On Wednesday afternoon after market close, Anchor Capital Group [ACG] released its full year results for 31 December 2016. At first glance the numbers looked solid given the tough market conditions within the asset management sector. The Group collectively performed well as they continue to outperform and realise further synergies.
The asset management industry has recently experienced an outflow of funds and we have seen a marked shift from active to passive investing. In that light, we feel that Anchor Capital Group has done well to increase its assets under management (AUM) and advice by 35%, from R34.1bn to R45.9bn. This has been achieved through organic growth, as well as acquisitions.
It has indeed been a busy year for the group. Anchor acquired a 47.4% stake in Capricorn Fund Managers as well as a 50% stake in AG Capital. Anchor Group increased its stake in Anchor Securities (of which it now owns 100%) and saw the successful rollout of the full stockbroking offering after receiving its JSE member license.
After an interview with Anchor Capital Group CEO, Pete Armitage, he confirmed the Group had reached a level of ’critical mass’, but was nevertheless always on the lookout for opportunities. He also confirmed that the new Stockbroking division was doing well and was a natural progression in the servicing of its Private Wealth clients.
Over the reporting period, adjusted headline earnings per share increased 12% to 64.7 cents and adjusted headline earnings was up 34% to R115.3m. The 32 cent dividend for the year was an increase of 18.5% from the previous period. While admitting that he would like to have achieved higher growth, company CEO Armitage is very happy with the results given the difficult market conditions and considering the results of some of the competitors.
We maintain a strong buy at current levels.
The reported numbers vindicate our strong buy recommendation and there are numerous positive factors that support our view.
We believe the current share price offers a great entry point. The share price has come under a lot of pressure recently, having fallen over 58% since its high in December 2015. We believe the market has harshly penalised the counter amidst a general downtrend in the industry as well as the poor recent performance of Capricorn, despite its enviable long term record. Anchor presents an attractive buy opportunity trading at a PE ratio of 10.46, given that peer average is 15.62.
Anchor’s flagship funds (particularly the BCI Equity Fund) have had a poor run over the last 12 months, contributing to the selloff. It boasts a solid 3-year record (having won numerous awards), but, like many other funds with strong exposure to Rand hedge stocks and global markets, it has recently performed poorly given the strength of the Rand. Gains in their offshore funds were largely offset by the strengthening rand.
This supports our view that current earnings represent a ’base case’. Anchor’s solid profits were generated with a low level of performance fees and profits will be likely be boosted, should the flagship funds start to outperform the benchmark again.
We believe the launch of the Stockbroking Division should contribute significantly to future group profits. Anchor has an entrepreneurial management team and an established and experienced investment team. The Company continues to grow its impressive distribution network within the retail market and is also making significant in-roads into the institutional space. Flagship Funds can now report a 3-year performance history, which is usually the minimum required by asset consultants. The group managed to increase its AUM organically by more than R500m per month on average for FY2016. This is in stark contrast to the R80bn outflows reported by industry competitor, Coronation, in their FY2016 results last September.
In addition to the positive fundamentals and qualitative characteristics, technical analysis further supports a buy. It looks like we are seeing a bottoming out of the share price as well as seeing a positive MACD divergence (share price decreasing while MACD indicator increasing) implying that there are not many sellers left in the market.
We believe Anchor Capital Group is a strong buy for suitable investors. It is a small cap stock and investors should be aware of the inherent risks, but the strong fundamental and technical factors make it a very attractive stock to add to the portfolio. Anchor Group is a sound growth business with a favourable outlook.
Portfolio Manager and Securities Trader
Cheyne has spent the last 10 years working in London, holding numerous positions within Equity and Equity Derivatives at various Investment Banks. His main focus has been on South African and Emerging Markets and also gained good exposure to global equity markets and products. He completed both his BCom degree in Economics and his BCom. Honours in Financial Analysis and Portfolio Management at the University of Cape Town. After completing each of the rigorous exams, Cheyne became a CFA Charterholder in 2014.