Active Management Strategy Will Leverage Future Opportunities

Key Takeaways

• Schroders' strategic focus on active management and core growth areas aims to leverage risk management opportunities, drive client demand, and improve operating margins.
  
• Efforts in wealth management and Schroders Capital, alongside cost-saving initiatives, are expected to boost margins, enhance revenue, and ensure long-term profitability.
  
• Macroeconomic challenges and operational inefficiencies threaten revenue growth and market share, with margin erosion and acquisition struggles impacting financial stability.

Catalysts

A publicly owned investment manager.

• The company's commitment to active management, especially in a landscape characterized by heightened index concentration and economic uncertainty, is positioned to leverage opportunities for return, income generation, and future-proofing strategies, potentially improving revenue growth as clients seek active solutions for risk management and performance.
  
• Schroders is focusing on core growth areas within their Public Markets business by channeling resources into nine core capabilities with high client demand and achieving stability of revenues by FY '27. This reallocation is expected to mitigate current margin erosion by driving demand in areas where the company has an established competitive edge, ultimately benefiting operating margins.
  
• In Schroders Capital, the company is aiming to deliver £20 billion in cumulative net new business over the next three years by scaling higher-return specialist capabilities, increasing co-investment through a set-aside of £500 million, and deploying a specialist sales team to capture growing demand for private market solutions. This strategy is likely to both boost net margins and enhance revenue through expanded client offerings and increased market share.
  
• Wealth Management is set to leverage its strong client relationships and retention rates to sustain annual growth targets of 5% to 7% in AUM, by expanding its senior relationship management team and selectively acquiring complementary capabilities. This growth in high-margin wealth segments should improve earnings and net margins over time.
  
• The plan to achieve £150 million in cost savings by simplifying and scaling operations, optimizing supplier relationships, and streamlining product offerings is set to lower the cost-to-income ratio, thus improving net margins and creating operating leverage, with a focus on Client outcomes enhancing future profitability.

Schroders Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Schroders's revenue will decrease by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.8% today to 21.3% in 3 years time.
• Analysts expect earnings to reach £576.0 million (and earnings per share of £0.36) by about April 2028, up from £417.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as £505.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, up from 11.9x today. This future PE is greater than the current PE for the GB Capital Markets industry at 10.8x.
• Analysts expect the number of shares outstanding to decline by 0.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.73%, as per the Simply Wall St company report.

Schroders Future Earnings Per Share Growth

Risks

• The company faces macroeconomic challenges, such as geopolitical uncertainty, immigration, demographics, and climate change, which could impact its global operations and revenue growth.
  
• There is a risk of continued margin erosion in Public Markets due to clients shifting demand from higher-margin equity products to lower-margin fixed income products, affecting overall revenue stability.
  
• Complexity and cost issues are highlighted, with the business having become operationally cumbersome, which could impact net margins and affect financial performance.
  
• There is a historical struggle with execution on acquisitions, with many not delivering expected financial returns, which could negatively impact earnings.
  
• Market share in the Public Markets segment could be at risk if the company fails to effectively stabilize revenues and adapt to shifting client preferences, potentially affecting future revenue streams.

Valuation

• The analysts have a consensus price target of £3.885 for Schroders 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 £4.96, and the most bearish reporting a price target of just £2.8.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £2.7 billion, earnings will come to £576.0 million, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 7.7%.
• Given the current share price of £3.16, the analyst price target of £3.88 is 18.7% higher.
• 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.