Declining Margins And Rising Costs Will Impair Future Performance

Key Takeaways

• Ongoing net outflows and fee pressure may hinder revenue and profit growth despite increased assets under management.
  
• Successful execution of the Sanlam agreement is crucial for growth and overcoming challenges in profitability and competition.
  
• Strategic partnerships and regional expansion, along with enhanced credit platform development, position Ninety One Group for diversified growth and improved financial performance.

Catalysts

Operates as an independent global asset manager worldwide.

• Net outflows persist despite the growth in assets under management due to muted demand for risk assets and risk-on strategies, likely impacting future revenue growth.
  
• Continued declines in basic and adjusted earnings per share, alongside a lower profit margin, may project challenges in improving net margins and overall profitability.
  
• A potential decline in operating margins due to sustained fee pressure and competitive mandates in the active investment management industry could impact future earnings.
  
• Increased costs through business expenses and IT investment, despite cost discipline potentially impacting the financials, particularly operating profits and margins, even if revenue remains stable.
  
• Dependency on successful integration and execution with the Sanlam agreement, including gaining regulatory and shareholder approval, introduces execution risk; this deal's success is critical to ensure it is earnings accretive and enhances future growth beyond South Africa.

Ninety One Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ninety One Group's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 26.2% today to 22.9% in 3 years time.
• Analysts expect earnings to reach £160.8 million (and earnings per share of £0.17) by about May 2028, up from £153.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £188.9 million in earnings, and the most bearish expecting £143.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, up from 8.8x today. This future PE is greater than the current PE for the GB Capital Markets industry at 11.1x.
• Analysts expect the number of shares outstanding to decline by 0.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.95%, as per the Simply Wall St company report.

Ninety One Group Future Earnings Per Share Growth

Risks

• Positive market performance and enhanced credit platform development may drive better-than-expected revenue and earnings growth, mitigating the impact of current net outflows.
  
• The partnership with Sanlam provides Ninety One with access to extensive distribution networks and additional assets under management, which could increase revenues and improve net margins over time.
  
• New commitments secured for emerging market and infrastructure credit strategies could boost future revenue streams as these areas are developed and expanded.
  
• Plans to launch additional credit strategies and expand into Asia and Europe suggest potential for increased revenue and a diversified earnings base.
  
• The focus on improving investment performance and maintaining a high-performance culture could lead to better earnings and possibly attract more inflows, improving the firm’s financial outlook.

Valuation

• The analysts have a consensus price target of £1.627 for Ninety One Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £2.15, and the most bearish reporting a price target of just £1.25.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £701.4 million, earnings will come to £160.8 million, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 10.9%.
  
• Given the current share price of £1.53, the analyst price target of £1.63 is 6.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.