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Sanne - new capital raised

Sophie Lund-Yates, Equity Analyst | 8 April 2021 | A A A
Sanne - new capital raised

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Sanne Group plc Ordinary 1p

Sell: 909.00 | Buy: 910.00 | Change 2.00 (0.22%)
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Sanne has issued 12.4m new shares, representing about 8.4% of the group's share capital. The new shares were priced at 640p, a 4.2% discount to the closing price on 7 April 2021. The placing raised gross proceeds of £79.5m, which will be used to support the group's financial position as it invests in acquisitions to drive growth.

Sanne also announced the acquisition of STRAIT, a North American private equity and hedge fund administration business. The deal will cost $32m up front, 30% of which will be paid in Sanne shares, and up to another $13m depending on performance.

The shares fell 2.8% following the announcement.

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Our view

Sanne provides administration services to alternative asset managers. The suite of services includes everything from regulatory reporting to transaction management.

The cost to bring Sanne in to detangle regulatory red tape is just a drop in the bucket for most of these funds, and getting it right is far more important than cutting corners. That gives Sanne some pricing power. Not to mention that once a fund has been established, it's all-but impossible to switch administrators so revenue is very sticky.

What's more, there aren't many direct competitors - at least not yet. The group has competitors in some of its individual markets, but ultimately there aren't many firms doing what Sanne's doing on a global scale.

Alternative investment funds are having a moment in the sun amid a low-interest rate environment as investors seek out higher returns. On top of that, global trading complexity is increasing as challenges like Brexit add to the regulatory headache that fund managers must deal with. That means Sanne has had no shortage of potential customers to draw from.

This year Sanne saw revenue growth slow as the pandemic increased the wait time between booking new business and seeing the fund turn a profit. This seems to be a temporary problem, and cost savings helped protect profits. The group expects double digit revenue growth to return in the current financial year. Coupled with improved margins, that could bode well for profits.

Sanne doesn't come without its challenges though. For one, a price to earnings ratio of 25.5 (looking at last year's earnings) means Sanne's not a lowly valued stock. That means meeting, and even exceeding expectations, is important. Otherwise the market could reassess its opinion of Sanne. We have reason to be hopeful about the current financial year if recent trends are anything to go by. But there are no guarantees.

Macro concerns, like a rise in interest rates, could make the market for alternative assets less appealing and shrink Sanne's pool of customers. Plus, as outsourcing back-end functions increases, Sanne will have to depend less on new business opportunities and more on upselling to existing clients.

Fortunately, management has been keeping an eye on the future, growing the business through strategic acquisitions that have widened the jurisdictions it can operate within. The group is also working to expand its reach within America, where outsourcing is less common.

We think Sanne is well positioned in an accommodative environment. We admire its business model and market position, which could translate into reliable revenues and profits. Keep in mind though, any unforeseen economic challenges could cause Sanne to veer off-course.

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Full Year Results (figures given at constant currency, 25/02/21)

Full year underlying revenue rose 7.3% to £169.7m, ignoring the effect of exchange rates. That reflects growth in every region, although performance was held back by the pandemic. There were delays to new business wins, and the amount of time it took for clients' funds to generate revenue.

Cost saving changes in some departments together with the uptick revenue helped underlying profits rise 8.4%, to £48m.

Sanne will pay a 9.9p final divided, bringing the total to 14.7p for the year, a 4.3% increase from 2019.

Revenue in Europe, Middle East and Africa (EMEA) rose 7.6% to £63.5m. This reflects strong growth in Private Equity revenues, especially in the UK and Luxembourg. The region also benefitted from improved Loan Agency and Real Assets performance. However, a significant slowdown in the South African Hedge fund business, combined with high fixed costs meant profits while profits fell 1.7% to £35.6m.

Channel Islands revenue was up 6.9% to £40.4m, fed by growth in both Alternatives and Corporate and Private Client (CPC) business. Profits rose 11.6% to £24.2m. This division has seen some of its growth shift to EMEA due to Brexit as asset managers choose to domicile in Luxembourg.

Growth in Japan and Singapore helped profits rise 6.8% to £25.3m in Asia Pacific and Mauritius (APM). That also reflects a 5.3% rise in revenue to £36.2m. Growth elsewhere offset the impact of civil unrest and pandemic-related headwinds in Hong Kong and China.

North America (NA) delivered a 9.7% revenue increase to £29.6m. That fed into a profit rise of 14.2% to £15.4m.

The group finished the year with a net debt position of £89.8m (2019: £88.2m). Excluding leases, Sanne's debt was 1.8 times profits. That's slightly below management's 2x objective. Free cash flow was £35.2m, down from £41.3m.

Looking ahead, Sanne said: "while the uncertainty caused by the COVID-19 pandemic remains, the signs of market progress first seen in Q4 have continued into 2021, with a catch-up in delayed fund closings and an increase in new business wins". It also expects revenue growth rates to return to double digit figures in 2021.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.