Description

Quick Summary

Manning & Napier (MN) is a Fairport, NY based asset manager.  The stock is interesting as a result of an extremely accretive  repurchase of 60mln non-traded units (73% of the existing diluted shares) from founder Bill Manning for $91mln in cash or $1.51 per share.  This sizeable repurchase at a discount to book value has dramatically changed the risk-reward for MN and provided significant leverage to the potential turnaround being orchestrated by new CEO Marc Mayer.  Downside should be protected by the ~$2.40 per share of pro-forma cash while it is not hard to see upside to $8-9+ in either a transaction or with a successful turnaround.  That seems like an attractive risk-reward at $2.80.

Capitalization and Valuation

MN has 16.0mln class A shares, 5.5mln units, and 1.4mln equity awards for a total share count of 22.9mln and a market cap of $64mln at $2.80.  The company has $55mln of cash pro-forma for the repurchase and no debt.  Thus the current EV is 9.4mln.  AUM at 6/30/20 was $18.6bln so the stock is trading at 0.05% of AUM.  TTM net income was 7.8mln or an 8.3x TTM P/E.

Upside

New CEO Marc Mayer joined MN in January 2019.  Mayer was previously the head of North American Distribution for Schroders and was previously the CEO of GMO and CIO at Alliance Bernstein.  Previously, MN had been run by 3 Co-CEOs who retired/left upon Mayer's appointment.

Since arriving, Mayer commenced a strategic review in early 2019.  As a result, the company's main focus has been to 1) expand MN's regional Wealth Management presence, 2) replace the company's outdated technology in the front, middle and back office and 3) improve profitability by enhancing the efficiency of operations by simplifying a complex platform and reducing SKUs. 

MN has an attractive Wealth Management business with a strong regional footprint in Upstate NY, Ohio, Western PA and Western Florida.  The company is investing in new technology to create incremental sales capacity for its existing teams and believes this can be an attractive growth avenue for sticky assets.

On the technology side, MN is replacing very outdated, internally created technology with state of the art systems from InvestCloud, Charles River and Workday.  As they have had to run these new systems side-by-side with the legacy technology for continuity, this changeover has been time-consuming (not fully complete until 2021) and expensive.  This near-term elevated technology spend has hidden savings being created in other parts of the P&L.

In simplifying a complex platform, the company announced in Q3 19 that it would shut 3 of its mutual fund offerings for a savings of $6.5mln in 2020 without any material impact on revenue.

Outflows have started to get better in Q1 20 and the company has been cycling some bad performance years in 2014-16 out of its 3 year numbers (and soon out of its 5 year).  Obviously however, getting to net inflows will be the critical factor and main uncertainty in this position.

On the Q1 20 call, Mayer first spoke about his vision for the company.  He noted that "we are on a path to turning net outflows into inflows, to achieving significantly improved profitability  that brings us to 10% operating margins on the way to 20% or better."  Adjusted EBIT margins are 11%  on a TTM basis so they are not that far away but these improved results are not showing up yet in the GAAP financials as a result of significant restructuring expenses.

If we assume a slight recovery in AUM to 20bln then the company would generate ~134mln in revenue and 20mln of EBIT at 15% margins and ~0.65 of  EPS which would be worth $8 at 12.5x.  Obviously if the turnaround really takes and the company achieves higher AUM levels and higher margins, then much higher returns are possible.

On an AUM basis, 1% of current AUM would be an over $9 share price.  Given that half of the AUM is stickier wealth management, I think 1% of AUM is conservative.

Finally, when Mayer joined, the stock was generally between $2-2.50.  He accepted an options package with ladder vesting at share prices from $3.25 to $7.75.  Plus, insiders have purchased over 440k shares in the past year, albeit mostly at lower prices pre repurchase (weirdly Bill Manning bought a small amount of stock in the market above $3 recently).

Downside

MN has $2.40 per share of pro-forma net cash and $2.60 per share of pro-forma book value and it is unlikely that they will burn cash given the nature of the asset management business. 

We can also try to value this on earnings.  If we assume AUM declines to $16bln and EBIT margins fall to 5%, then the company would generate almost 20c of EPS which would be worth ~$2 at 10x.

Absent an AUM implosion, I find it hard to generate significant downside below $2 per share.

Catalyst

AUM growth

Margin improvement