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Berenberg downgrades Schroders' to 'hold' given low returns on surplus capital
17th Dec 2019 11:23
(Sharecast News) - Analysts at Berenberg lowered investment manager Schroders' from 'buy' to 'hold' on Tuesday, noting there now appeared to be "little upside" left to their 3,510p target price for the shares.
Berenberg stated that shares in Schroders' had performed strongly in recent months, up 37% year-to-date - mostly reversing the "acute mispricing" that developed towards the end of 2018.
"Since consensus 2020 earnings have fallen by 10% over the same period, Schroders' shares have become materially more expensive as the year has progressed," said Berenberg.
The German bank also noted that with FX headwinds as the pound strengthened were likely to hold back earnings growth for the current quarter.
"We do not expect Schroders' earnings momentum to improve in the near term. Although quarter-to-date market moves have been positive, any benefit of this to Schroders has been undone by adverse foreign exchange movements."
Berenberg said it was "more optimistic" that Schroders will benefit from a recovery in industry-wide flows in 2020, but that strength appears to have come too late to "meaningfully support" its second-half numbers.
The analysts also highlighted that in the first half of 2019, the fund manager had generated a return of only 4.0% on its seed and surplus capital.
"In the absence of a clear path for this capital to be returned to shareholders, we understand why investors may be reluctant to make this adjustment to the group's valuation," Berenberg explained.
"The recent strength in Schroders' shares leaves us with only 3% upside to our 12-month price target. We downgrade our recommendation to 'hold' as a result."
Berenberg stated that shares in Schroders' had performed strongly in recent months, up 37% year-to-date - mostly reversing the "acute mispricing" that developed towards the end of 2018.
"Since consensus 2020 earnings have fallen by 10% over the same period, Schroders' shares have become materially more expensive as the year has progressed," said Berenberg.
The German bank also noted that with FX headwinds as the pound strengthened were likely to hold back earnings growth for the current quarter.
"We do not expect Schroders' earnings momentum to improve in the near term. Although quarter-to-date market moves have been positive, any benefit of this to Schroders has been undone by adverse foreign exchange movements."
Berenberg said it was "more optimistic" that Schroders will benefit from a recovery in industry-wide flows in 2020, but that strength appears to have come too late to "meaningfully support" its second-half numbers.
The analysts also highlighted that in the first half of 2019, the fund manager had generated a return of only 4.0% on its seed and surplus capital.
"In the absence of a clear path for this capital to be returned to shareholders, we understand why investors may be reluctant to make this adjustment to the group's valuation," Berenberg explained.
"The recent strength in Schroders' shares leaves us with only 3% upside to our 12-month price target. We downgrade our recommendation to 'hold' as a result."