United Bankers extensive report: Growth from real asset funds

Translation: Original report published in Finnish on 6/26/2024 at 8:20 am EEST.

UB's operational performance in recent years has been very strong and the company's results have grown rapidly. While challenging market conditions will slow new sales in the short term, the company is well positioned to continue its healthy growth in line with the rest of the asset management market, particularly over the longer term. However, we believe that the valuation of the stock is neutral, so the expected return we forecast is not enough to be positive after the share price rises. We therefore lower our recommendation to Reduce (was Accumulate) and reiterate our target price of EUR 19.0.

Asset manager focusing on real assets

The company's business operations are divided into two operating segments – Asset Management and Capital Markets Services. Asset Management is the core business of UB, and its share of the company's revenue and value is dominant. Overall Capital Market Services are of minor importance to UB and can be seen as complementary to Asset Management.

In the past, UB has been a product-driven operator whose main focus has been on the sale of individual products. In recent years, however, the company has in line with its strategy focused on increasing the cash flow generating fund capital. In particular, the focus has been on real asset products. In fact, the fund's capital has historically grown rapidly, driven by asset value developments and strong new sales. There has also been a significant improvement in cost efficiency, which is starting to bring the company's profitability to a very good level. However, the distribution of returns is still relatively skewed toward non-recurring income. As a result, recurring revenue is one of the most important variables an investor should monitor in UB. In addition to fund products, the company has invested in the sale of wealth management services in recent years.

The long-term growth outlook is favorable despite short-term uncertainty

In the short term, the challenging market environment will put pressure on new sales, but we expect UB's fund assets to continue to grow strongly in the coming years, supported by new fund launches. Overall, we expect UB to deliver average earnings growth of around 5% between 2024 and 2027. Performance growth will be driven primarily by management fees, which will increase in line with AUM, as we expect performance fees to normalize from the exceptionally high levels of recent years. However, investors should note that the level of performance fees is still quite high (~20% of operating income), which is a key forecast risk for the stock. As is typical for the sector, the dividend stream remains strong while investment needs are low.

Growth prospects and profit distribution support valuation

On a multiple basis, UB's current valuation is moderately neutral, so an investor's expected return is a combination of the dividend yield (~6%) and our forecast earnings growth (~5%). Performance growth is driven primarily by management fees, which increase in line with assets under management. Dividend payouts, on the other hand, are supported by low investment needs. However, it should be noted that the dividend ultimately depends on the actual results. Overall, therefore, we estimate that the expected return over the next few years will be in the ballpark of our 10% RoE requirement, which we do not consider sufficient compensation. The value of our DCF model (EUR 19.5) is also in line with our target price.