LON:REC | Record Plc - 33 1/3p ... 45p ... 78p ... Or Just Broken?

9th Jun '16 by Whitbyview

17 comments 7276 reads

Hi All. I've been looking for financials that are high quality and that are not banks. Record came up and I have been trying to do some homework on them. Apart from what is on their own website, I've not been very successful. Little in the press and little on here. They are presumably too small to get very much coverage and the free float is relatively low also. Based on the Stockopedia numbers however, they look rather attractive, with net cash and a 7% divi that seems pretty well covered. The stock rank is reasonable good given the dire momentum. So I'm left wondering why this share seems so unloved? At a time of financial uncertainty I would have thought that currency hedging would be very much in demand but it seems not based on the drifting down of the shar price. Just wondered if any of you have a better understanding of this share than me? I have bought a small holding on the basis of what I have gleaned so far but would be interested to know more. Thanks for any thoughts :)

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Mike888

9th Jun '16

Yes you'd have thought that current market conditions would indeed favour them. However this doesn't seem to be the case, with declining clients, declining assets under management, and with that, forecast revenue, profit and EPS reducing this year and into 2017 too.

So a theoretically beneficial environment, but with declining forecasts, you've got to ask yourself why, personally I wouldn't be seduced by the yield.

gus 1065

10th Jun '16

Year end results due on June 17th might give further insight.

I think the problem with any kind of boutique financial service is the paucity of the product moat (any good ideas can be copied and cloned relatively easily), the portability of the business (good people/product quants can walk out the door to set up on their own or join a competitor taking key client accounts with them) and the cut throat competition offered by the big, capital rich players like JPM, Citi and Barclays. Hard to turn a buck in this environment, even harder to keep turning the bucks year on year.

Good luck.

Gus.

Whitbyview

Yes, I would agree with you generally Gus but then that is the problem with investing in financials generally but for diversity (and current value) I need to. The reason I thought otherwise of this one is that the majority of the shares are owned by insiders and they have therefore a very good reason to stay and work hard at what they do. Maybe it's actually the reverse and the place needs a change of ideas? This is just second guessing though, which is why I was interested to see what others thought. Thanks anyway ... Guess on the 17th we will know more.

Dearg Doom

Hi Whitbyview,

Nice to see a range of stocks being suggested on the site that are otherwise ignored. Gave you a thumbs up.

Regards

shipoffrogs

Record floated in 2007 on the back of its then recently burgeoning carry trade business (selling low yielding and buying high yielding currencies) which it sold to clients. It's not a complicated investment strategy and it works until it doesn't. It stopped working after the economic crisis in 2008 which saw the disappearance of high yielding currencies.

Record then concentrated on building up its much lower margin currency hedging business, which is where it is today. Hedging should remain in demand in all market conditions driven by institutional investors, particularly pension schemes, who are spreading into a more global wide asset base, but with largely domestic liabilities.

Both strategies are incredibly simple and hence barriers to entry seem very limited for banks and other asset managers.

Since moving into the hedging business the last 4 years have seen sales and post tax profits in the region of £20m and £5m respectively, a great margin with not too much volatility.

The balance sheet is very strong with net assets of £36m - mostly very liquid and with no debt, but some of this is required as regulatory capital. Nevertheless set against a market cap of c£54m, it looks very healthy. Over the last 3 years it has been averaging an annual increase in retained net assets of over £2m - at that rate in 10 years net assets will match today's market cap.

There are the same number of shares in issue now as at the time it floated and the executive directors have significant skin in the game. They also have a very generous performance package but it rewards profits ahead of growth. (Don't read to much into director share purchases - part of the performance package requires it).

In 2008 revenue was £66m, AUME: $56bn and staff numbers: 47. In 2015 revenue had fallen to £21m on a similar AUME, and the number of clients had fallen from 141 to 55. But staff numbers had risen 45% to 68.

The key risks specific to this company seem to be (i) an operational cock up leading to a claim against the company (AUME is in the billions), and (ii) the need to collateralise currency positions from 2017 which may see clients moving their positions to other places to centralise collateralisation.

There is a lottery ticket here too - if spreads reappear in global interest rates and the carry trade comes back Record should benefit and back in 2007 the market valued it at £354m - nearly seven fold up from where it is today. But it could be a long wait.

Thank you - that is really helpful to understand the change in the circumstances of this company. Having read your comments, I feel rather more positive about it actually. It's not the most exciting share out there for sure but with a lean towards value investing, I feel the income is high and relatively secure. Those are probably famous last words - let's see what they announce next week - but at least it doesn't seem to be a total basket case. Thanks again for your detailed and insightful comments.

11th Jun '16

Going back to your original comment (looking at non bank financials), have you looked at H & T (LON:HAT) ? Completely different business model (long established pawnbroker, market cap about £87m) with very strong Stockopedia ranking of 99 based on consistent earnings and decent asset backing. To a lesser extent, also an indirect play on a rising gold price given their inventory.

Good commentary (as ever) in Paul's recent SCVR on the company. (His main concern is potential regulatory intervention into sub prime consumer financing). Decent dividend yield of about 4% and shares have had a good run so far this year. This is one of the few UK financial stocks that I hold - the other main one being Burford Capital (LON:BUR)

Best,

Gus.

Hi Gus. Yes, I did look at that one but I felt a bit uncomfortable with it. Nothing financial, just the business they work in really. As people say, if it's a listed company, it's legal but not really for me. On this basis you might think there is no financial company I would invest in!! Seriously though, I've struggled because a lot of the ones towards the top of the ranks overlap with other business areas I'm already exposed to. Then there are the insurance companies but the new UK legislation changes coming into effect this summer concern me. The glorious 12th might not be so glorious for any insurance company that hasn't put enough resource into this and there is no way of telling from the outside which companies have done this right or not. Hence why I started to look at Record (LON:REC) really.

topvest

Well, I like this company. It's the only ever stock I've bought on 4 separate occasions. I think it's done pretty well given the decline in currency for return products. If / when this reverses and this type of product is more popular it could do very well. In the meantime, its doing OK and happy to hold and pick up the nice dividend. Needs a few more contract wins to help the price. Guess there could be some turmoil in currency markets soon given the Brexit vote. Actually, the share price hasn't factored in the fact that this company has $ and € revenues and a £ cost base. That is a good tailwind to have at present!

Fair comment on H & T (LON:HAT) . I took the contrary view that they seem to provide a reliable and user friendly service to the credit challenged and seem to be at the less usurious end of the sub prime lending market. I have a couple of friends that have had reason to use their products and they spoke quite highly about the transparency of the costs and quality of the service.

I share your concerns about possible risks in the insurance market. Likewise the possible new Basle accord for banks might be yet another iceberg on the horizon for the mainstream banks.

Really pleased to read your comments. If you have bought it 4 times and are still comfortable this makes me a feel a lot better for my initial purchase testing the water on relatively limited knowledge based essentially on the Stockopedia rank. Time will tell but thanks for you input.

Well if you know more about a company like you describe, it makes it a lot easier to take sensible decisions and allow yourself to feel comfortable with the subsequent choices. The problem with these financials is some you know really well because they are high street names (for good or bad) but others are just unknowns to me at least from the City. It's a lot easier to research a company with physical products, producing widgets. I have been looking over SafeCharge International (LON:SCH) (bizarrely down as an industrial) and 3i (LON:III) as further weight to my financial sector without actually going for the banks. I already have a fund manager, so that means I don't want to take on another of those. Anyway, thanks for all the helpful posts on Record (LON:REC) - very helpful.

17th Jun '16

Well, today's results are pretty much what I expected and there has been a slight bounce in the share price to reflect the cash generation despite the otherwise rather flat outlook. As we said before, not a share to set the world alight under current market conditions but i will continue to hold.

It's the first time that they've mentioned collateralisation as a concern though.

On the other hand - they're flagging that they're holding excess cash and will be looking at special dividends.

But there seems to be a real failure to grow the business and I think that's down to the wrong incentive structure.

Thanks for that. Incentives for whom? The company executives, staff generally or customers? I noticed the other day that Record (LON:REC) were top of the Stockopedia QV rank so maybe there will be some more interest (or at least analysis) in this one going forwards. I think that Paul tends to avoid financials so he probably won't comment on these results but you never know ... Friday is usually a quiet day :)

Incentives for the Executive - there's a generous bonus structure based on profits and so only indirectly rewarding growth. And the staff (there are many) got a 10% rise - which was blamed for the reduced margin on stagnant turnover.

aflash

30th Jun '16

Some useful comments here, especially 'shipofrogs', Thank-you.

I have held since the profit warning last autumn when they lost a major contract. My average price is 28p and I am reviewing the position.

Post Brexit I say there is a risk of huge upheaval in the financial sector with major institutions moving to Frankfurt or Paris to be within the EU. Talented traders will be transferred and duds and back-office people laid off. That will create a pool of unemployed applying to firms like REC who can pick and choose. They will need business contracts to support the workers but there may be space for nimble players to mop up what the institutions leave behind. All subject to article 50 which the market appears to think will never be triggered.

On balance then I continue to hold.

If this becomes an active thread other financials can be discussed. I buy and sell a lot of them.

Record Plc - 33 1/3p ... 45p ... 78p ... Or just broken?

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Whitbyview

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