Confidence Grows In Janus Henderson

This story features JANUS HENDERSON GROUP PLC. For more info SHARE ANALYSIS: JHG

Growth drivers for Janus Henderson are tracking ahead of most expectations and brokers are more confident regarding the outlook.

-Cost profile appears higher going forward
-Business now more exposed to less-favourable trends for active equities
-Merged organisation better able to leverage capabilities via global collaboration
 

By Eva Brocklehurst

In its September quarter update, Janus Henderson ((JHG)) indicated integration efforts are moving ahead of expectations, upgrading synergy targets from the recent merger by US$15m to US$125m. Furthermore, brokers note flow trends into the company's funds are looking more positive.

UBS suggests that a return to positive net inflows will be supported by ongoing improvements in investment performance, higher assets under management and fee margins, as well as the upgraded cost synergy targets. The broker acknowledges cost growth is elevated but expects this to normalise in the current quarter. In addition, upgraded merger synergy targets should assist the outer-year margins.

Deutsche Bank is a little more cautious regarding the flow outlook, as positive net flows of $700m included a $1.8bn institutional equity mandate. This suggests core equity flows remain weak despite the generally improved performance. The broker remains encouraged by the potential for stronger long-term growth post the merger of two well-regarded US and UK/Australian active managers, but believes the risk/return is balanced.

The business is more exposed to less favourable trends for active equities and mutual fund vehicles and there is more downside risk in a bear equity market scenario. On the other hand, the combined organisation should better leverage its active management capabilities via global collaboration. Hence, Deutsche Bank maintains a wait-and-see approach and a Hold rating.

Citi suggests the strong performance in the equity market since September 30 has offset the impact on earnings from the miss to its expectations. The company potentially offers superior growth versus many of its peers and the broker lifts its rating to Buy from Neutral.

Bell Potter also believes the company is proving the merits of the merger. In addition, closing funds under management were 3.4% ahead of expectations, resulting in a meaningful upgrade to estimates and a recalibration of the growth trajectory. The broker, not one of the eight monitored daily on the FNArena database, has a Buy rating and $63 target.

Credit Suisse found the results disappointing because of lower performance fees and higher expenses. A miss on cost estimates reflects a higher cost profile going forward. Nevertheless, the broker concedes the outlook is more positive, as the company has upgraded its synergy target and this will add 2% to FY19 earnings per share.

Cost Synergies

Credit Suisse is concerned about costs and, relative to forecasts, suspects synergies are not flowing through to earnings as much as they should. There were US$70m in synergies achieved  in the September quarter, mostly related to compensation, yet comparable growth was 14% and total cost growth 10%.

Consequently, the broker's earnings estimates are negatively affected by a mix of restated costs and/or lower net synergies. There is some valuation support relative to Australian managers but Credit Suisse suspects rising regulatory costs may still impose some risk.

This doesn't concern Morgan Stanley, which notes the synergy upgrade and positive flows ensued despite the limited tailwinds from cross selling into the new geographies that are being opened up by the global platform. Hence, the broker suggests there is a case for a re-rating and retains an Overweight recommendation.

Morgan Stanley considers the valuation compelling and will look for the catalysts that should start playing out now, such as improving flows, stronger investment performance, new products and delivering on cost synergies. The broker acknowledges the market is still forming its view on the merged entity but believes the risks are skewed to the upside.

Morgan Stanley is more confident that there will be a return to positive flows at the former Henderson retail funds as well as a better INTECH performance.

Citi acknowledges comparable expenses need to come down, and suggests that, with synergies and the outsourcing to BNP Paribas in the first quarter of 2018, expenses should fall. The broker notes management fee margins are continuing to climb because of a favourable mix.

Also, the rally in equity markets post September 30, if sustained, should be supportive. Citi had expected the synergy target would be upgraded, although this still remains shy of its US$130m estimate.

Dai-ichi

Morgan Stanley suspects the market is missing the fact the business is evolving into a truly global platform, supported by the company's relationship with Dai-ichi Life Insurance, and points out that a one-stop asset manager increases the relevance for larger clients that are reducing their asset manager panels.

Dai-ichi has publicly stated it intends to increase its stake in the company to at least 15% from the current 9% and Citi suggests there is a reasonable chance the stake will be raised in the current quarter.

The database shows four Buy ratings and two Hold. The consensus target is $51.47, suggesting 6.5% upside to the last share price.
 

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