Emerging Markets Trends Will Unlock Growth Despite Fee Risks

Key Takeaways

• Ashmore is positioned to benefit from a significant shift toward emerging market assets, driving superior growth in assets, revenues, and long-term profitability.
  
• Investment in technology and local presence equips Ashmore to outpace competitors, enhance margins, and capture transformative inflows as global portfolio allocation strategies change.
  
• Reliance on traditional emerging markets and concentrated client base, amid fee compression and evolving industry trends, threatens Ashmore's long-term growth, margins, and earnings stability.

Catalysts

Ashmore Group plc is a publicly owned investment manager.

• Analyst consensus expects higher client activity and net flows, but these forecasts likely understate the magnitude and duration of the shift as Ashmore's 3
• and 5-year outperformance and expanding local presence position it to capture a disproportionate share of the coming multi-year reallocation cycle, driving step-change growth in AuM, revenues, and long-term earnings far beyond consensus estimates.
  
• While consensus is bullish on margin enhancement from equities and alternatives, the scale of opportunity is likely much greater as demand for higher-yielding, less correlated emerging market assets accelerates globally, enabling Ashmore to structurally re-weight towards its fastest-growing, highest-fee businesses and achieve sustainably higher group net margins and profit growth than the market anticipates.
  
• There is significant untapped upside from the growing wealth and investable capital pools in emerging markets, as Ashmore's local office network, deep relationships, and tailored products prime it to become the 'manager of choice' for both domestic clients and cross-border flows, accelerating AuM and fee growth at above-industry rates.
  
• The under-penetration of emerging market assets in global portfolios is at a tipping point, and as global allocators shift to address concentration risk in U.S. equities and bonds, Ashmore will benefit from transformative inflows and a structural re-rating of emerging market-focused managers, directly impacting top-line revenue and supporting higher performance fees.
  
• Ashmore's continuous investment in proprietary research and advanced technology infrastructure will not only insulate earnings through volatile cycles but enable operational leverage, meaning incremental AuM and new product launches can deliver disproportionately strong profit and cash flow growth with minimal added costs.

Ashmore Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Ashmore Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Ashmore Group's revenue will grow by 8.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 57.0% today to 36.3% in 3 years time.
• The bullish analysts expect earnings to reach £65.6 million (and earnings per share of £0.09) by about September 2028, down from £81.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 27.3x on those 2028 earnings, up from 13.1x today. This future PE is greater than the current PE for the GB Capital Markets industry at 12.6x.
• Analysts expect the number of shares outstanding to decline by 0.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.21%, as per the Simply Wall St company report.

Ashmore Group Future Earnings Per Share Growth

Risks

• The ongoing shift from active to passive investing continues to exert fee pressure on Ashmore, as evidenced by management acknowledging both competitive pricing and lower management fee margins, thus threatening long-term revenue growth and profitability.
  
• Continued growth in ESG and sustainability mandates globally risks reducing the relevance of Ashmore's traditional emerging markets strategies, potentially limiting new asset inflows and thereby restricting the company's ability to grow assets under management and future revenues.
  
• High client concentration exposes Ashmore to sudden, large outflows, as illustrated by recent institutional redemptions that materially impacted assets under management and could lead to future earnings volatility and unpredictable net margins.
  
• The company's limited product diversification, with a heavy reliance on emerging markets and high-yield, leaves it exposed to cyclical and structural declines in the asset class, evident in the persistent net outflows and ongoing difficulties in attracting U.S. capital, putting long-term revenue and margin growth at risk.
  
• Industry-wide fee compression and regulatory scrutiny, combined with competitive technology-driven disruption, are likely to intensify pressure on management fees and margins-already reflected in a 22% decline in adjusted net revenue and management noting ongoing downward pressure, with repercussions for future earnings and profitability.

Valuation

• The assumed bullish price target for Ashmore Group is £2.21, which represents two standard deviations above the consensus price target of £1.56. This valuation is based on what can be assumed as the expectations of Ashmore Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £2.4, and the most bearish reporting a price target of just £1.2.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be £180.8 million, earnings will come to £65.6 million, and it would be trading on a PE ratio of 27.3x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of £1.63, the bullish analyst price target of £2.21 is 26.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.