Polar Capital - seeking renewed momentum

Polar Capital: Some very smart people work at Polar Capital, which has now been in existence since 2001. However, there seems to be a loss of momentum, which somewhat takes the gloss off the story just now. In the year to 31^st March 2015 AuM fell from $13.2bn to $12.3bn. Despite this core operating profits, excluding performance fees, rose 13% to £27.7m, but pre-tax profits fell from £32.7m to £31.1m. This was in part due to performance fees falling from £7.6m to £5.2m and an increase in share based payments from £1.5m to £2.6m. Adjusted diluted eps likewise slipped back from 29.04p to 28.12p. With £41.4m of net cash (down slightly YoY) on the balance sheet, the group maintains a high payout ratio, with the dividend set at an unchanged 25p. The drop in AuM was blamed on a partial reversal of the previous year’s surge into the Japan fund, whose size dropped from $5.5bn to $3.6bn, but was still their largest single vehicle. The group is very proud of its focused fund range and specialisms, but a resultant weakness is that the four largest (Technology Trust, Japan Fund, Healthcare Opportunities and North American) account for $7.8bn or 63% of the group total. In response, the group has pursued selective diversification in its fund range, with new UK and European funds having been recently launched. Generally fund performance remains very good, although a blip for the Japan fund contributed to the fund outflows experienced.

  

Looking ahead, the group cites many of the concerns faced in the world and by investors, whilst re-affirming their faith in stockpickers (Ed. yippee!). They hope that a turnaround in their Japan fund flows will enable the growth seen elsewhere in their range to show through, with an eventual capacity of $25bn for their current range of funds mentioned. That is roughly double the current size, with most of the cost already sunk. So the flow through to the bottom line would be dramatic. In the shorter term, the outlook is rather more cloudy, with consensus looking to a further slight dip in eps in FY2016. At 455p, 27p of eps would be a PE of 16.8x and a maintained yield of 5.5% on a flat 25p dividend. The eps can be moved around by the treatment of performance fees and any excess capital, but the story of a group seeking renewed momentum from this short term plateau remains. For the moment I would prefer to keep an eye on the AuM trend (they had crept up to $12.bn at end-May), before charging into the shares, but that big (and affordable) yield may make an earlier move worth considering. (Neil Cumming^, 23^rdJune 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower