2023-05-05 09:35:09 ET
Summary
- Sprott Inc. reported Q1 2023 earnings and saw a quarter-over-quarter growth in assets under management of 8%, but adjusted base EBITDA declined by 7%.
- The positive precious metals price trend has continued in April-May, which means Q2 does so far look like a very positive quarter.
- The stock price of Sprott remains attractive based on what we have seen so far this year.
Investment Thesis
Sprott Inc. ( SII ) earlier today reported its Q1 2023 results and the company will have a conference call later today. Below are my main takeaways on the company following the quarterly results. Sprott is North American investment company I have covered frequently over the last 5 years, and those articles can be found here .
The majority of Sprott's assets under management ("AUM") and revenues are linked to precious metals. The exposure to uranium has grown lately, but it is still only somewhere around 20-25% of revenues. Sprott's stock price has over the years been correlated with the VanEck Gold Miners ETF ( GDX ) and the Sprott Uranium Miners ETF ( URNM ).
Figure 1.
The stock has over the last year underperformed the GDX by quite a lot, despite having delivered excellent AUM growth during the period. We haven't yet seen the same growth in earnings, but my expectation would be for that improve throughout the year. The AUM growth has continued into Q2, judging by the exchange-listed products segment, and the relevant commodity prices. So, I view Sprott as a good risk-reward at this level.
It has also been announced that Sprott divested Sprott Capital Partners in Q2, which is most of the brokerage business, for an undisclosed fee to a team led by the former CEO Peter Grosskopf. The brokerage segment has lately had much more of a marginal contribution to earnings. So, I don't expect this transaction to impact Sprott's business substantially over time.
Exchange Listed Product Segment
The exchange-listed products segment is the largest segment in terms of assets under management, revenues, and adjusted base EBITDA. It is also the highest margin segment, where it in 2022 had an adjusted base EBITDA margin and an operating margin above 80%.
Sprott has had impressive AUM growth in the 2020s, as illustrated by figure 2, where much of it has come from the exchange-listed products segment. The segment has as of the 4th of May seen a YTD AUM growth of 12% already, which compares very favorably to the prior two years, that averaged 21% AUM growth for the full years.
In 2023, the AUM growth has so far been more impacted by its positive performance than by large inflows, even if over $400M is still a very respectable amount of inflows in the segment. We have as usual seen the inflows in the physical trusts, but also in the two uranium mining ETFs lately, which is encouraging given how poor the sentiment has been for uranium equities in 2023.
Quarter-over-Quarter
In the figure below, we can see that all 3 core segments have had a positive AUM growth in the quarter. The private strategies segment has had the most impressive percentage growth in Q1, with a massive 32% growth rate. In terms of dollar growth, the exchange-listed product segment has naturally been the biggest contributor.
We have also see adjusted base EBITDA grow in the 3 core segments, while less than AUM in the managed equities and private strategies segments. However, adjusted base EBITDA did still decline compared to Q4-22, primarily due to less transaction-related income and slightly higher costs. Given that we have seen the AUM growth continue in Q2, as illustrated in the exchange listed products section, my expectation would be for earnings to increase going forward as well.
Conclusion
Sprott Inc. has had a very impressive AUM growth over the last few years and in 2023 so far, but I still think Q1-23 should be viewed as a slight disappointment as the company has failed to translate the excellent AUM growth into earnings growth. It is not the first quarter where we have seen that, either.
With the divestments of most of the brokerage segment, we should hopefully see more of a correlation between AUM and earnings going forward, and I continue to be very bullish on the industries that Sprott operates in. It is also worth pointing out that Sprott has been taking market share and many other natural resource and precious metals ETFs have seen outflows, while Sprott continues to see inflows.
So, while the quarter feels a little bit like a disappointment for Sprott Inc., the valuation is still very attractive compared to the royalty & streaming companies, which I think have comparable risk profiles. The stock also offers a dividend yield of 2.9%, with quarterly distributions.
For further details see:
Sprott: Great Assets Under Management Growth In Q1 2023 But Weaker Earnings