JHG - Janus Henderson: Multiple Value Creation Levers (Rating Upgrade)

2023-04-27 13:04:39 ET

Summary

• Ali Dibadj would have been JHG's CEO for a complete year by late-June 2023, and it is time that he pulls the levers to create more value for shareholders.
• Janus Henderson's key value creation levers include growing alternatives' AUM, expanding in non-US markets, and returning more excess capital to shareholders through dividends.
• I upgrade my rating for JHG to a Buy, as I see Janus Henderson's shares rising on the realization of multiple value creation levers in the future.

Elevator Pitch

My investment rating for Janus Henderson Group plc's ( JHG ) stock is a Buy.

In my earlier article for Janus Henderson published on February 6, 2023, I reviewed JHG's financial performance for the final quarter of the prior year. I focus specifically on the potential value creation levers for Janus Henderson in the current update.

I am raising my rating for Janus Henderson from a Hold previously to a Buy now. My bullish view of JHG's shares is based on the assumption that the new CEO will able to pull the relevant value creation levers to drive the company's stock price up.

New CEO Is Ready To Ring In The Changes

In the middle of last year, Janus Henderson disclosed that Ali Dibadj will become the company's new CEO beginning on June 21, 2022. Ali Dibadj will have served as CEO of JHG for one full year in a little less than two months' time, and I think that Ali Dibadj's recent comments suggest that he understands what actions are needed to drive shareholder value creation at Janus Henderson.

At the Bank of America ( BAC ) Securities Financial Services Conference 2023 in mid-February 2023, Ali Dibadj emphasized that there is an "enormous opportunity to gain market share in areas where we are underrepresented", and he also stressed that "returning cash to shareholders is an important part of the story for us and all asset managers." I believe that Janus Henderson's new CEO has touched on the key areas of value creation potential for JHG in his presentation at the BAC investor event, which I will go into greater detail in subsequent sections of the article.

Alternatives Hold Huge Growth Potential For Janus Henderson

As indicated in the company's Q4 2022 earnings presentation slides , 100% of Janus Henderson's AUM (Assets Under Management) in the Alternatives category are performing better than their respective benchmarks for the three-, five-, and 10-years' time periods, respectively as of December 31, 2022. Specifically, JHG's Diversified Alternatives business which manages "multi-strategy hedge funds, and equity and commodity enhanced index funds", as revealed in its fourth quarter results presentation, boasted a reasonably good Sharpe ratio of 1.7 (higher than 1) for the previous year.

But JHG hasn't been able to capitalize on the good performance of its Alternatives capability and Diversified Alternatives business in a meaningful way. Alternatives only accounted for 4% of Janus Henderson's total AUM at the end of 2022, with the firm's equities, fixed income, and multi-asset capabilities contributing the rest of JHG's AUM. The company also estimated that its Diversified Alternatives business enjoys a market share of under 1% as per its Q4 2022 results presentation.

Looking forward, Janus Henderson's CEO Ali Dibadj noted that "options are available to us to buy, build or partner to fill those (product) gaps." If JHG chooses to acquire another company to expand its presence in Alternatives, the company has sufficient free cash flow that can be allocated to M&A. As per S&P Capital IQ's historical and consensus data, Janus Henderson generated more than $450 million of free cash flow for FY 2022, and the sell-side analysts' forecasts that JHG can deliver annual free cash flow of close to $400 million in FY 2023 and FY 2024.

JHG Should Grow Its AUM In Non-US Markets

North America represented more than half, or 59% to be specific, of Janus Henderson's AUM at the end of last year. It is clear that JHG's geographic mix could become more balanced going forward, and there is ample room for Janus Henderson to expand its AUM in markets outside the US.

For the EMEA (Europe, the Middle East and Africa) and Latin American market which accounted for 30% of JHG's AUM, the company has been gaining traction with very large clients. At the February 2023 BAC Financial Services Conference, Janus Henderson revealed that it is currently "winning mandates" from "sovereign wealth funds" or SWFs and "insurance and reinsurance companies" in the Middle East and Northern Europe, respectively. Insurance businesses and SWFs tend to be the influential capital allocators in terms of size, and it is a positive sign that JHG has gotten the endorsement from this type of "heavyweights" in the EMEA region to manage more assets.

With respect to the Asia Pacific market where Janus Henderson derived 11% of its AUM, JHG emphasized at the Bank of America investor conference that it has "extraordinarily low market share" in Asia despite operating in this part of the world for many decades. With my prior February 6, 2023 write-up, I specifically highlighted that its "partnership with Dai-ichi Life ( DLICY ) ( DCNSF )" and the appointment of "a new Head of Asia Distribution" will hold the key to Janus Henderson's future AUM growth in this region.

Janus Henderson's Dividends

JHG's consensus forward FY 2023 dividend yield is a reasonably attractive 6.2% now. As per S&P Capital IQ's consensus data, the market sees Janus Henderson' yearly dividend per share growing by 1%-3% per annum from $1.56 for FY 2022 to $1.71 in FY 2027.

In my opinion, it is realistic to expect a growing dividend payout for Janus Henderson.

At the Bank of America conference mentioned earlier, JHG's CEO Ali Dibadji specifically mentioned that asset management companies usually achieve "low single-digit type growth organically from a revenue perspective" rather than the "10%-15%" return that investors are seeking. This explains why it is necessary for asset managers like JHG to offer reasonably generous dividend yields to ensure that asset management companies' shares remain appealing for investors from a total return (capital gains plus dividends) perspective.

I think that Janus Henderson will increase its future dividend pay-outs in such a way that the stock offers a high single-digit percentage dividend yield at the minimum.

Closing Thoughts

Janus Henderson' shares have upside potential, since there are a number of things that the company can tweak to create more value for its shareholders. This explains why I have made the decision to lift the investment rating for JHG to a Buy.

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