Ashmore shares 'far too cheap' after stunning quarter

Emerging markets asset manager Ashmore left investors in no doubt today that conditions remain very much in its favour, despite the recent stockmarket turbulence.

In a spectacular beat against consensus, the company reported net inflows of $6.4 billion (£4.5 billion) to achieve its best quarterly performance since March 2013.

This compares with forecasts for a figure around $2 billion, and follows a broad-based improvement with net flows strongest in the local currency and corporate debt themes. With one quarter of the financial year still to go, Ashmore has already achieved year-to-date inflows of $14.3 billion.

"Wow!" says finnCap analyst Jeremy Grime.

"The valuation is modestly above the peer group, but inflows are strong and it is the only fund manager to report a market tailwind. Add to that the FX benefit of a strong dollar combined with the 68% operating margin and the shares soon become far too cheap. This is one to own for earnings and not to worry about the valuation."

• UK's best mid-cap shares

• Top mid-cap shares for 2018

Ashmore said Tuesday it is also confident that sentiment towards emerging markets will remain positive in the medium to long term, supported by attractive valuations and the need for institutions to address underweight allocations.

And in terms of the recent volatility, it says this is when emerging markets assets tend to be mispriced and result in some attractive opportunities.

Ashmore's assets under management totalled $76.5 billion at the end of March, with the company's own positive market performance adding $600 million.

The company's shares, which rose 7% today on the back of the quarterly trading update, have more than doubled in just over two years.

Source: interactive investor           Past performance is not a guide to future performance

UBS is a big fan of Ashmore, having included it in its UK Mid-Cap First XI. Today, the bank's analyst Michael Werner increased his already above-consensus earnings per share (EPS) estimate for 2019-20 by 4% and upped his price target from 440p to 460p.

He said the earnings upgrade would have been higher were it not for the negative impact of the rising GBP/US$ FX rate.

Werner added: "Given the positive flow momentum combined with the strong absolute and relative performance of Ashmore's strategies, we reiterate our Buy rating on the stock and continue to view it as a top pick in our sector."

Shore Capital also regards Ashmore as one of the highest quality and best-managed companies in the asset management sub-sector.

The broker applies a 20% sector premium to its standard 13.5x 12-month forward sector multiple in setting a fair value, which it believes is closer to 400p. However, it will need a lower entry point to turn positive on the stock.

Shore's Paul McGinnis notes that a prospective 2018 yield of 4.2% is based on a dividend forecast of 16.65p, which is where the pay-out has been since 2015.

He adds that the June 2018 financial year looks sets to be Ashmore's highest ever year for inflows, compared with just $1.9 billion the year before.

McGinnis said: "We started the current financial year with what was then a top-of-the-range estimate of $6 billion -this has clearly been blown out of the water."

He is expecting a slowdown in inflows over the following two years and warned investors that when a "cycle turns it can flip quite violently", as shown by Ashmore experiencing outflows in the three financial years to 2016.

London-based Ashmore was founded in 1992 as part of the Australia and New Zealand Banking Group (ANZ) before gaining its independence in 1999.

Chief executive Mark Coombs, who led Ashmore's buyout from ANZ, said the market volatility experienced over the past three months had little effect on the "fundamental drivers of returns" in emerging markets.

He pointed out there had been outperformance in both fixed income and equity markets.

Coombs added: "Volatility that originates in the developed world typically leads to emerging markets assets being mispriced, presenting attractive investment opportunities for Ashmore with its specialist, active management approach and a focus on value."