Author Topic: ASHM - Ashmore Group PLC  (Read 16180 times)

klarmanite

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ASHM - Ashmore Group PLC
« on: February 17, 2014, 10:07:22 AM »
I noticed that Odey has a 3% + short position here. Which I don't really understand since I can't help being very bullish on ASHM long term myself. Valuation is fairly undemanding also. Anyone familiar with the gist of their short thesis?
Whenever a theory appears to you as the only possible one, take this as a sign that you have neither understood the theory nor the problem which it was intended to solve.
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constructive

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Re: ASHM - Ashmore Group PLC
« Reply #1 on: February 17, 2014, 10:30:12 AM »
Could be a pair trade against the long position in Man Group. Or a bearish view on emerging markets. Or something specific to ASHM.

http://www.valuewalk.com/2013/09/tiger-cubs-short-nokia/

cr6196

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Re: ASHM - Ashmore Group PLC
« Reply #2 on: February 17, 2014, 10:59:37 AM »
I noticed that Odey has a 3% + short position here. Which I don't really understand since I can't help being very bullish on ASHM long term myself. Valuation is fairly undemanding also. Anyone familiar with the gist of their short thesis?

Yes, I imagine they are expecting outflows due to general EM hijinks. It is also pretty difficult not to conclude that there isn't immense amounts of hot money in Ashmore's funds...at the start of the decade they were, at best, very small managing £250m. Now they manage £50bn which is, at least, very large.

I can see your point but: 1) it is very hard to get cash out of asset managers due to heavy insider ownership, there are quite a few London-listed asset managers in the same position and 2) if this isn't the peak for EM bonds I am not sure what could be...so lets say this isn't the peak, what more has to happen? Developed equities/rates would have to go back down, even more liquidity, Japan may disrupt things but I just can't see huge EM debt flows resuming. On top of that, we know that EMs are volatile, investors move in herds, and that some countries ran huge deficits and didn't really spend them on anything useful. That said, it looks like people were pretty interested at 320p so maybe it will just hold up here for a bit...I just can't see what the upside is though, def can't see it going above 400p over the next 5-10 years.

Edit: Forgot to add, their thesis on Aberdeen Asset Management is, most likely, something similar.
« Last Edit: February 17, 2014, 11:50:36 AM by cr6196 »

klarmanite

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Re: ASHM - Ashmore Group PLC
« Reply #3 on: February 17, 2014, 12:29:44 PM »
Another one we may disagree on I see  ;D

Excellent, some back and forth with intelligent people is the best way to see if my thesis holds up. Let me post the main points of my long thesis here later this week and we'll take it from there.
Whenever a theory appears to you as the only possible one, take this as a sign that you have neither understood the theory nor the problem which it was intended to solve.
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klarmanite

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Re: ASHM - Ashmore Group PLC
« Reply #4 on: February 18, 2014, 01:28:49 AM »
So the main points of my long thesis are the following (I'm assuming some familiarity with Ashmore's business here):

1. Ashmore has a scalable, very profitable business model with recurring income

2. Ashmore is out of favor because of negative EM flows. These fears are overdone. The long term outlook is good, not bad, even if not much could happen to earnings and cash flow in the short term.

3. Ashmore has sustainable economic moats

4. Ashmore has great management with lots of skin in the game. It has a culture that I like and recognize from great fund management companies: low fixed salaries, long term share based comp, not star driven but focused on long term team effort.

5. EM unrest has resulted in undervaluation. 

I will go through these points quickly below, one by one:

1. Fund management is a great business once a company reaches critical mass. I will not go into this in detail but this is self-evident. *In the case of ASHM, this is certainly the case. Looking at historical ROE, ROIC and EBIT margins (9 yr averages are 50%, 49% and 74% respectively), it is obvious that this is a truly great business.

2. Although negative EM flows in general have impacted AHM as well as the latest AUM report indicated, the media reports are misleading. First of all, the data most often quoted is EPFR data. This is an incomplete data set, because it doesn't properly account for investment flows from pension funds, sovereign wealth funds etc. Looking at IIF data, it becomes obvious that (for now) the media reports exaggerate the negative asset flows from EM. I suggest looking up the recent IIF flow report online for details. It is my contention that due to the make-up of ASHMS investor base, this is the most relevant data set, since ASHM has virtually no retail money. A whopping 81% of ASHMs AUM is from public and private pension funds and government sources. These assets are more long term and a lot stickier than retail funds. So the amount of hot money in ASHMs mandates is limited. Numbers from JP Morgan confirm the IIF estimates which show that it is retail money that has been flowing out for the most part in 2013 and 2014.

Admittedly, we don't know how long asset flows will be negative or how much worse things could get, or if institutional flows will turn more negative. But long term, the case for increased flows is good, not bad, in my opinion.

The reasons are:

a. EMs have less sophisticated capital markets which will evolve and grow over time. Low but rising disposable income in the local population will be supportive also. The BIS estimates that equity and debt markets in EM will grow from 28 Trn USD today to 79 Trn USD in 2020. My contention is that more sophistiocated, bigger EM debt and equity markets + growing disposable income in local economies means a big opportunity for ASHM.

b. That the developed world is dramatically underweighted in EM assets. If investors would have been properly weighted in EMs as implied by the MSCI  world index, EM weightings should have been 15-16% instead of a paltry 5% today. This is the equivalent of 4 Trn USD in debt and equity instruments. Ashmore has a market share of a little less than 2% of this (my numbers are not exact, but close enough).
Every percent increase in allocation to EM assets would mean about 800 Bn USD. If ASHM should maintain its market share on this 800 Bn, thatís 16 Bn USD in increased AUM. 10 x 16 Bn is 160 BnÖ
Now of course, 160 Bn may be unlikely, but I think itís obvious that with the severe underweighting and growing underlying capital markets, the ASHM opportunity is huge.

3. ASHMs moats are mainly cost and distribution advantages from scale and relationships with capital allocators and government officials that have been built up since Mark Coombs first got started in the 80s. These moats are very real (I know, I have spent a few years starting a small fund management company and have experienced first hand the barriers to entry in this business).

4. Mark Coombs is brilliant and owns 42% of the company. Reading interviews with the man (hard to come by mostly), you come away with a solid impression. Heís building something to outlast him, and is always thinking long term.

5. ASHM is undervalued! It has no debt, and about 20% of the market cap in cash, and looking beyond a P/E of 15 and an EV/EBITDA of 9 for 2014, it is actually very modestly valued. These multiples are ędistortedĽ by ncreased investment in distribution capacity which has elevated costs temporarily. I expect a 15% increase in COGS and OPEX in 2014, and 10% increases every year after that in my forecast period thru 2019 (this increase shows that management truly believes in substantial further growth, btw). I am way below consensus on EPS for 2014 and 2015 (25 pence and 29 pence respectively) at 21 and 20 pence. This is mainly because I assume costs will rise, but also because I think that AUM stays flat this year, after which I assume 15% annual growth in AUM through 2019.
Based on normalized historical numbers, I think a fee margin of 0.85% on the AUM is realistic (marigns lately have been depressed because of larger than usual currency AUM inflows, which have lower margins). In my valuation I assume a gradual recovery toward the normalized fee margin of 0.85% by 2016.
In my model, EBIT will thus increase from about 185m in 2015 to about 400 in 2019. My numbers imply a reduction in EBITDA margin in the long term from 70% a few years ago to 60% or thereabouts.
Based on this EBIT estimate and other reasonable assumptions based partially on historical numbers and management guidance, I get a DCF value of 5.2 GBP:

DCF calculation   
Discount rate   10.0 %
Terminal FCF gr. rate   3.0 %
Forecast period value   687
Terminal value   2,501
Net cash/debt   500
Equity value   3,688
Shares outstanding   707
Per share   5.2


Interestingly, if you assume no growth in FCF at all i the future, and use the avg FCF number from the last 3 years, you get a value 3.3 GBP, which means there is virtually no growth priced in today:

Avg FCF 2011-2013:   182
Disc rate   10 %
growth rate   0 %
plus cash   500
 / no shares   707.4
Base case fair value   3.28


So my conclusion is that ASHM is a good opportunity here. Sure, it can get cheaper if the shit really hits the fan with a debt crisis in China/emergin markets, but it is a fantastic company trading at a reasonable price. It may also be a takeover target in my opinion, but Coombs is unlikely to sell unless the price is sky high I think.

« Last Edit: February 18, 2014, 01:30:43 AM by klarmanite »
Whenever a theory appears to you as the only possible one, take this as a sign that you have neither understood the theory nor the problem which it was intended to solve.
- Karl Popper

skanjete

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Re: ASHM - Ashmore Group PLC
« Reply #5 on: February 18, 2014, 02:00:18 AM »
Klarmanite,

Ashmore is a company I have been following for some time and I agree with your assessment.
Of all the fund managers focused on E.M., it strikes me as the most solid and qualitative one. As an aside : Peter Cundill also used the house for his E.M. investments.

Maybe some additional remarks :
- growth in the future will increasingly come from E.M. money itself, and not necessarily from developed world money being invested in E.M.
- In view of the economics of the sector and the quality of the company, the share price is not expensive. Nor is it dirt cheap. However, it seems that every few years there is some kind of E.M. crisis, and in such a climate there is every chance that the stock will be ridiculously cheap. So if and when there is such a crisis, it's a good name to remember. I have no position at the moment, but I would almost surely buy it during the next E.M. crisis. It's a way to play the E.M. in a very risk-averse way.

klarmanite

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Re: ASHM - Ashmore Group PLC
« Reply #6 on: February 18, 2014, 02:15:58 AM »
Thanks for your comments, I agree completely. Today the valuation is reasonable, but not a table-pounder. We have a modest position (5% of our AUM) today and are hoping for more trouble, in which case we will  increase our position substantially, probably by another 5%.

I left out the local fund sourcing angle, but agree with you that this could be a major source of inflows in the future.
Whenever a theory appears to you as the only possible one, take this as a sign that you have neither understood the theory nor the problem which it was intended to solve.
- Karl Popper

steph

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Re: ASHM - Ashmore Group PLC
« Reply #7 on: February 18, 2014, 03:35:47 AM »
Hi,
This is interesting.
Do you know what the percentage of equity / cash / bonds under management is?
Do they have performance fees?
What are the AUM?
What is the cost/income ratio?

Thank you!

klarmanite

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Re: ASHM - Ashmore Group PLC
« Reply #8 on: February 18, 2014, 04:26:17 AM »
Hi

That information is available in recent company presentations, results and AUM updates on the company website.

http://www.ashmoregroup.com/
Whenever a theory appears to you as the only possible one, take this as a sign that you have neither understood the theory nor the problem which it was intended to solve.
- Karl Popper

cr6196

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Re: ASHM - Ashmore Group PLC
« Reply #9 on: February 18, 2014, 04:48:36 AM »
So the main points of my long thesis are the following (I'm assuming some familiarity with Ashmore's business here):

1. Ashmore has a scalable, very profitable business model with recurring income

2. Ashmore is out of favor because of negative EM flows. These fears are overdone. The long term outlook is good, not bad, even if not much could happen to earnings and cash flow in the short term.

3. Ashmore has sustainable economic moats

4. Ashmore has great management with lots of skin in the game. It has a culture that I like and recognize from great fund management companies: low fixed salaries, long term share based comp, not star driven but focused on long term team effort.

5. EM unrest has resulted in undervaluation. 

I will go through these points quickly below, one by one:

1. Fund management is a great business once a company reaches critical mass. I will not go into this in detail but this is self-evident. *In the case of ASHM, this is certainly the case. Looking at historical ROE, ROIC and EBIT margins (9 yr averages are 50%, 49% and 74% respectively), it is obvious that this is a truly great business.

2. Although negative EM flows in general have impacted AHM as well as the latest AUM report indicated, the media reports are misleading. First of all, the data most often quoted is EPFR data. This is an incomplete data set, because it doesn't properly account for investment flows from pension funds, sovereign wealth funds etc. Looking at IIF data, it becomes obvious that (for now) the media reports exaggerate the negative asset flows from EM. I suggest looking up the recent IIF flow report online for details. It is my contention that due to the make-up of ASHMS investor base, this is the most relevant data set, since ASHM has virtually no retail money. A whopping 81% of ASHMs AUM is from public and private pension funds and government sources. These assets are more long term and a lot stickier than retail funds. So the amount of hot money in ASHMs mandates is limited. Numbers from JP Morgan confirm the IIF estimates which show that it is retail money that has been flowing out for the most part in 2013 and 2014.

Admittedly, we don't know how long asset flows will be negative or how much worse things could get, or if institutional flows will turn more negative. But long term, the case for increased flows is good, not bad, in my opinion.

The reasons are:

a. EMs have less sophisticated capital markets which will evolve and grow over time. Low but rising disposable income in the local population will be supportive also. The BIS estimates that equity and debt markets in EM will grow from 28 Trn USD today to 79 Trn USD in 2020. My contention is that more sophistiocated, bigger EM debt and equity markets + growing disposable income in local economies means a big opportunity for ASHM.

b. That the developed world is dramatically underweighted in EM assets. If investors would have been properly weighted in EMs as implied by the MSCI  world index, EM weightings should have been 15-16% instead of a paltry 5% today. This is the equivalent of 4 Trn USD in debt and equity instruments. Ashmore has a market share of a little less than 2% of this (my numbers are not exact, but close enough).
Every percent increase in allocation to EM assets would mean about 800 Bn USD. If ASHM should maintain its market share on this 800 Bn, thatís 16 Bn USD in increased AUM. 10 x 16 Bn is 160 BnÖ
Now of course, 160 Bn may be unlikely, but I think itís obvious that with the severe underweighting and growing underlying capital markets, the ASHM opportunity is huge.

3. ASHMs moats are mainly cost and distribution advantages from scale and relationships with capital allocators and government officials that have been built up since Mark Coombs first got started in the 80s. These moats are very real (I know, I have spent a few years starting a small fund management company and have experienced first hand the barriers to entry in this business).

4. Mark Coombs is brilliant and owns 42% of the company. Reading interviews with the man (hard to come by mostly), you come away with a solid impression. Heís building something to outlast him, and is always thinking long term.

5. ASHM is undervalued! It has no debt, and about 20% of the market cap in cash, and looking beyond a P/E of 15 and an EV/EBITDA of 9 for 2014, it is actually very modestly valued. These multiples are ędistortedĽ by ncreased investment in distribution capacity which has elevated costs temporarily. I expect a 15% increase in COGS and OPEX in 2014, and 10% increases every year after that in my forecast period thru 2019 (this increase shows that management truly believes in substantial further growth, btw). I am way below consensus on EPS for 2014 and 2015 (25 pence and 29 pence respectively) at 21 and 20 pence. This is mainly because I assume costs will rise, but also because I think that AUM stays flat this year, after which I assume 15% annual growth in AUM through 2019.
Based on normalized historical numbers, I think a fee margin of 0.85% on the AUM is realistic (marigns lately have been depressed because of larger than usual currency AUM inflows, which have lower margins). In my valuation I assume a gradual recovery toward the normalized fee margin of 0.85% by 2016.
In my model, EBIT will thus increase from about 185m in 2015 to about 400 in 2019. My numbers imply a reduction in EBITDA margin in the long term from 70% a few years ago to 60% or thereabouts.
Based on this EBIT estimate and other reasonable assumptions based partially on historical numbers and management guidance, I get a DCF value of 5.2 GBP:

DCF calculation   
Discount rate   10.0 %
Terminal FCF gr. rate   3.0 %
Forecast period value   687
Terminal value   2,501
Net cash/debt   500
Equity value   3,688
Shares outstanding   707
Per share   5.2


Interestingly, if you assume no growth in FCF at all i the future, and use the avg FCF number from the last 3 years, you get a value 3.3 GBP, which means there is virtually no growth priced in today:

Avg FCF 2011-2013:   182
Disc rate   10 %
growth rate   0 %
plus cash   500
 / no shares   707.4
Base case fair value   3.28


So my conclusion is that ASHM is a good opportunity here. Sure, it can get cheaper if the shit really hits the fan with a debt crisis in China/emergin markets, but it is a fantastic company trading at a reasonable price. It may also be a takeover target in my opinion, but Coombs is unlikely to sell unless the price is sky high I think.

The main points I would make is that your view is the consensus and ASHM isn't "out of favour" at all. The price has sunk into a channel but the company is very well supported, all of the points you make are well known by the market. At 12x trailing, the market is saying they are going to keep collecting AUM, just not as fast as before. The mean target for the stock is 392p (I would be cautious of using DCFs, they almost always overvalue these situations).

I am also not convinced by any argument on what investors should do and then taking a market share based on that (I would also be very cautious about projecting anything forward in USD terms). Just in terms of logic, it makes no sense. It is possible that they have sticky institutional money (I don't think they do, esp. after the last AUM report) but even then that is just an argument for why they won't lose money, not how they are going to grow. Basically, I don't see any argument which really says...here is why AUM is going to grow, here is why profit is going to grow. I would also add, EM crises take many years to get to crisis point, usually about three. We may have already started that process but that is just going to weigh on them in my view.

I also don't think they will get flows from EMs. For one, the reason why EM crises happen is because EM countries are borrowing and not building solid foreign currency assets. By definition, we know that they aren't saving. For two, local investors will use local managers. For three, when states are building the resources to offset inflows (Chilie) they aren't generally turning around and investing back in EMs, the point is that they collect $ assets. For four, currency movements probably aren't helping. Finally, even if we knew that this was 100% true, it seems unlikely that it will happen soon.

Anyway, we will see what happens when they report out next Tuesday. My guess is that they go below 325p.