Shares digital

PEs that may mean bargains

by Simon Keane

It has been a poor quarter for alternative asset managers, but with some of these companies now trading on single-digit PEs the City is asking whether the accompanying sharp share price corrections have been overdone.

Since the start of the year hedge fund groups RAB Capital, Polar Capital Holdings and Eastern European specialist Charlemagne Capital have seen their shares come off 37%, 44% and 48% respectively. That follows a respective 11% and 15% quarterly fall in assets under management (AUM) from the latter two. RAB is yet to report on the first three months of 2007 but, with its flagship RAB Special Situations fund down 14% over the period, the numbers will be gloomy reading.

While current year earnings forecasts have been slashed in the region of 40% on the back of these falling AUM, some question whether these companies can get any cheaper. Analyst Katrina Preston from Landsbanki, Polar’s house broker, calculates that, once you strip out the net cash all these companies are sitting on, RAB, Polar and Charlemagne trade on less than five times this year’s earnings.

Preston points to ‘anecdotal’ evidence that, barring Polar’s Japanese funds, redemptions remain controlled. Indeed, at the same time as reporting its sharp first quarter drop in AUM, Charlemagne (where six directors were buying, see Director Deals page 37) revealed it had won three new institutional mandates.

Preston comments: ‘RAB’s funds enjoy long-term support from the Mittal and Forte families, as well as lock-in restrictions and lengthy notice periods. Poor performance has been so widespread that alternative homes for investors’ money appear few and far between.’

The analyst’s comments come after hefty earnings downgrades. Since November Landsbanki has reduced its December 2008 EPS forecast for RAB by 41%. On 19 March the broker slashed its March 2009 EPS for Polar by 40% and on 7 April re-adjusted downward its December 2008 numbers for Charlemagne by 40%. Based on Landsbanki’s revised earnings forecasts these companies are sitting on respective PEs of 8.4, 7.1 and 7.5 times.

Only a few alternative asset managers, such as hedge fund manager Man Group (see Plays, page 14), have managed to continue performing in today’s difficult markets. Many have been struggling with poor performance and redemptions as dismal returns spur clients to withdraw funds. For those heavily leveraged funds, there is the further risk of cash-strapped banks asking for their money back, a trend predicted by some commentators to wipe out two-thirds of hedge funds.