outperformed their benchmarks over the last year and 67% outperformed over the last 3 years. This could lead to asset growth in higher margin segments. Its fixed income assets have done about average with 52% outperforming their benchmarks over the last year and 49% outperformed over the last 3 years.
  • Share Repurchases: In May 2009, FCAM approved a share repurchase program that would allow them to buy approximately 10% of its outstanding shares over the next 15 months.
  • Balance Sheet: Safe balance sheet with £223M in cash and ~£18M in annual interest payments. FCAM has subordinated debt of £260M (6.75% rate) with no covenants, an interest deferral provision and a call option in 2016 to extend the bond another 10-year (until 2026) at L+269bps. Also has £35M in vendor loans related to REIT acquisition. FCAM has £72M in net debt and modest leverage (1.1x Net Debt/EBITDA).
  • Management: Management seems intelligent, open and shareholder friendly. CEO semi-annual letters are insightful and CFO includes very detailed financial notes in annual report.

 

GBP in mm, FYE Dec- 2005 2006 2007 2008 2009 2010 2011
Total Revenue 268.4 249.9 265.6 231.7 220.0 226.2 253.2
% Growth   (6.9%) 6.3% (12.8%) (5.0%) 2.8% 12.0%
Operating Expenses (147.5) (156.4) (180.1) (166.9) (156.9) (160.0) (169.6)
% Growth   6.0% 15.2% (7.3%) (6.0%) 2.0% 6.0%
               
EBITDA 120.9 93.5 85.5 64.8 63.1 66.1 83.6
% Growth   (22.7%) (8.6%) (24.2%) (2.6%) 4.7% 26.5%
               
Depreciation (3.2) (3.0) (3.7) (4.7) (4.9) (5.1) (5.3)
               
Adj. EBITA 117.7 90.5 81.8 60.1 58.2 61.0 78.3
% Margin 43.9% 36.2% 30.8% 25.9% 26.5% 27.0% 30.9%
               
Net Interest Expense (10.0) (0.8) (2.9) (3.8) (5.0) (5.0) (5.0)
Underlying EBT 107.8 89.7 78.9 56.3 53.2 56.0 73.3
Taxes (32.7) (27.3) (27.1) (16.1) (14.9) (14.7) (19.3)
Rate -30.3% -30.5% -34.3% -28.6% -28.0% -28.0% -28.0%
Minority Interests 0.0 (1.0) (1.6) (1.9) (3.2) (3.4) (4.4)
Underlying Net Income 75.1 61.4 50.2 38.3 35.1 37.9 49.6
Average Shares Out. 472.4 479.3 484.2 492.7 494.3 494.3 494.3
               
Underlying EPS (p) 15.90 12.80 10.37 7.77 7.11 7.67 10.04
% Growth   -19.5% -19.0% -25.0% -8.6% 7.9% 30.9%
               
NOPAT (@ 28% tax rate) 84.8 65.2 58.9 43.3 41.9 43.9 56.4
Total Debt 219 263 258 293 293 293 293
Total Equity 747 684 693 612 617 626 646
Capital Employed 966 947 951 905 911 919 939
Total ROCE (incl. goodwill + intangibles) 8.8% 6.8% 6.2% 4.7% 4.6% 4.8% 6.1%
Total ROCE (excl. goodwill + intangibles)   211.6% 54.0% 51.4% 93.9% 85.3% 86.0%
Incremental ROIC (Δ NOPAT / Δ Capital) -455.8% -272.9% -49.1% -33.7% 47.9% 231.4%
               
Cash Flow 2005 2006 2007 2008 2009 2010 2011
Adj. EBITA 117.7 90.5 81.8 60.1 58.2 61.0 78.3
add: Depreciation 3.2 3.0 3.7 4.7 4.9 5.1 5.3
less: Interest Paid (10.0) (0.8) (2.9) (3.8) (5.0) (5.0) (5.0)
less: Taxes Paid (32.7) (27.3) (27.1) (16.1) (14.9) (14.7) (19.3)
less: Distribution to Minority 0.0 (1.0) (0.9) (1.6) (3.0) (3.2) (4.1)
less: CapEx (3.7) (4.1) (2.2) (2.7) (4.0) (4.2) (5.4)
Total Adj. FCF 74.6 60.3 52.4 40.6 36.2 39.0 49.8
Total Adj. FCFS (p) 15.79 12.57 10.82 8.24 7.33 7.90 10.08
Dividends (51.8) (52.7) (43.5) (29.6) (29.7) (29.7) (29.7)
Cash Acquisitions (0.6) (0.2) (0.1) (29.1) 0.0 0.0 0.0
               
AUM (GBP in bn) 2005 2006 2007 2008 2009 2010 2011
Opening AUM 124.3 131.0 104.1 103.6 98.6 96.5 101.6
+ Market Performance 12.8 5.4 8.6 (9.0) 3.9 5.6 5.9
+ Net Outflows (6.1) (32.3) (9.0) (10.7) (6.0) (0.5) 1.1
+ Acquisitions                       -                     -                    - 3.2                     -                      -                      -
+ Currency Change                       -                     -                    - 11.4 0.0                      -                      -
Closing AUM 131.0 104.1 103.6 98.6 96.5 101.6 108.6
Average AUM 127.6 117.5 103.8 101.1 97.6 99.0 105.1

Peer Multiples P/E EV/EBITDA
    2009 2010 2009 2010
LSE:ADN   15.6x 12.3x 15.2x 11.3x
LSE:HGG   13.6x 11.4x 9.7x 8.4x
LSE:SDR   17.0x 14.4x 9.6x 8.5x
Peer Average   15.4x 12.7x 11.5x 9.4x
           
           
           
LSE:FCAM          
Sellside   9.0x 8.0x 6.9x 6.5x
Internal   9.0x 8.3x 6.9x 6.6x
Premium to Peers -42% -34% -40% -30%
           
           
           
           
           
           
           
Market Stats     Intrinsic Value  
Current Price (p) 64.00 ROCE   15.0%
Market Cap   316.4 Growth   5.0%
Net Debt (Cash) 67.7 Norm. 2011E NOPAT 56.4
Minority   49.6 Fair Multiple   13.0x
Enterprise Value 433.6 Fair EV   733
Dividend Yield 9.4% Fair Equity Value 616
Mgmt Ownership 1%   Fair Value per Share 124.56
      % Upside (Downside) 94.6%
      Curr Mkt. Cap./'11E EPS 6.4x
      Curr. EV / '11E NOPAT 7.9x
           

In GBP   Market Statistics P/E EV/EBITDA EV/Sales Total Debt / Cap 5-yr Avg ROCE 5-yr Avg EBIT Margin
Peers Ticker Price Mkt Cap EV 09E 10E 09E   10E 09E 10E Current 2004-2008 2004-2008
                             
Aberdeen LSE:ADN £1.23 1,234 1,633 15.6x 12.3x 15.2x   11.3x 3.8x 3.5x 25.6% 6.3% 23.6%
Henderson LSE:HGG £0.94 771 853 13.6x 11.4x 9.7x   8.4x 3.3x 3.1x 38.6% 7.9% 20.7%
Schroders LSE:SDR £7.84 2,248 1,648 17.0x 14.4x 9.6x   8.5x 2.3x 2.2x 0.8% 8.8% 22.8%
F&C Asset Management LSE:FCAM £0.64 316 434 9.0x 8.0x 6.9x   6.5x 1.9x 1.9x 31.7% 2.2% 31.3%

In GBP  
Peers Div. Yield
   
Aberdeen 4.8%
BlueBay 4.6%
Henderson 7.2%
Man Group 9.4%
Schroders 3.7%
AVG 5.9%
FCAM 9.4%

Risks:

  • AUM Declines: A decline in the overall level of the equity or bond markets as well as continued net outflows would decrease AUM and hurt revenues. As FCAM's costs are relative fixed (in the short run) this would hurt its operating margins and flow through to bottom line in a greater percentage change than in revenues.
  • Inability to Gain Clients: Failure to gain higher margin business from retail clients could hurt the business as FCAM needs to diversify away from its insurance assets and gain higher margin business. FCAM has had net outflows every year since 2004 and needs to find prove it can retain assets over the long-term.
  • Loss of Insurance Clients: Inability to renegotiate or extend long-term insurance contracts could lead to large outflows after 2014 from FP and Eureka assets.
  • Currency Effect: Weakness in the Euro will impact earnings and AUM as FCAM is heavily biased toward Europe (€-denominated assets are 58% of AUM) while 80% of its cost are in sterling (this Euro exposure is only 50% hedged). In 2008, the Euro's 21% appreciation over the sterling contributed to a 12% increase in FCAM's AUM.

 

 

Catalyst

  • De-merger unlocks shareholder value and/or creates a re-pricing in the value of the equity as a standalone business.
  • Competitor (likely Henderson) acquires the business in the next 12-24 months.

 

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