Liontrust Asset Management’s crown has not only slipped amid the current market volatility, it now languishes with the fund management lightweight Jupiter in the eyes of investors.
Since January the shares have fallen by more than 50 per cent and a forward price/earnings ratio of just nine is the worst since the days after the pandemic and roughly half the level at which earnings expectations stood at the start of this year. A sharp derating is entirely rational.
Liontrust is hardly alone in facing weaker earnings prospects, but previously high expectations mean investors have singled out the manager for punishment. The FTSE 250 constituent had gained a reputation for attracting assets, imbuing it with a premium rating only its green-badged peer Impax Asset Management could surpass at the end of last year. Over the 18 months to the end of December, assets under management almost doubled to £37.2 billion, fed by a rebound in markets, investor appetite and the acquisition of the multi-asset specialist asset manager Architas.
The economic turmoil since the outbreak of the war in Ukraine caused assets under management in the first three months of this year to contract for the first time in two years. Net outflows of £432 million, versus net inflows of almost £1 billion the year before, and a market dive have inflicted further pain.
Market sell-off aside, an asset manager promoting itself as a specialist in environmental, social and governance strategies has a natural disadvantage when shares in oil and gas and mining giants have soared amid the supply shortages caused by the Russian invasion.
Then there’s the shift from growth stocks to value as companies priced for high future growth have fallen out of favour amid rampant inflation and the prospect of interest rate rises. On a one-year basis, only around a third of Liontrust’s UK retail funds were ranked in the first or second quartile of their sectors at the end of March, versus just over 80 per cent on a three-year basis.
Liontrust stands by a preference for growth stocks, arguing that companies that have proved their mettle in the past will outperform in the longer term and the current sell-off could provide the chance to add to some holdings at a cheaper rate. Yet the outperformance of traditional energy stocks and inflation that has sapped technology valuations are stumbling blocks that might weigh on market returns in the near-term.
A further downturn in flows and negative market returns pose the biggest threat to fees, which account for the bulk of revenue and are calculated as a percentage of assets under management. A reduction in variable remuneration paid to staff should temper the impact of a fall in revenue and management reckons it can maintain an operating margin of 40 per cent. Analysts at Berenberg are not so confident, forecasting a margin of 36 per cent for the current financial year and the next.
A bias towards catering to retail investors rather than institutions, the latter of whom tend to be stickier customers, mean Liontrust is more vulnerable to a weakening in disposable incomes. That, combined with further market volatility, has prompted analysts to downgrade earnings forecasts. The brokerage Numis cut earnings forecasts for this year and next to 108p and 101p a share respectively, while Peel Hunt has pencilled in 108p and 106p. Both sets of forecasts are below earnings of 129p a share recorded last year.
A beefy dividend is one consolation, still forecast to total 72p a share this year, which would offer a potential dividend yield of 7.2 per cent at the current share price. But then a high yield is not exclusive to Liontrust among its peers.
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Essentra
Disparate businesses never go down well with investors: just look at the discount that has dogged the industrial conglomerate Smiths Group. Essentra is a minnow in comparison but, like Smiths, it sees flogging some of its parts as a way of winning over investors.
Shares in the FTSE 250 industrial group trade more than 50 per cent lower than they did five years ago. Management’s solution? Split the three businesses and focus on the higher-growth components arm, which makes and distributes plastic and metal parts to industries ranging from automotive to construction.
The £312 million price put on the sale of the packaging division, announced last week, was below the £389 million sum-of-parts valuation by the brokerage Jefferies in February. Yet the disposal should not only accelerate profit growth at a group level but shore up the balance sheet and leave more in the bank for acquisitions. Proceeds will be used to pay down debt and make a small contribution to the pensions scheme.
The division that manufactures cigarette filters could also be for the chop, which might prompt additional cash returns to shareholders. The brokerage Numis says a sale could fetch around £225 million, leaving the remaining components business with an enterprise value of roughly nine times forecast earnings before taxes and other charges for this financial year — a valuation below its peers discoverIE and Diploma, previously justified by lower margins and revenue growth.
The components business has historically grown revenue at roughly 4 to 6 percentage points above the rate of industrial production, so a contraction in industrial output poses a threat to demand later this year, and the benefit of post-pandemic recovery means comparators will get tougher in the coming quarters. The caveat? The parts it produces are typically production-critical and cost a small amount of the overall manufacturing costs, which could provide some cushion against weaker demand. Cost inflation has thus far also been passed on through higher pricing.
Slimming the group down further and returning cash to investors could both provide catalysts for the shares.
Advice Buy
Why Further disposals would make the shares look too cheap compared with peers