Market ‘materially overvaluing’ Lindsell Train

Boutique fund house represents over 40% of the Lindsell Train Investment Trust

Lindsell Train staff pay averages £1m

Lindsell Train Limited, the boutique manager founded by star fund managers Nick Train (pictured) and Michael Lindsell, is materially overvalued by the market compared to rival fund houses that have more diversified product ranges and less “key man” risk, according to Kepler Trust Intelligence.

The unlisted business is held via the Lindsell Train Investment Trust and has ballooned in value from a nominal amount in 2001 to £62m at the end of March 2018. It has been one of the key drivers of performance in the investment trust and represents 41.7% of net assets, according to Kepler.

The investment trust holds a 24.2% stake in the business.

“Investors are currently materially overvaluing the stake in the manager,” Kepler said, noting this was based on the current “ear-bleeding” premium to net asset value (NAV) of 50%.

Funds under management rose 44% year-on-year from £9bn to £13bn, while operating profit rose 41% to £38m, according to the fund house’s latest annual financial statements published in May. The investment trust’s latest annual results showed the net asset value had increased 30% in the year ended 31 March, significantly outperforming its bond benchmark.

Lindsell Train vs rival fund houses

Kepler compared Lindsell Train’s valuation to rival listed and unlisted asset management businesses.

The Sanditon Investment Trust owns a 20% stake in Sanditon Asset Management, which is an earlier stage business than Lindsell Train with £600m assets under management. The board of that investment trust values its stake at a conservative average of 1% of AUM and 5x adjusted profits multiple.

Majedie Investments owns a 17.1% stake in Majedie Asset Management, which has AUM more comparable with Lindsell Train at £14bn. Kepler said the board valuations of Majedie Asset Management and Lindsell Train were within a “whisker” of each other. That is approximately 1.5% of AUM and 11.8x profits.

Miton Group and Premier Asset Management, listed rivals of Lindsell Train, have valuations equivalent to 4.2% and 5.8% of AUM respectively, based on the 11.8x profits.

However, at Lindsell Train investment trust’s current share price the valuation of the fund house is just shy of 7% of AUM. Kepler said this implies shareholders anticipate “explosive growth”. If the investment trust returned to its three-year average premium of 31%, its valuation would be more in line with rivals, Kepler said.

Board warning for investment trust shareholders

The Lindsell Train Investment Trust board has warned new shareholders any reversal in the fund house’s performance could cause the premium to evaporate.

The board has told investors Train and Lindsell have no desire to surrender their independence and sell the business to a third party. They have also highlighted the risk, “albeit a low one”, that the company ceases trading when the founders retire.

Kepler stated: “We understand that there are succession plans afoot at LTL, but it is no understatement that Michael Lindsell and Nick Train are LTL. Without them, it is entirely possible to see a situation in which there was little or no value ascribed to this stake.”

Investors could consider Majedie Investments as an alternative to Lindsell Train Investment Trust, Kepler said. That investment trust is current trading at a 10% discount implying investors can buy the £60m stake in Majedie Asset Management for £43m.

Kepler said: “This implies valuation metrics of only two-thirds that of the LTL board’s valuation for its manager. Is this discount justified? We don’t think so – clearly, each business will have a different trajectory and risks, but MAM certainly has a more diversified product suite and with its many managers and strategies, considerably less ‘key man’ risk.”

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