Why Citi slapped a $4 share price target on Henderson Group plc

According to financial news wires the analysts at Citigroup just put a $4 share price target on Henderson Group plc (ASX: HGG) as the UK-based funds manager continues to navigate the fallout from the UK’s Brexit vote.

This afternoon shares in dual-listed Henderson Group sell for $3.85 and Citi’s analysts have taken the opportunity to run the ruler over the business after it announced a giant merger with U.S. investment group Janus.

The combined group will rival Macquarie Group Ltd (ASX: MQG) as the largest and most globally diversified financial services businesses on the ASX, with around a pro-forma US$322 billion in funds under management.

Janus has more of a focus on fixed-income asset management than Henderson, which has traditionally concentrated on international equities management.

The combined groups expect to achieve US$110 million in “recurring annual run rate pre-tax net cost synergies within 3 years” of the merger’s completion, with expected double-digit accretion to each company’s consensus forecasts for earnings per share.

The funds management business is scalable in that additional revenues can be earned faster than costs rise as the main overhead in managing money is staff wages. Capital expenditures are generally low and in the event of a merger it is often possible to cut costs where duplication across shared (like HR, operations, compliance, IT, client services) or even fee-earning (investment management) cost centres is involved.

Henderson is certainly one of the best fund managers on the ASX; alongside Macquarie, BT Investment Management Ltd (ASX: BTT) and Magellan Financial Group Ltd (ASX: MFG). All of which have been able to consistently grow funds under management over the past five years in part thanks to the fact that they keep their retail distribution and institutional business development teams in house.

They have also generally retained fee structures lower than hedge fund focused managers that continue to struggle in the face of years of quantative easing propping up markets and the increasing popularity of very-low-fee exchange traded funds that offer investors passive investment exposure to indices.

Of all the asset managers within the S&P/ASX 200 (Index: ^AJXO) (ASX: XJO), I would look to Macquarie based on today’s valuations.

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Motley Fool contributor Tom Richardson owns shares of Macquarie Group Limited and Magellan Financial Group.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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