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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.

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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.

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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.

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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.
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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.
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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


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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