Security price: $3.71
FY1 value: $4.85
Industry: Funds management
FY17 forecast distribution: 17.0 cents per share
Henderson Group (ASX:HGG) is a leading European asset manager based out of London. Despite having little remaining business in Australia, its ASX listing is a vestige of its days as an AMP subsidiary. Henderson has historically delivered strong returns for its clients over a number of different strategies, building an inimitable reputation and brand for itself in the process. Its planned merger with US peer Janus Capital is poised to create a truly global business with enormous product diversity and geographic reach. The combined business will have more than US$350 billion in assets under management (AUM) across a wide range of asset classes, strategies and clients. Accordingly, it is expected to generate EBITDA of around US$700 million before any synergies that may arise post-merger.
With a dividend payout ratio of 60%, this translates to a healthy annual yield of 4.6%, paid quarterly. Additionally, in response to Janus’ intention to pay a final quarterly dividend prior to the merger’s close, HGG will pay a corresponding special dividend to its own shareholders. Though it has not yet announced the quantum or timing of the dividend, it is likely to be in the order of 3-4 cents per share (an additional ~1% of income).
Despite its yield, Henderson is not a typical income stock. Its earnings are leveraged to the performance of global stock markets and it is still reinvesting a large proportion of its capital to grow the business. Recent concerns over the implications of Britain’s exit from the EU (‘Brexit’) and a weakening pound have created share price volatility, but to date the underlying business has not been affected. Once it merges with Janus, these concerns should abate as Henderson’s European focus dissipates into a truly global portfolio. Henderson is also benefiting from the ongoing global shift in asset class mix from fixed interest (bonds) to equities (stocks) as investors search for growth and income in a yield-starved environment.
Of course, Henderson isn’t without its risks as it continues to be exposed to global equity markets, Anglo-European relations, and key foreign exchange rates between the pound, US dollar, Euro and Aussie dollar. Still, these risks are not unique to Henderson and are typical of the industry in general. As a result, Henderson’s sharp discount to its peers and its discount to its intrinsic value appear overdone. If the group is able to execute on its merger and subsequent growth strategy, this discount may shrink over time.