T Rowe Price has maintained its sell rating from Citi Research analysts a week after its acquisition of Oak Hill Advisors.
Last week T Rowe Price scooped up the alternative credit manager for $4.2bn, adding $53bn worth of assets across private, distressed, special situations, liquid, structured credit, and real asset strategies.
Citi expects the deal will be accretive and hiked its 2022/23 adjusted earnings per share estimates to $14.12 and $15.22 from $13.48 and $14.38. Its target price rose from $154 to $169.
“We like the move to better align against shifting industry ‘mega-trends’, and the deal should bolster flows and fee rates over time,” analyst William Katz said in a note.
T Rowe Price on 30% premium relative to peers
However, Citi maintained its ‘sell’ rating and opened a 90-day negative catalyst watch, meaning it expects further downside risk during the period.
Citi calculated the fund group is trading at 10x its pro forma 2023 enterprise value (EV)/Ebidta, an “unsustainable” 30%+ premium to peers despite delivering “sub-par organic growth”.
T Rowe Price’s shares have risen over 54% in the past year.
Other players have stronger asset growth and alternatives platforms
Katz said after the Q3 earnings season, he expects more shareholders to rotate away from T Rowe Price and toward asset managers with healthier fund flows and on lower valuations like Affiliated Managers Group and Invesco. In the three months to 30 September clients pulled $6.4bn from T Rowe Price.
“Other players are emerging with stronger long-term net new asset organic growth, that have also acquired key alternatives platforms and/or offer superior capital deployment upside,” Katz said.
Citi expects T Rowe Price’s valuation premium to compress further given the firm has “consumed significant balance sheet capacity”.
“With management using up about 50% of its 9/30 balance sheet cash and investments for the $3.3bn upfront cash consideration and earmarking another $900m for an earn out payment that can be achieved beginning in three years, for three years, and ~$500m in seed capital, while indicating primary focus on executing on Oak Hill Advisors, outsized capital deployment risk is less likely, in our view.”
