APP Securities Company Research

19 April 2016

Henderson Group PLC

HGG 2.56

TARGET PRICE

2.80

BUY
Brett Le Mesurier
+61 2 9226 0071
Brett.LeMesurier@appsecurities.com.au

This Research has been prepared and issued by APP Securities Pty Ltd and remains the property of APP Securities Pty Ltd. No material contained in this Research may be reproduced or distributed
without prior written approval of APP Securities Pty Ltd, except as allowed by the Copyright Act. This Research is current at the date of publishing. For updates or further information regarding this
research, please contact your advisor. APP Securities Pty Ltd does or seeks to undertake business with companies covered in its research, including being paid for research and therefore, Investors should
consider this report as only a single factor in making their investment decisions. For explanations regarding ratings and other important disclosures, please refer to the disclosure section at the end of this
document.

Record of growth will be challenged in 1Q16

Henderson Group PLC (HGG) has the following appealing
features:
1.
2.
3.

4.

Company Data
Y / E D e c e m be r

F Y 15 ( a )

F Y 16 ( f )

F Y 17 ( f )

197

181

199

0.180

0.168

0.186

P /E

14.2

15.2

13.8

N T A p.s . ( )

0.32

0.39

0.46

P / N T A ( t im e s )

7.9

6.6

5.6

C ash R OE

58%

49%

46%

C ash N P A T (M )

A diversified product base by asset class and by

country;
An ability to attract significant net cash inflows;
As a consequence of the above 2 factors, revenue
can be expected to increase at a faster rate than the
equities market and in most cases, increase faster
than expenses; and
Can offer investors a 60% dividend pay-out ratio
while retaining capital for further acquisitions.

EP S ()

Source: Factset, APP

As with all fund managers, the decision to buy is reliant on a

view that the equities markets will rise. Notwithstanding its
product range and its history of investment success, earnings
can be expected to fall in declining markets as shown in the
following chart.

Share Price Performance

CHART: EPS vs MSCI EAFE

0.10

1,200

0.08

1,000
800

0.06

600
0.04

400

0.02

200

0.00

0
1H12A 2H12A 1H13A 2H13A 1H14A 2H14A 1H15A 2H15A
EPS (LHS)

1H16F

2H16F

MSCI EAFE (RHS)

Source: Factset

Source: HGG and APP

HGG is expected to report net cash outflows in 1Q16 due to

the poor start to the year in equity markets generally and the
loss of a 500M institutional mandate in January.
We are forecasting underlying EPS to decline by 7% from
2015 to 2016 but to increase by 11% the following year,
assuming markets recover.

APP Securities Pty Ltd ABN 45 112 871 842

19 April 2016

Sydney Office: Level 41, 259 George Street Sydney NSW 2000 Australia

Tel: (61) 2 9226 0000Website: www.appsecurities.com.au

Henderson Group PLC

FINANCIAL SUMMARY

APP Securities Research

1H15A

2H15A

2015A

2016F

2017F

91

71

161

181

199

102

95

197

181

199

No shares (M)

1,141

1,132

1,132

1,118

1,103

Avg # of shares (M)

1,095

1,090

1,093

1,078

1,070

0.093

0.087

Rep NPAT (M)

Underlying NPAT (M)

Actual EPS ()

0.180

0.168

0.186

EPS growth

13%

-7%

11%

PER (x)

14.2

15.2

13.8

0.103

0.106

0.110

Underlying EPS ()

DPS ()

0.031

0.072

33%

82%

57%

63%

59%

Div yield

4.0%

4.1%

4.3%

Franking

0%

0%

0%

Payout ratio (% underlying cont.)

NTA (M)

355

367

367

431

507

NTA per share ()

0.31

0.32

0.32

0.39

0.46

Price to NTA ps (x)

8.2

7.9

Cash ROE (cash NPAT / open NTA)

GROUP RESULTS (M)

Net management fees

Performance fees
Other fee income
Net fee income
Non-fee income
Net income - continuing operations
Operating expenses
Finance expenses
Underlying PBT - continuing operations
Underlying PBT - discontinued operations
Underlying profit before tax
Tax
Underlying NPAT
Non-cash and acquisition items
Reported NPAT
KEY COMPONENTS

Income growth
Total AUM growth
Revenue margin (% AUM)
Operating margin (%)
CTI
Debt to NTA

7.9

6.6

5.6

58%

49%

46%

1H15A

2H15A

2015A

2016F

2017F

230

238

468

522

555

49

50

99

74

84

17

18

35

35

35

296

306

602

631

674

16

17

15

15

312

307

619

646

689

(189)

(198)

(387)

(416)

(434)

(6)

(6)

(12)

(3)

117

103

220

226

255

117

103

220

226

255

(16)

(7)

(23)

(45)

(56)

102

95

197

181

199

(11)

(25)

(36)

91

71

161

181

199

1H15A

2H15A

2015A

2016F

2017F

15%

-2%

16%

4%

7%

1%

12%

13%

6%

10%

0.76%

0.71%

0.73%

0.68%

0.67%

36.3%

35.2%

35.7%

34.0%

35.6%

60%

65%

62.5%

64.5%

63.0%

42%

41%

41%

0%

0%

Source: Factset, APP

APP Securities Pty Ltd ABN 45 112 871 842

19 April 2016

Sydney Office: Level 41, 259 George Street Sydney NSW 2000 Australia

Tel: (61) 2 9226 0000Website: www.appsecurities.com.au

Henderson Group PLC

APP Securities Research

HENDERSON GROUP
CHART: NET CASHFLOWS BY PRODUCT (M)
2500
2000
1500
1000
500
0
-500

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

1Q16F

3Q16F

-1000
-1500
UK OEIC

Retail SICAVs

US mutuals (retail)

Institutional

Source: HGG and APP

Net cash flows

On the day of the 2015 full year result announcement, Henderson management advised that there were net
cash outflows in aggregate during the first 6 weeks of 2016. The net outflows were most significant in the
European SICAVs, less significant in the UK but positive in the US, as shown in the chart above. There is also
a 500M institutional net outflow in 1Q16. Our forecast cash flows for 1Q16 assume no net cash flows in the
second 6 week period of that quarter. Total net cash out flows are forecast to be 700M in 1Q16.
We have assumed some recovery in the remaining 3 quarters of 2016.
Management fees
HGGs management fee margins (which exclude performance fees) fell from 58 bps in 2014 to 56 bps in
2015. The full year impact of the Perennial acquisition will push that margin down further. The company said
that the margin at the end of 2015 was 55 bps and we have used this as our 2016 forecast.
Operating margins
Operating expenses are expected to increase in the high single digits, according to the company. They also
said that they are not managing the business to necessarily achieve an increasing operating margin in 2016.
We are forecasting that the equity markets will finish 2016 at much the same level as they started it, which is
consistent with the companys view. This is shown in the chart below. Our forecast income growth for 2106 is
4% which compares to 8% forecast expense growth over the period. In this scenario, the operating margin
falls from 36% in 2015 to 34% in 2016. Profit before tax changes little from 2015 to 2016 but underlying NPAT
falls because the tax rate is expected to increase from 10% in 2015 to 20% in 2016.
CHART: INCOME (M) VS MSCI EAFE
400

1,200

350

1,000

300
800

250
200

600

150

400

100
200

50
0

0
1H12A

2H12A

1H13A

2H13A

1H14A

2H14A

1H15A

Net income - continuing operations M (LHS)

2H15A

1H16F

2H16F

MSCI EAFE (RHS)

Source: HGG and APP

APP Securities Pty Ltd ABN 45 112 871 842

19 April 2016

Sydney Office: Level 41, 259 George Street Sydney NSW 2000 Australia

Tel: (61) 2 9226 0000Website: www.appsecurities.com.au

Henderson Group PLC

APP Securities Research

This Research has been prepared and issued by APP Securities Pty Ltd (APP Securities) and remains the property of APP Securities Pty Ltd. No
material contained in this Research may be reproduced or distributed, except as allowed by the Copyright Act, without the prior written approval of
APP Securities.
This report has been prepared and issued (in Australia) by APP Securities Pty Ltd (ABN 45 112 871 842) (AFS Licence No. 307 706) (APP Securities) and is subject to the disclosures and
restrictions set out below.

Analyst Certification
The research analyst(s) identified on the cover of this report individually certify that in respect of each security or issuer that the research analyst covers that: this report accurately reflects
his or her personal views about any and all of the subject issuer(s) or securities; and no part of the research analysts compensation was, is, or will be directly or indirectly related to the
specific recommendation(s) or views expressed by the research analyst(s) in this report.

General Disclosure
APP Securities and its associates (as defined in Chapter 1 of the Corporations Act 2001), officers, directors, employees and agents, from time to time, may own or have positions in
securities of the company(ies) covered in this report and may trade in the securities mentioned either as principal or agent or may be materially interested in such securities.
APP Securities does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could
affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Brett Le Mesurier and/or family member(s) holds shares in the product(s) referred to in this document, however APP Securities Pty Ltd considers such holdings not to be an interest which is
sufficiently material to compromise the recommendation or advice. Brett Le Mesurier and/or family member(s) holdings may change during the life of this document.
Contact with Henderson Group PLC has been made during the preparation of this report for assistance with the verification of facts.

Disclaimer & Warning

This report may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This report
does not purport to contain all the information that a prospective investor may require. Before making an investment or trading decision, the recipient must consider market
developments subsequent to the date of this document, and whether the advice is appropriate in light of his or her financial circumstances or seek further advice on its appropriateness or
should form his/her own independent view given the persons investment objectives, financial situation and particular needs regarding any securities or Financial Products mentioned
herein. Information in this document has been obtained from sources believed to be true but neither APP Securities nor its associates make any recommendation or warranty concerning
the Financial Products or the accuracy, or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not
indicative of future performance. This document is not an offer, invitation, solicitation or recommendation with respect to the subscription for, purchase or sale of any Financial Product,
and neither this document or anything in it shall form the basis of any contract or commitment. Although every attempt has been made to verify the accuracy of the information contained
in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by APP Securities, its associates, officers, directors,
employees and agents. The securities of such company (ies) may not be eligible for sale in all jurisdictions or to all categories of investors.
Analysts Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of the
analyst(s) research, client evaluation feedback, independent survey rankings and overall firm revenues, which include revenues from, among other business units and corporate finance.
Other International Investors: International investors outside the US, UK, UAE or Canada are encouraged to contact their local regulatory authorities to determine whether any restrictions
apply to their ability to purchase this investment and should seek their own advice
Recipient Representations/Warranties: By accepting this report, the recipient represents and warrants that he or she is entitled to receive such report in accordance with the restrictions
set out in this document and agrees to be bound by the limitations contained herein. Any failure to comply with these limitations may constitute a violation of law.

Meanings of APP Securities Stock Ratings

Buy Describes stocks that we expect to provide a total return (price appreciation plus gross yield) of 10% or more within a 12-month period.
Underperform Describes stocks that we expect to provide a total return (price appreciation plus gross yield) of less than 10% within a 12-month period.
NR The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or APP Securities policies.
CS Coverage Suspended. APP Securities has suspended coverage of this company.
Speculative Buy Describes stocks we research with a positive bias, whose company fundamentals and/or financials are being covered, but for which there is insufficient information for APP
Securities to assign a Buy or Underperform rating.
Speculative Underperform Describes stocks we research with a negative bias, whose company fundamentals and/or financials are being covered, but for which there is insufficient
information for APP Securities to assign a Buy or Underperform rating.
Secondary recommendation - Market weight relative to the S&P/ASX 300 under a weighting range of 0-3, with intervals of 0.5 (7 point scale). 1.0 indicates a market weight position in the stock
while a weight over 1.0 indicates an overweight position and the current level of analyst conviction.
Monitor Describes stocks whose company fundamentals and/or financials are being monitored, or for which no financial projections or opinions on the investment merits of the company are
provided.
It is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.
Free Float (float / current shares outstanding) *100 This float figure is the number of shares that are available to the public and is calculated by subtracting the shares held by insiders and
those deemed to be stagnant shareholders. Stagnant holders include ESOP's, ESOT's, QUEST's, employee benefit trusts, founding shareholder equity stake plus senior management equity stake,
corporations not actively managing money, venture capital companies and shares held by Governments.
Terminal Value methodology - APP Securities' Discounted Cash Flow (DCF) valuation applies a terminal growth rate to the last forecast year's cash flow and discounts the amount using
Weighted Average Cost of Capital (WACC). The Terminal Value is tested using ASX-listed company multiples. For resource companies there is no terminal value because cash flows are forecast
to the end of mine life.

Meanings of APP Securities Credit Ratings

Buy If the last traded price of the hybrid security is more than 3% below our valuation
Underperform If the last traded price of the hybrid security is more than 3% above our valuation

Valuation Methodology
APP Securities methodology for assigning stock and credit ratings may include the following: market capitalisation, maturity, growth/value, volatility and expected total return over the next 12
months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow (DCF),
EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of parts,
net asset value, discounted dividend model (DDM), franking credits and return on equity (ROE) over the next 12 months. Listed credit securities analysis uses appropriate discount rates that
reflect credit risk of both issuer and the underlying instrument.
Copyright APP Securities Pty Ltd

APP Securities Pty Ltd ABN 45 112 871 842

19 April 2016

Sydney Office: Level 41, 259 George Street Sydney NSW 2000 Australia

Tel: (61) 2 9226 0000Website: www.appsecurities.com.au