My Stock in Focus (SIF) buying screen is showing signs of life once more. The company I want to look at this week, specialist currency manager Record (LON:REC) is a stock I’ve kept an eye on for some years.
I’ve always been attracted to Record’s high returns and generous dividends. But the lack of growth and fee erosion in recent years has left me questioning whether this niche firm might be losing its edge.
$8bn contract lifts outlook
The picture changed somewhat in September when the firm reported a major new contract win.
Record has been selected for a dynamic hedging mandate of approximately $8bn in size. In this context, this figure represents the total value of foreign currency client portfolios that could potentially be covered by the hedging mandate. Record refers to this value as Assets Under Management Equivalent (AUME).
Given that group AUME was $65.9bn at the end of September, it’s clear that this new mandate represents a significant level of new business. Indeed, I think the impact could be greater than these numbers suggest.
Record’s largest business by AUME is passive hedging. This service generated £6m of revenue from $55.6bn of AUME during H1.
My understanding is that fee margins are much higher for dynamic hedging, which is a more active approach. Dynamic hedging had just $3.2bn of AUME in H1, but this generated £1.9m of revenue.
We’re told that fee rates on the new contract are in line with existing rates. My sums suggest this could equate to an extra £4.8m of revenue when the contract reaches full scale. That’s also the conclusion suggested by broker forecasts, which show revenue growth of £4.9m for FY22:
The new contract win clearly has the potential to drive a significant increase in profits. But it does also highlight the lumpy nature of Record’s revenue streams. I don’t think we can rely on a smooth progression upwards.
Perhaps coincidentally, this contract win has come just seven months after new CEO Leslie Hill had replaced 10-year veteran James Wood-Collins. Ms Hill has worked at Record since 1992 and was promoted to pursue “growth opportunities that Record is currently anticipating”.
Ms Hill has made a flying start in the top job - I’ll be interested to see if this really is the start…
