Credit Suisse downgrades Schroders to 'neutral'

Credit Suisse downgraded Schroders on Friday to ‘neutral’ from ‘outperform’ and slashed the price target to 470p from 510p, citing flow headwinds and cost inflation.

CS said the downgrade reflects a 3%-9% reduction in its 2023-25 operating earnings per share forecasts.

"We continue to like Schroders’ longer-term strategy and its diversified business model," it said. "However, we see headwinds for 2023: we forecast +1% growth in profit, and technical support factors from increased index weighting are now past."

The bank said it forecasts only 4% revenue growth in 2023 despite the tailwind effect of private asset acquisitions in 2022.

"This reflects: i) caution on achievable levels of fundraising for Schroders Capital this year; ii) strong bias of fund flows in Q1 / H1 to low-margin Solutions; iii) risk that modest mutual fund flow momentum will be derailed by poor relative investment performance; and iv) CSe caution on JV and Institution flow momentum," it said.

It also pointed to near-term cost inflation. "We forecast 6% cost growth in 2023E," CS said.

"This reflects our expectation that Schroders will continue to invest in IT/Cloud infrastructure and extension of its Chinese joint ventures (WMC and WOFMC)."

The bank said it prefers outperform-rated Man Group. "We see positive fund flow momentum into FY23E, support from a further $125m in buybacks to start shortly, and inexpensive valuation at 8.7x 2024E PE for 15% EPS CAGR 2023E-25E," it said.

At 0920 GMT, Schroders shares were down 3.6% at 462.10p.