The buzz is back at Record (maybe) #REC
Here’s one that not many of you will have noticed.
Last Thursday, Record plc issued a Q2 trading update.
Alpha FX has seen explosive growth from nothing all the way to 500 clients, and has been rewarded by an EV/EBITDA multiple of nearly 25x (Stockopedia numbers).
Record, meanwhile, languishes at an EV/EBITDA multiple of less than 6x. That’s the punishment for seeing your client numbers and profits stagnate, and then shift into reverse gear.
But there are signs of life at Record, where I’ve been a shareholder since early 2018.
Despite still sitting on a very low (cash-adjusted) earnings multiple, Record’s share price is actually 35% higher than the lows it reached in April/May of this year (latest share price 36.6p).
(Source: London Stock Exchange.)
The Good News
For a start, Thursday’s trading update showed that assets under management equivalent (“AUME”) increased for the second consecutive quarter – optimists will start to pencil in a new uptrend.
On an annual basis, AUME are now 3% higher, compared to a year ago, at $59.9 billion.
Even better, client inflows were positive, at $1.7 billion. This is the best quarterly inflow result since December 2016.
And the number of clients improved to 70, which is another new high.
Investment performance was positive across a wide range of mandates: dynamic hedging, Record’s forward rate bias index fund, emerging markets and multi-strategy.
Fee rates remain “broadly unchanged” – fee pressure has been a big worry, but perhaps they are stabilising?
Economic, political and market uncertainty continues to prevail. The client engagement opportunities which this creates, in conjunction with our ongoing focus on enhancement and innovation, have contributed to the inflows we have seen during the period.
“We also continue to see an attractive range of further new business opportunities, still balanced against competition and fee pressure. We remain confident of making further progress in the current financial year.”
I invested in this as a contrarian value play, and have stubbornly held on during the challenges of the past two years. This has been a struggle at times, as the share price dipped in response to fee pressure and disappointing flows. I’ve been tempted to sell, but the valuation always looked too cheap, making it too painful to sell. The trailing EV/EBIT multiple of less than 6x is still pitiful.
Now, after the positive signs of the last few quarters, I am starting to feel confident that I will at least get my money back on this investment.
Existing clients must be happy, as they are responsible for the bulk of the inflows, and an increase in the client list shows that the company’s outreach capabilities can also bear fruit.
Meanwhile, investors have been enjoying a dividend yield of around 6%-7% as Record has never had a problem converting profits into cash, and has an extraordinarily cash-rich, liquid balance sheet.
What I would love to see now is another buy-back using excess cash, perhaps on a similar scale to the one in 2017.
In 2017, Record spent £10 million buying back 22 million shares at 44.8p each.
More recently, in 2018 and 2019, Record has paid out between £5 million and £7 million per year in dividends. The high dividend yield says to me that the market doesn’t value these dividends very highly.
In these circumstances, and especially when you have a mid-single digit EV/EBIT multiple, I think the correct course of action is to prioritise buybacks over dividends. Given the present market cap of £73 million and 36.6p share price, it might not be too difficult for Record to cancel another 20 million shares. And if the market continues to value it at these levels, while the company remains profitable, then it should keep doing it!
While that would be my preferred course of action by the company, it’s more likely that I’ll have to sit still and accept the dividends for the time being.