16 November 2018
Board of Directors
Franklin Resources Inc
One Franklin Parkway
San Mateo
California
94403
Dear Board of Directors,
Unlocking the value in Franklin Resources “Franklin”
Franklin has substantially under-performed its peer group over the past 5 years and currently has the lowest broker ratings among peers with only a single “Buy” recommendation and 5 “Sell” recommendations.
This lack of confidence by the market has led to the point where the business is effectively selling for less than 5 times earnings because cash, investments and net current assets total $8.5bn, equal to 50% of Franklin’s market capitalisation – a remarkably low valuation for a capital light, high return business with an annuity income profile.
This depressed valuation is substantially below all your listed peers and recent private market transactions, including your own $683m acquisition of Benefit Street Partners “BSP” where it appears that you purchased BSP at an Enterprise Value to AUM ratio of 3%, nearly triple Franklin’s current EV/AUM ratio of 1%.
At the current rate of share re-purchases of 10-12m shares per quarter, I calculate diluted shares outstanding will fall 8% – 10% y/y for the next four quarters and at the current share price, would be funded entirely from net income generated and not from utilising your substantial cash balances. Furthermore, I calculate that Franklin has been re-purchasing shares at a rate of 5% – 6% of traded volume, suggesting there is substantial scope to increase the rate of share re-purchases.
I also note the recent shift in the market bias from “growth” to “value” which is benefitting the relative performance of many of Franklin’s funds.
Therefore, given the current opportunity to invest surplus capital in your own business at a free cash flow yield approaching 25%, together with the relative improvement in the performance of Franklin’s funds, I urge the board to consider options to capitalise on the opportunity at hand and accelerate the re-purchase of the remaining 71.7m shares available under the existing share re-purchase authority.
If this was done via a Modified Dutch Auction at a 10% premium to the current price, this would cost $2.5bn, equal to less than 50% of the company’s net current assets. Furthermore, it would reduce the share count by approximately 20% over the next few quarters, providing shareholders with double-digit earnings per share growth while the improved relative performance of your funds translates through to increased asset flows.
Now more than ever, active fund management needs to demonstrate its value relative to passive fund management and it would be inappropriate for us active asset managers to call on other companies to unlock value when substantial value has not been unlocked internally.
Therefore, as stewards of one of the largest and most respected investment managers globally, I call on you to play your part.
Yours sincerely
Sean Peche
Chief Executive Officer
Disclosure:
Ranmore Fund Management Ltd is the appointed Investment Manager of the Ranmore Global Equity Fund Plc, a value oriented Irish UCITS. Ranmore Global Equity Fund Plc is a shareholder in Franklin Resources.
