In this article I am explaining why I’d be happy to sell Hurricane Energy (LSE: HUR) to snap up Jupiter Fund Management (LSE: JUP).
Inflows charge higher
The asset manager, which made headlines this week after news emerged that it drew £300m from Neil Woodford’s Woodford Income Fund in September, marched to fresh record peaks above 560p per share on Wednesday after its latest financial update whetted the appetite of investors.
In a bubbly third-quarter statement, Jupiter announced that it recorded mutual fund net inflows of £1.2bn, “achieved across a range of different strategies and geographies.” This pushed total assets under management to £48.4bn as of September, up 19% from the corresponding 2016 period.
Recorded inflows between July-September smashed through most brokers’ estimates, and Jupiter believes it has what it takes to keep delivering the goods, helped by a steady stream of product and fund launches and healthy investment in its global operations.
It said: “Looking towards the end of this year and onward into 2018, we aim to build on the momentum we have seen to date. We believe that diversification and investment in maintaining our scalable operating model, supported by a strong and sustainable balance sheet, provides resilience to our business.”
The company has a pretty sturdy growth record in recent times, and City analysts do not expect Jupiter to throw up any frights in the near future — additional earnings rises of 16% and 8% are forecast for 2017 and 2018 respectively.
And this is expected to lay the foundation for further significant dividend growth. The calculator bashers expect last year’s 27.2p per share dividend to swell to 29.9p in the present period and again to 31.7p in 2018.
As a consequence, yields at the FTSE 250 business stand at a mountainous 5.4% for 2017 and 5.7% for the following year.
Jupiter’s share price has now gained 25% in value so far this calendar year, but with the share trading on an undemanding forward P/E ratio of 16.1 times (and a bargain PEG reading of just 1), I fully expect its eye-popping ascent to continue.
In choppy waters
I am certainly less assured over the investment potential of Hurricane Energy, however.
The fossil fuel play remains a whisker off September’s one-year troughs around 27p per share, and the unpredictable nature of energy production could easily mean Hurricane sees more significant troughs should news flow fail to improve about work at its Lancaster field.
The company has been no stranger to seeing investors flee for the exits, its share price collapsing by more than half in little more than five months as it has been forced to bulk up the balance sheet (raising $520m through a share issue and by issuing new bonds) to keep developing its mammoth asset in the North Sea.
Hurricane is clearly up against the clock to get Lancaster — which it has previously described as “the largest undeveloped discovery on the UK Continental Shelf” — up and running. The company said last month that it is on course to produce maiden oil in the first half of 2019, but there is clearly a long way road until hitting that milestone, a road fraught with operational and financial hazards.
When you also throw in the murky outlook for oil prices in the near term and beyond, I reckon investing in Hurricane is a gamble too far right now.