CNS - Cohen & Steers: Focus On Asia Expansion And Cost Management (Rating Upgrade)

2023-09-10 05:11:18 ET

Summary

• Cohen & Steers has recently made a significant new hire for its new Singapore office, and the company has plans to expand its office in Tokyo.
• Cohen & Steers' recent financial metrics indicate that the company has done well in terms of optimizing general & administrative and staff expenses.
• I revise my rating for Cohen & Steers stock to a Buy, as I think CNS deserves to be valued by the market at higher multiples.

Elevator Pitch

I rate Cohen & Steers, Inc. ( CNS ) shares as a Buy.

In my prior update for Cohen & Steers written on June 27, 2023, I touched on how CNS' focus on real estate affects the company's prospects in the near term and long run. With this latest article, I highlight Cohen & Steers' expansion plans in Asia and its success in expense control.

CNS has the intention to grow the company's operations in Asia, judging by recent hiring and office expansion plans. Cohen & Steers is also managing its costs well, especially in the areas of staff and G&A (General & Administrative) expenses. All of these factors point to a favorable financial outlook for Cohen & Steers, which supports my decision to upgrade CNS' rating from a Hold previously to a Buy now.

Expansion Plans For The Asian Region

CNS is an asset management company that still derives the vast majority of its revenue from North America, which accounted for 87% of its 1H 2023 revenue as indicated in its Q2 2023 10-Q filing . Japan, EMEA (Europe, Middle East, and Africa), and Asia Pacific (excluding Japan) contributed the remaining 6%, 4%, and 3% of Cohen & Steers' revenue, respectively for the first half of this year. Notably, Cohen & Steers mentioned at its Q2 2023 results call that "our net outflows were concentrated in North America, whereas we had inflows in EMEA, Asia Pacific and Japan."

As per the metrics presented above, it is quite clear that CNS has lots of room to expand outside of North America, especially in Asia (including Japan). It is encouraging to observe signs which indicate that Cohen & Steers has ambitions to increase its presence in the Asian markets.

Last week, Cohen & Steers issued a media release disclosing that the company has named Liyen Wee as "Vice President and Head of Wealth, Asia Pacific" for CNS with the role of "establishing and managing relationships with financial intermediaries in the Asia Pacific Ex-Japan region." This new appointment is noteworthy for two key reasons.

Firstly, Liyen Wee is a hired hand with significant work experience. Liyen Wee is an industry veteran, having close to two decades of work experience in the Asian investment space and strong relationships with financial institutions based in Southeast Asia. CNS could have redeployed an existing employee from the US office to take over this new position, but it chose to recruit someone with relevant experience and expertise in Asia. This shows that CNS has placed a strong emphasis on the company's Asian expansion plans.

Secondly, Liyen Wee is working from Singapore, where CNS has recently established a new office. At the company's most recent Q2 2023 results briefing, Cohen & Steers stressed the new Singapore office, which opened its doors in May this year, is "a strategic move to compete for emerging demand for real assets" and offer "another business location for our talent in Asia."

For Japan specifically, Cohen & Steers has plans to take up more office space in Tokyo in 2024. CNS highlighted at its second quarter earnings call that Japan "is an area where we're going to spend more time" because there is strong "investor demand for income and diversification" in that market.

UBS ( UBS ) published a research report on June 1, 2023 outlining the key findings from its survey of family offices around the world. As per UBS' report, 13% and 27% of family offices in the Asia-Pacific region intend to grow their exposure to real estate and private equity assets, respectively in the coming five years. Real estate is one of the key industries that Asia-Pacific family offices are focused on with respect to their private equity allocations. Therefore, it makes sense for CNS to identify Asia as a key growth market.

Cost Optimization Efforts

Cohen & Steers' plans to grow its presence in Asia are expected to boost its top line and AUM (Assets Under Management) expansion in the future as indicated in the preceding section. On the other hand, CNS' future bottom line growth should be boosted by good cost management.

Operating expenses for Cohen & Steers decreased by -8.6% YoY and -2.2% QoQ to $76.5 million in the second quarter of the current year as highlighted in the company's Q2 2023 results presentation slides . The company has done a great job managing its staff and G&A expenses.

At its recent Q2 earnings call, CNS emphasized that "new hires have to be tied to revenue growth" and "replacement positions are now being required to come to a group to plead the case." This explains why Cohen & Steers' employee compensation & benefits (a subset of operating costs) fell by -26.9% YoY in the most recent quarter.

Separately, the company's G&A costs (a subset of operating expenses) contracted by -6.2% QoQ for Q2 2023. In relation to this, Cohen & Steers noted at its second quarter results briefing that it has "always been pretty adept at reviewing (non-client facing) expenses and we have a rigorous process."

The market's confidence in Cohen & Steers' cost discipline is reflected in the sell-side analysts' consensus financial estimates for the company. As per S&P Capital IQ's consensus data, CNS' EBITDA margin is projected to widen by +200 basis points from 38.9% in FY 2022 to 40.9% for FY 2023.

Concluding Thoughts

CNS is currently trading at consensus forward next twelve months' EV/EBITDA and normalized P/E multiples of 14.9 times and 20.4 times (source: S&P Capital IQ ), respectively. As a comparison, Cohen & Steers' five-year average EV/EBITDA and P/E ratios are 15.1 times and 20.6 times, respectively.

I think that CNS deserves to trade above its historical mean valuations, in view of its Asia expansion and excellent expense management. As such, I assign a Buy rating to Cohen & Steers.

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