Ashmore Group PLC (LON: ASHM) – Strong Emerging Markets Fundamentals Underpin Long-Term Growth

Ashmore Group PLC is a FTSE 250 Index listed Investment Manager, which provides investment opportunities to participate in Emerging Markets. It offers a wide range of different debt, equity, and regional strategies. It serves with various themes for investments, such as external debt, local currency, corporate debt, blended debt, alternatives, equities, liquidity, and multi-asset. As of 30 June 2020, the Company had US$83.6 billion in assets under management, and investment performance was positive in all the equities, multi-asset, and fixed-income themes. The Company has won two awards from Institutional Investors in the US and Europe as it was named Emerging Markets Local Debt Manager of the Year and Emerging Markets Fixed Income Manager of the Year. It employs around 310 employees in 11 countries.

On 11 September 2020, the Company is expected to announce the full-year results for FY20.

 

(Source: Presentation, Company Website)

Key Fundamental Statistics



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.


(Source: Company Website)

Growth Prospects and Risk Assessment

Ashmore operates in a large, diverse, and liquid investment universe of Emerging Markets. It has an active, value-based investment philosophy which provides them significant opportunities even in inefficient markets. It has a strong performance track record of over 27 years. It has quite a diversified client base in terms of investment themes and location, which provides substantial resilience to the business. Moreover, the disciplined cost control delivers a high-profit margin, which is reflected in the high conversion of operating profits to cash (110% cumulative conversions since IPO). Also, the Company has a progressive dividend policy as it has returned £1.2 billion to shareholders through ordinary dividends since 2007, which is equivalent to 68% of attributable profits over the period. The balance sheet strength is reflected in their high-quality financial resources and no debt position.


(Source: Presentation, Company Website)
 
However, the Company faces several operational, market and credit risks. The lower performance amid market volatility could reduce assets under management, which can further lead to reputational damage and dissatisfied clients. Moreover, 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 ongoing Covid-19 mayhem may also impact the business growth trajectory in the near term.

Key Shareholders

Segment Analysis

The Company operates in investment management and considers this as a single segment business. However, the revenue bifurcation by geography can be seen in the image below:


(Source: Interim Report, Company Website)

Synopsis of Recent Developments

14 July 2020: The Company updated that markets have begun to recover from the levels witnessed in March 2020, due to lockdown easing, monetary and fiscal stimulus introduced by the governments.

16 April 2020: The quarter-on-quarter investment performance for the quarter ended 31 March 2020, was negative in all investment themes, but the performance against benchmarks remained good over five years.


(Source: Presentation, Company Website)

Comparison of Key Performing Indicators

The image below depicts the comparison of key performing indicators between H1 FY20 and H1 FY19:


 (Source: Presentation, Company Website)

Trading Update (Q4 FY2020)


(Source: Company Website)

On 14 July 2020, the Company provided assets under management (AuM) update for the quarter ended 30 June 2020 (Q4 FY20). AuM increased by US$6.8 billion over the quarter, reflecting a net outflow of US$2.2 billion and positive investment performance of US$9.0 billion. Further, the Company faced a combination of negative flows and positive market performance in Q4 FY20. It has also shown a positive investment performance in all the fixed income themes, equities and multi-asset, and flat in the other themes.

With markets staging a recovery from the levels seen in March 2020, ASHM stated that the relative performance in the equities theme has been good but the relative performance of all the fixed-income themes over one and three years stayed belowbenchmarks. The active investment processes delivered high levels of outperformance over the quarter and were recovering the mark-to-market underperformance generated by the market deteriorations in February 2020 and March 2020. Despite the COVID-19 crisis over the quarter, valuations across equity markets and fixed income still offer significant upside and opportunities for further outperformance. The flows and AuM are expected to increase in the near to medium term.

Financial Highlights (H1 FY2020) - Strong Operating and Financial Performance


(Source: Company Website)

In the first half of 2020, the Company witnessed a good performance, with an increase of 7% in AuM to US$98.4 billion and delivering net inflows of US$5.7 billion. This increase was driven by a positive return for the Emerging Markets asset classes, fluctuating investor sentiment and price volatility.

The Company has shown a strong operational delivery with an increase in net management fee income of 18% year-on-year and adjusted EBITDA of 24% year-on-year. Over the period, it has delivered a 69% of adjusted EBITDA margin. The diluted earnings per share increased by 56% year-on-year (including a positive contribution from the Group’s seed capital investments and a lower effective tax rate).Consequently, the interim dividend has been increased by 5% year-on-year to 4.80 pence per share.

Financial Ratios (H1 FY20 ended 31 December 2019): Decent Profitability Margins versus the Industry Median

Reported profitability metrics for the first half of 2020 stood higher than the Industry Median, reflecting higher revenue generated and better control over expenses.  In H1 FY20, ROE (Return on Equity) stood at 13.7%, which was higher as compared to the corresponding period of the last year of 9.6%, reflecting effective utilization of equity capital. The Group has a robust liquidity profile to meet the short-term obligations in the near term. On leverage front, the debt-equity ratio was nil from the last three years which shows that the business has not relied on the external borrowings to finance business operations.

One Year Share Price Chart
 
 

Daily Chart as on 24 August 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 24 August 2020, at the time of writing (before the market close, at 9:17 AM GMT+1), Ashmore Group Plc shares were trading at GBX 409.20, up by 1.84% against the previous day closing price. Stock 52 week High and Low were GBX 581.50 and GBX 281.80, respectively.

Bullish Technical Indicators

From the technical standpoint, the shares were trading well above the short-term support level of 100-day simple moving average prices, which reflects an upward trend in the stock. Also, 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 4.97% in the last three months.

Ashmore Group Plc Vs FTSE Mid 250 Index (2 Years)


 (Source: Refinitiv, Thomson Reuters)

In the last two years, Ashmore Group Plc share price has delivered 15.85% return as compared to the negative 14.42% return of FTSE Mid 250 index, which shows that the stock has outperformed the index during the last two years.

 Valuation Methodology

Price/Book Value Approach (NTM)
 


To compare Ashmore Group Plc with peers, Price/Book Value multiple has been used. The peers are Schroders Plc (Price/NTM Book Value was 2.03x), Intermediate Capital Group Plc(Price/NTM Book Value was 2.81x), Brewin Dolphin Holdings Plc (Price/NTM Book Value was 2.50x), Ninety One Plc (Price/NTM Book Value was 7.45x), and London Stock Exchange Group Plc (Price/NTM Book Value was 6.05x). The Average of Price/NTM Book Value of the Company’s peers was 4.17x (approx.).

Business Outlook

In Q4 FY20, investment performance was positive quarter-on-quarter for equities, fixed-income, and multi-asset themes. Moreover, the lockdown easing combined with fiscal and monetary stimulus have improved the trading from the levels experienced in March 2020. Although the global macroeconomic outlook is still uncertain; however, Emerging Markets are relatively less likely to suffer than the developed economies. Therefore, Emerging Markets continues to provide clear opportunity to enhance returns as assets are trading at significantly more attractive levels than the equivalent developed world bond and equity markets. Moreover, interest rates will remain low for a prolonged period due to debt-funded fiscal stimulus and unconventional monetary policies, which will continue to favour Emerging Markets’ high real yields.
 

(Source: Presentation, Company Website)

The Company has a consistent track record of reporting EBITDA margin, Net Margin and ROE above the industry benchmark. Over the course of 4 years (FY15 – FY19), the Company’s net profit (from continued & discontinued operations) surged from £140 million in FY15 to £181.50 million in FY19. Compounded annual growth rate (CAGR) stood at 6.71%.

Considering the decent business growth rate trajectory, sound financial position, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Ashmore Group at the current market price of GBX 409.20 (as on 24 August 2020, before the market close at 9:17 AM GMT+1) with lower double-digit upside potential based on 4.17x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).  
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.