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Sanne Group - board reject significant offer

Nicholas Hyett, Equity Analyst | 14 May 2021 | A A A
Sanne Group - board reject significant offer

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Sanne Group plc Ordinary 1p

Sell: 905.00 | Buy: 906.00 | Change -1.00 (-0.11%)
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The Sanne board has rejected an offer to buy the group from private equity group Cinven. The offer was set at 830p per share, a 37.6% premium to the closing price the day before the approach was announced, and would also have allowed shareholders to receive the 9.9p dividend announced in March.

Cinven is now considering its position, although there can be no certainty that an additional offer will be made.

The shares rose 25.2% following the news.

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Our view

Given the size of the premium, the Cinven offer might usually have been seen as pretty tempting. However, the shares were trading at that price on the market four years ago and the board clearly think the business is worth more. The market is less sure though. The shares are trading at 755p this morning, some way below the offer price and an indication that investors think there's a strong chance Cinven will walk away from the deal without improving its offer.

However, the mere fact Cinven is interested in snapping up the company is interesting. It's a potential customer as well as an owner, since Sanne provides administration services to alternative asset managers. The suite of services includes everything from regulatory reporting to transaction management, and the fact Cinven think the services are good enough to buy is a big vote of confidence in the product.

It helps that the cost to bring Sanne in to detangle regulatory red tape is just a drop in the ocean for most of these funds, and getting it right is far more important than cutting corners. The group has competitors in some of its individual markets, but there aren't many firms doing what Sanne's doing on a global scale. All that gives Sanne some pricing power.

Alternative investment funds are having a moment in the sun amid a low-interest rate environment as investors seek out potential 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. Sanne has had no shortage of potential customers to draw from and once a fund has been established, it's all-but impossible to switch administrators so revenue is very sticky.

In 2020 Sanne saw revenue growth slow as the pandemic increased the wait time between booking new business and funds actually getting launched. This should be a temporary problem, and cost savings helped protect profits. The group expects double digit revenue growth to return in the current financial year which, coupled with improved margins, would bode well for profits.

Sanne doesn't come without its challenges though. And, following the offer from Cinven, valuation is one of the biggest. That means meeting, and even exceeding expectations, is important going forward if they are going to maintain recent gains. Even if all goes to plan, should Cinven walk away the valuation is likely to be affected.

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 becomes the norm, Sanne will have to depend less on new business opportunities and more on upselling to existing clients. That concern is behind efforts to expand the group's global footprint through strategic acquisitions, especially in America where not only is the market deep but outsourcing is less common.

Overall, we think Sanne is well positioned with some supportive tailwinds. We admire its business model and market position, which could translate into reliable revenues and profits. Beware though that the Cinven offer adds a significant degree of uncertainty in the short term.

Sanne key facts

  • Price/Earnings ratio: 21.0
  • Ten year average Price/Earnings ratio: 23.2
  • Prospective dividend yield (next 12 months): 2.6%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Full Year Results (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.