United Bankers H1'24: Record earnings from performance fees

This report is a summary translation of the report “Tuottopalkkioista tulosennätykseen” published on 8/26/2024 at 8:20 am EEST.

United Bankers' H1 report was better than expected in terms of numbers, with fund performance fees again driving the earnings beat. Forecast changes remained moderate in the wake of the report, although we revised our sales forecasts for the rest of the year down a notch. We expect management fees to continue to grow strongly in the coming years, but the normalization of performance fees will be a bit of a headwind to the result, which we expect to be moderately stable over the next few years. We believe that the valuation of the stock is neutral, so the expected return we forecast is not enough to be positive at the current price level. Therefore, we reiterate our Reduce recommendation and our target price of EUR 19.0.

Performance fees driving another earnings beat

UB's H1 revenue increased by 34% to 33.0 MEUR, exceeding our forecast of 32.0 MEUR, as Wealth Management's development was stronger than expected due to a strong increase in performance fees (H1’24: 13 MEUR vs. H1'24e: 12 MEUR). Management fees were slightly below our forecasts, but 4% above the comparison period. Expenses in Wealth Management remained well contained, despite being burdened by salary increases implemented at the beginning of the year and general inflation. In contrast, Capital Markets Services had an even quieter start to the year than we had expected, with only 0.6 MEUR in revenue. Due to a very fixed cost structure, the result was close to zero. The group's revenue overshoot flowed into the bottom line with a good ratio, as EBIT rose to 13.5 MEUR, exceeding our forecast of 12.5 MEUR. There were no material surprises on the bottom lines, and EPS landed at
EUR 0.96.

Sluggish fundraising in alternative funds will remain a challenge for the remainder of the year

In the short term, the challenging market environment will put pressure on new sales, especially of alternative funds, but we expect UB's fund assets to continue to grow strongly in the coming years, supported by the latest fund launches. However, we have lowered our sales forecasts for UB's alternative funds for the rest of the year. We have not made any material changes to our fund growth forecasts for the coming years, but growth is expected to be more heavily weighted towards next year than in our previous forecasts. On the other hand, the result is clearly up this year and we forecast that it will remain around this excellent level for the next few years. This is due to performance fees, which we expect to decline somewhat from this year's high level, masking most of the increase in recurring fees. We expect the dividend payout to remain strong, as the company's business growth ties up very limited capital.

Expected return remains meager at current exchange rate

Our forecasts for the current year place UB's P/E ratio (~13x) at the lower end of our accepted range, so we believe there is some upside in the multiples. UB's historical pricing multiples tell the same story, as the company has traded at an average P/E of 14x over the past five years. We believe this level is reasonable and justified by the company's low investment needs, earnings growth prospects, and the current risk level.  However, earnings growth will remain modest over our forecast period due to the normalization of performance fees. Overall, we estimate the expected return over the next few years to be close to our 10% ROE requirement. In our view, this is not a sufficient level to justify a positive recommendation. The expected return consists of a dividend yield of around 6% and a moderate increase in multiples. The value of our discounted cash flow model is also in line with the current share price.