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BT Investment Solid But Caution Over Brexit Prevails

Australia | Oct 11 2016


Brokers like the diversity in BT Investment Management but several remain cautious about the outlook, given lingering risks surrounding Brexit.

-Gains two more mandates to provide upside in the December quarter
-Australian business drives quarterly flows with upside from new global equities fund
-Cycling strong contribution from JO Hambro performance fees in FY16


By Eva Brocklehurst

BT Investment Management ((BTT)) surged to a new record in funds under management (FUM) in the September quarter, at $84bn. Brokers generally like the diversity inherent in the business, with strength in Australian fixed interest and US pooled funds and a global distribution footprint.

Yet while the stock offers a compelling global expansion theme and the flows suggest the risks from Brexit are lower than previously feared, Credit Suisse is cautious, citing the risks of a rotation in the US back to domestic US equities where BT Investment has a narrower product offering.

September funds under management grew 5.4% in the quarter. Growth was achieved through net inflows and positive market movements but offset by negative foreign exchange. The better than expected flows in JO Hambro and $2bn in mandate wins, mainly by JO Hambro, imply Brexit risks were over-compensated in its estimates, Credit Suisse acknowledges. Consequently, the broker upgrades estimates for earnings by 1% in FY16 and 7-9% in FY17-18.

Net inflows in the quarter were $2.2bn which resulted in an increase to annualised fee income of $4.5m. The business has gained two more mandates which are expected to provide fund upside in the December quarter. There is a $300m diversified income mandate in October and $1.7bn in JO Hambro equities to be funded in November. The latter is an institutional mandate which brokers note may lead to further flows.

Bell Potter considers BT Investment a top pick in the sector, with meaningful growth expected over the medium term. JO Hambro FUM is expected to double before capacity constraints are hit. Bell Potter also upgrades estimates on the better net flows and marking to markets, partly offset by the FX impact as well as adverse changes to FX assumptions in future periods.

Some risks remain in terms of Brexit, Britain's exit from the European Union, the broker agrees, particularly surrounding the trigger of Article 50 and resultant negotiations, which are currently expected to take place in March 2017. Nevertheless, Bell Potter is confident in the resilience of the JO Hambro business. The broker, not one of the eight monitored daily on the FNArena database, reiterates a Buy rating and raises its target to $13.

Australian business drove the flows in the quarter, led by institutional fixed income and cash. Morgan Stanley believes the company's growth options are broader than just JO Hambro, with upside in the medium term from the new Australian based global equities fund. The broker suspects the peak in outflows has passed and the US retail flow is proving strong, with JO Hambro having a strong product range for US retail.

While BT Investment is relatively reliant on a single client/distribution channel, i.e. Westpac ((WBC)), their interests are aligned, with Westpac owning 31% of the BTT stock, and it could provide further growth avenues in the broker's opinion. Upside potential exists with JO Hambro's expansion in the US and a sustained period of investment performance. The negatives include market volatility, which affects confidence and inflows, Australian equities margin pressure and pricing pressure from the UK retail competition review.

It was a firm final quarter, Morgans acknowledges, and the company continues to attract strong inflows across its core markets despite the uncertainty surrounding Brexit. The broker forecasts FY16 net profit of $145.9m and a final dividend of 22c (to be reported in November).

Areas of potential surprise are from product fees, investment returns and better than expected operational leverage. The business will cycle a strong contribution from JO Hambro performance fees, which at this point Morgans believes is tracking at a lower level. Further weakness in the British pound also creates a slight headwind in the broker's calculations.

FNArena's database has one Buy rating (Morgan Stanley), four Hold and one Sell (UBS, yet to update on the quarterly). The consensus target is $9.47, suggesting 5.0% downside to the last share price. This compares with $8.94 ahead of the update. Targets range from $7.30 (UBS) to $11.00 (Morgan Stanley). The dividend yield on FY16 and FY17 forecasts is 4.0% and 4.2% respectively.

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