Key points
- Westpac is reducing its holding in BT Investment Management (ASX code BTT) from 59% to 31% via a partial sell down.
- BTT is one of Australia’s largest listed fund managers. Capitalised at around $2.5 billion, BTT is a global asset manager with $80.7 billion in funds under management (FUM).
- If the trading price stays above the offer price, it might be worth subscribing and seeing how the shares perform.
Westpac might be my least favoured bank (I prefer NAB and CBA) but they might have done Westpac shareholders like you and I a favour with their decision to sell down part of their holding in BT Investment Management.
In case you missed the announcement, Westpac is reducing its holding in BT Investment Management (ASX code BTT) from 59% to 31% via a partial sell down. The first tranche of 55 million shares in BTT was completed on Wednesday to institutions at a price of $8.20 per share, a discount of 6% to the closing price. The second tranche of 27 million shares will be offered at the same price to Westpac’s retail shareholders.
Westpac’s sale continues the theme of major banks selling non-core assets to boost their capital ratios. The sale will boost Westpac’s Tier One capital ratio by around 0.15%, as well as generate a post-tax profit of $700 million.
BT Investment Management
A specialist investment manager, BT Investment Management (BTT) was spun out of the Westpac Group and listed on the ASX in 2007, with Westpac maintaining majority ownership. In 2011, BTT expanded offshore and acquired J O Hambro Capital Management, a London based active equity fund manager.
Today, BTT is one of Australia’s largest listed fund managers. Capitalised at around $2.5 billion, BTT is a global asset manager with $80.7 billion in funds under management (FUM). It follows a ‘multi-boutique’ business model, where teams of investment professionals focus exclusively on asset management, with other services delivered centrally.
FUM has grown strongly, from $45.8 million in 1H12, to $80.7 billion as at May 31. Of this amount, only $29 billion is managed on behalf of the Westpac/BT Financial Group (for example, funds such as the BT Imputation Fund), $38.8 billion is managed offshore under the J O Hambro Capital Management brand, with the remainder of $12.9 billion from other institutional and wholesale mandates in Australia.
[1]BTT says that it has delivered strong growth due to its investment performance and inherent stability of its investment management teams, and expansion of its investment capabilities. It argues that it is an attractive place for investment teams to work, and is currently expanding in the US with FUM from its US business at US $6.6 billion.
It is also adding new products in existing markets. BTT has also managed to expand margin (base management fees have risen from an average of 0.39% in 1H12 to 0.48% in 1H15), which, together with the increase in FUM, has led to cash earnings per share increasing from 14.6 cents to 22.1 cents per share in 1H15.
[2]
Risks to this strategy, in particular the margin, include the high proportion of its FUM in equities (about 66%), where the margins are higher than most other asset classes. An equities market downturn could impact both FUM and average margin.
It is also exposed to the Westpac/BT Financial Group, which provides it with $29 billion of FUM under various investment management agreements. The first $15 billion under these agreements terminates on 31 December. BTT says that it is currently re-negotiating this with Westpac/BT, and it does “not anticipate that the replacement agreements will result in any materially adverse outcomes for BTT”, although “these changes may include a reduction in BTT’s management fee”.
BTT is positive about the partial sell-down by Westpac for BTT’s shareholders, noting that the increased free float should see an increase in the liquidity of BTT shares and make it eligible for inclusion in key market indices.
The retail offer
Westpac and BTT retail shareholders will be given the opportunity to purchase either $5,000 or $10,000 worth of BTT shares at a price of $8.20. Shareholders should be able to access a prospectus this week (online here [3]), or by request and have one posted. The offer is due to close on Friday 10 July.
With only 27 million shares to be issued (worth $221 million) and an offer price of $8.20, compared to a current market price on Friday of $8.65, there is a good chance that this offer will be over-subscribed and scaled back.
Is it a buy and hold?
After a big run up, each of the listed fund managers has come down from their price highs set in late March/early April. Using Friday’s closing prices, BTT at $8.65 is off 21.1% from its high of $10.97 (at the offer price of $8.20, it is 25.5%), Henderson is off 5.3%, Magellan is off 16.6% and Platinum is off 20.5%.
BT Investment Management Share Price – 20/6/14 to 19/6/15
[4]Source: Yahoo!7 Finance, 19 June 2015
While earnings multiples have come down, this group of listed fund managers are priced at above average market levels. This reflects the attractive annuity style nature of their businesses, strong growth in FUM, and expectations that they will benefit if the Australian dollar continues to weaken. According to FN Arena, the brokers are more positive on Magellan than they are about BTT. They have Magellan trading at a 15.7% discount to its target price. This is despite Magellan trading on a multiple of 21.3, compared to BTT’s 19.2.
[5]Source: FN Arena, 19/6/15. Sentiment ranking scale (-1.0 most negative, to +1.0 most positive)
Is BTT a buy and hold? Well if the trading price stays above the offer price, I will certainly be subscribing for $10,000. My inclination will be to hold these shares and see how they perform.
I am encouraged by the pullback from the March price high, I don’t see the Westpac sell-down as a negative (I think if anything, this is a positive), and on track record, their growth in earnings and FUM is impressive. At a multiple in the high teens, while it is not in the “must have” category, I think it is worth backing.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.