Silvercrest Asset Management Group: Focus On High Net Worth Segment Is Yielding Great Results

Summary

• Despite negative headwinds in their industry, management has continued to attract net positive asset flows.
• Total AUM was up 10.8% year-over-year indicating management's ability to execute in a challenging environment.
• The institutional asset management pipeline is picking up steam with the current 6-month actionable pipeline at $1.34 billion.
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The company announced solid Q4:20 results, delivering AUM growth amidst a challenging environment. SAMG is primarily focused on the high net worth segment, which is large and attractive. We remain bullish on the firm’s long-term prospects. We maintain our BUY rating and increase our target price to $19.50 per share (earlier $17.50).

Q4:20 Highlights

• Q4:20 AUM was $27.8 billion, up 10.8% from Q4:19 due to higher client inflows and a supportive equity market.
• Discretionary assets under management, which is the primary driver of revenue, rose to $20.6 billion, up 9.6% versus $18.8 billion in Q4:19.
• Revenue was $28.4 million, up 2.1% YOY compared to $27.8 million in Q4:19.
• Adjusted EBITDA was $7.3 million (or a 25.7% margin), flat compared to $7.3 million (or a 26.3% margin) in the prior year quarter.
• Adjusted net income at $4.4 million in Q4:20, or $0.31 per diluted share, was flat compared to $4.4 million or $0.31 per diluted share in Q4:19.
• We adjust our estimates based on the quarter end results and management’s commentary. We maintain our BUY rating and increase our target price to $19.50, with an implied capital appreciation of 39%.

PRIMARY RISKS

• Volatility in capital markets could cause a decline in AUM which could adversely impact SAMG’s revenues.
• The business is highly regulated and is subjected to frequent regulatory changes. Any unfavorable change could negatively impact operations.

QUARTERLY SUMMARY – Q4:20

• Total AUM up 10.8% YOY. Total assets under management (AUM) increased ~10.8% to $27.8 billion versus $25.1 billion in Q4:19. The increase was attributable to client inflows of $4.2 billion and market appreciation of $2.3 billion, partially offset by client outflows of $3.8 billion. Discretionary assets under management, which is the primary driver of revenue, rose to $20.6 billion, up 9.6% versus $18.8 billion in Q4:19.
• Revenue was $28.4 million for Q4:20, up ~2.1% YOY compared to $27.8 million in Q4:19. This increase was driven by net client inflows and market appreciation in discretionary AUM. We note that revenue is primarily based on market values as of the end of the prior quarter (in this case September 2020).
• Total expenses increased to $25.1 million, up 5.7% driven by higher G&A costs (+13.1% YOY) and compensation and benefits expense (+3.4% YOY).
• Adjusted EBITDA was $7.3 million (or a 25.7% margin), almost flat compared to $7.3 million (or a 26.3% margin) in the prior year quarter.
• Adjusted net income at $4.4 million in Q4:20, or $0.31 per diluted share, which was flat compared to adjusted net income of $4.4 million or $0.31 per diluted share in Q4:19.
• OCIO business continues to show strength. With new wins in the fourth quarter of 2020, the OCIO business now advises on more than ~$700 million in AUM. SAMG expects OCIO to cross $1 billion in AUM in 2021.
• Organic growth initiatives. During the fourth quarter, SAMG made investments to grow the business organically, including the hiring of new high net worth portfolio management professionals. Similarly, SAMG also made investments in their institutional and OCIO businesses.
• Pipeline activity picking up. SAMG noted that their institutional asset management pipeline is picking up and the current 6-month actionable pipeline is $1.34 billion. The OCIO pipeline is nearly $340 million.

EARNINGS ESTIMATE

SAMG continues to receive net inflows from the HNW and institutional segments. Silvercrest has maintained a proven ability over time to continue to attract net positive asset flows despite negative industry-wide trends in active management.

For the full year of 2021, we expect revenue of $133.0 million, up 23.2% YOY. We expect compensation and benefits expense to be around ~55-56% as noted by management. Adjusted EBITDA and adjusted net income for 2021 are forecasted to be $40.6 million and $25.5 million, respectively, resulting in adjusted earnings per share of $1.76.

VALUATION AND RECOMMENDATION

We value SAMG using a P/E multiple. We compare SAMG to other companies involved in wealth management as there is no pure-play publicly traded investment management firm focused on ultra-high net worth clients. We value SAMG at 12x 2021 adjusted EPS of $1.76 and then discount that target back at our computed cost of capital (7.0%). The multiple based target after discounting back to the present comes to $19.69, which we round down to $19.50.

The exhibit below summarizes our peer group multiples.

Exhibit 1: Silvercrest Asset Management Peer Group Multiples and Price Targets

Source: Singular Research Estimates

The Exhibit below shows stock price targets using various combinations of EPS and P/E multiples. Our earnings per share estimates for 2021 and 2022 are $1.76 and $1.92, respectively. The unshaded portion of the chart shows resulting stock price targets at various forward P/E ratios that are above the current price of $14.10 as of March 24, 2021.

Exhibit 2: Forward P/E Ratio Vs. Forward EPS

Source: Singular Research Estimates

Analyst’s Disclosure: I am/we are long SAMG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.