Henderson's healthy position

It doesn’t seem that long ago that AMP Limited was forced to restructure its business and spin off what is now Henderson Group Limited at $0.85 per share.

However it was long before the world had heard of the Global Financial Crisis and the consequent turmoil and volatility associated with high levels of subprime debt. HGG, like many financial services companies and fund management businesses, struggled through this period and now finds itself in an interesting situation.

After listing in 2003 at around $0.85, HGG performed well to reach about $4 prior to the GFC. During the GFC it fell to just above $1, and it has now recovered well to be $3. Despite the turbulent performance, HGG has significantly outperformed the All Ordinaries Accumulation Index over the 10-year period that it has been listed.

By way of background HGG has funds under management of around $100 billion, a market capitalisation of $1.9 billion, and I estimate it should make about $150 million of net profit after tax for the financial year 2014, putting it on a price earnings multiple of 12.9 times.

These valuation parameters are by no means expensive. In fact, HGG is one of the cheapest funds management businesses listed on the Australian Securities Exchange as well as the London Stock Exchange (HGG is dual listed on both exchanges). It could be argued that HGG tends to ‘fall through the cracks’ being neither an Australian fund manager nor a pure London-based fund manager and certainly, from an Australian perspective, is not widely covered by brokerage houses and the investment community.

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From an Australian perspective HGG represents diversification into a fund manager with large operations overseas as well as a large percentage of earnings in overseas currency.

HGG also represents exposure to potential recovery in European, and in particular, UK financial markets. HGG management has managed to stabilise the business in the financial year just completed, and now has a portfolio of funds, many of which are in a position to earn performance fees in the years ahead.

Management has spent considerable time and effort positioning the business with funds that not only earn consistent base management fees, but also performance fees for absolute performance and outperformance. I see this development as representing significant potential upside in the medium to long term, especially as overseas financial markets stabilise. HGG now has net cash on the balance sheet after having paid down all debt.

The debt free HGG balance sheet and stabilised business, along with attractive valuations relative to other companies in the sector, also make HGG vulnerable to a potential takeover. While the mooted takeover activity for 2013 has not as yet materialised, I nonetheless see HGG as a potential candidate for consolidation within the sector.

The financial services sector traditionally benefits from significant cost savings through consolidation of businesses as well as significant productivity and efficiency gains when businesses merge or are taken over.

HGG is currently not expensive, and in a world where European financial markets start to recover, the Australian dollar remains at current levels (or falls), and where mergers and acquisitions activity improves, HGG could well prove very cheap.

Karl Siegling is portfolio manager at Cadence Capital Limited.