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How much value is left in Jupiter's share price?

Jupiter's shares have almost doubled in price since its float in June 2010 leaving the fund firm sitting on its highest ever premium to the peer group. RBC Capital asks how much value is left in the stock.  

A stunning run

Shares in Edward Bonham Carter’s (pictured) firm have nearly doubled in value since its float on 16 June 2010, rising from an IPO price of 165p to 315.7p. While the asset manager has always traded at a premium to the sector, it now trades at its highest ever premium at 13.6x 2013 earnings versus a sector average of 12.3x and 9.9x 2013 earnings before interest, taxes, depreciation and amortization (Ebitda) versus a sector average of 9.4x.

The recent performance of Jupiter’s share price has outstripped the competition. From 30 September 2012 to 11 January its price has increased by 28.6% versus a peer group average of 21.5%.

RBC Capital analyst Peter Lenardos says this performance may represent ‘an opportunity for investors to take profits’ in a research note on the firm. However, he still sees upside potential in the stock and has increased its price target by 15% while upgrading his earnings forecast for 2013 by between 2 and 4% and its 2014 forecasts by between 4 and 8%.

With a fourth quarter trading update scheduled for 16 January set to offer a further insight into business at Jupiter, Lenardos highlights the following indicators to map his path for the asset manager.

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Positive equity performance

In the final quarter of 2003 equity market performed positively. Lenardos forecasts that with 79% of Jupiter’s assets invested in equity markets this leaves the firm strongly placed.

‘We now forecast market movement to be 8% of beginning (AuM) in 2013 (previous 4%) and 5% of beginning AuM in 2014 (previous 4%),' Lenardos says.

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Positive inflows & RDR boost

With sentiment turning towards equities, Lenardos forecasts net inflows of £0.6 billion. This combined with positive market movements could see assets under management ending the year at £26.2 billion at the end of 2012.

‘We now forecast net flows to be 6% of beginning AuM in 2013 and 2014 (previous 5% in both years). We believe that positive momentum in equity markets, in addition to the benefits for Jupiter of retail distribution reviews RDR, should drive an acceleration of net inflows,’ Lenardos says.

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Upgrade to earnings forecasts

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Upside and downside and base case scenarios

Base case: increase price tax by 15% to 310p

Lenardos says: 'The increase to our price target is the result of the increases to our 2013 EPS and Ebitda forecasts, a change in the valuation multiples we utilise, and rolling forward net cash used in our valuation to our 2012 year-end forecast of £55 million (we previously utilised last reported net cash of £1 million).

Upside scenario: 335p price target

'Should equity market performance exceed our forecasts in 2013, we believe that Jupiter could experience positive market movement of 12% of beginning AuM in 2013 (our current forecast is 8%). We would expect capital to accelerate into equity products, which are typically higher-margin products at the expense of fixed income products, which are typically lower-margin.

'Therefore, the 2013 net management fee margin could increase to 94 basis points (our current forecast is 91 basis points). We believe that retail engagement in the equity markets tends to improve as a result of market stability and/or positive market performance. Therefore, net flows could reach 8.0% of beginning AUM in 2013 (our current forecast is 6%).

Downside scenario: 255p per share

Should equity markets experience a downturn, we believe that Jupiter could experience negative market movement of 5% of beginning AuM in 2013. We would expect a re-allocation of capital from equity products, which are typically higher-margin products, toward fixed income products, which are typically lower-margin.

Therefore, the 2013 net management fee margin could decline to 88 basis points (our current forecast is 91 basis points). We believe that retail engagement in the equity markets tends to decline as a result of market volatility and/or negative market performance. Therefore, net flows could be flat (our current forecast is 6.0%). This yields a downside scenario of 255p per share.

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