Company Overview: Magellan Financial Group Limited is a fund management company. The Company's objective includes offering international investment funds to high net worth and retail investors in Australia and New Zealand, and institutional investors across the globe. Its segments include Funds Management, Principal Investments and Corporate. The funds management activities of the Company are undertaken by the controlled entities, Magellan Asset Management Limited (MAM) and MFG Services LLC (MFGS). MAM's funds management activities comprise acting as trustee, responsible entity and investment manager for the managed investment schemes offered primarily to Australian and New Zealand investors. MFGS acts as a service company providing MAM with services of investment analysts and distribution personnel based in the United States. The principal investment portfolio comprises its investments in the Australian Stock Exchange (ASX) Quoted Funds, the Unlisted Magellan Funds and the Frontier MFG Funds.
 

MFG Details
 
Recently, Magellan Financial Group Limited (ASX: MFG) announced a decent mix of interim result for 2018 and bagged a few deals with an aim to strengthen its retail funds management business in Australia and broaden its institutional distribution in the US and Canada. The Group also received a favourable response to its new acquisitions and looks to be an interesting opportunity given the recent 5% fall in stock price in last five days (as at February 09, 2018) when the markets were in a tailspin. While the recent profit result was impacted by significant one-off costs relating to Magellan Global Trust (MGG) raising, underlying Funds Management profit was in-line with average funds under management growth with more resilient revenue margins giving headway for decent operating margins for 2018.
 
Strategic Moves and successful Partnerships for Expansion: The group has announced two strategic acquisitions, namely Frontier Partners in the United States and Airlie Funds Management, a leading Australian funds management business. MFG is acquiring 100% of the Frontier Partners, a privately -owned group of companies based in Chicago, which is a specialist distribution group that assists fund managers that penetrate the North American institutional market. The partnership with Frontier and relationship with the owner and founder of Frontier, Mr Bill Forsyth, have been highlighted to mark next leg of success in North America. With the acquisition of Frontier, Bill also agreed to become the Executive Chairman of Magellan’s business in North America to lead the development of its North American business. Financially, this transaction is attractive to Magellan and following the completion of this transaction, MFG will cease to pay an ongoing success fees to Frontier; and based on the current level of funds under management, it will result in an initial benefit of around $10 million per annum. On the other acquisition update, Magellan is said to acquire 100% of Airlie through the issue of shares in Magellan to Airlie’s shareholders at the completion of the acquisition which is expected on 28 February 2018. Airlie will continue to operate under the Airlie brand which provides Australian equities to its clients. The first joint endeavour with Airlie will be commencing through the launch of the Airlie Industrial Share Fund, an Active ETF quoted on the ASX, expected to begin trading on the ASX in the coming months. This will provide an opportunity for retail investors to access one of the most experienced teams in Australian funds management. The transactions are expected to be modestly accretive to EPS in the first full year and provide an attractive return on capital and exclude any benefits over time from the soon to be launched Airlie Industrial Share Fund. Total consideration payable in respect of the acquisitions comprises US$15 million in cash and approximately 4.5 million Magellan shares.
 
Decent Interim Results of 2018: Magellan witnessed an extremely busy and productive first half period with the $1.57 billion initial public offering of the Magellan Global Trust completed alongside the largest closed end fund raising and attaining to be the naming rights sponsor for the men’s Domestic Test Cricket. Despite these efforts going in parallel, the group’s underlying net profit after tax for the period ended 31 December 2017, i.e., 1H FY18 witnessed an increase of 25% as compared to the same period in the last year to $109.2 million, and this excluded the one-off costs of the Magellan Global Trust raising. An increase of 25% was also seen in average funds under management on prior corresponding period (pcp) to $53.6 billion, and this in line with the support from Management and services fees that increased 22%. The interim dividend also increased by 16% and amounted to 44.5 cents. So, excluding the performance fees component, the interim dividend jumped up by 20% as compared to the same period of last year. This was in line with the increase in the profit before performance fees of the funds management segment.
 
However, MFG reported profit after tax of $53.5 million which was down about 39% from $87.0 million for the six months to 31 December 2016. However, after excluding the one-off offer costs of the Magellan Global Trust, its underlying profit was $109.2 million for the first half of 2018 which was up by 25% over the prior corresponding period, as indicated above. The growth in underlying profitability of the group reflected a 22% growth in management and the services fees, which was driven by a 25% increase in average funds under management. Its diluted earning per share was 31.0 cents per share which excluded the MGG net offer cost, so diluted earnings per share also increased by 25% over the corresponding period in the prior year and amounted to 63.4 cents per share. On the other hand, expenses in the Funds Management business grew by 27% and were recorded at $50.5 million on pcp basis.
 

 
Comparative Analysis of 1H2017 and 1H2018 (Source: Company Reports)
 
Sustaining decent financial position: The Group is still in a strong financial position with investment assets (cash and cash equivalents and financial assets) of $378.3 million as at 31 December 2017, against 30 June 2017 figure of $411.1 million and shareholders’ funds of $437.9 million against 30 June 2017 figure of $447.6 million. The Group’s NTA per share was $2.54 despite the one-off net offer costs of the Magellan Global Trust IPO against 30 June 2017 figure of $2.60.
 
Focussed on Self-directed retail channel: The group continues to focus on developing its retail business and executing its self-directed investor strategy with two important and innovative access points into the global equities and global listed infrastructure strategies on the ASX, through three Active ETFs and closed ended listed investment trust, the Magellan Global Trust (MGG).
 

Retail Net Inflows (Source: Company Reports)
 
Closing of Global Equity Strategy and Retail Net flows: Earlier, MFG announced to close its Global Equity Strategies to new institutional investors on 31 December 2017. The group expects to have solid ongoing institutional inflows into the global equity strategies over the next 24 months as clients utilise all or part of the reserved additional capacity. The group’s retail net inflows as on 31 December 2017, excluding the Magellan Global Trust receipts were materially lower in the past six months than in the previous corresponding period. Its monthly average net inflows were approximately $55 million per month over the six months ending on 31 December 2017 as compared with previous corresponding period’s figure of $207 million per month. The net inflows have also been impacted by lower industry net inflows by the advice industry and to some extent by changes by a very limited number of advice practices. On the other hand, the new unit class in the Magellan High Conviction Fund with a lower base fee and higher performance fees has been performing exceptionally well.
 
Magellan Global Trust and Cricket Australian Sponsorship: The Magellan Global Trust was an important part of MFG’s self-directed strategy and raised $1.57 billion in October 2017 from more than 32,000 investors. As at 31 December 2017, the Magellan Global Trust and its three Active ETFs had a combined funds under management of approximately $2.8 billion over 50,000 unitholders. Group’s partnership with Cricket Australia to sponsor the men’s domestic test cricket series for 3 years was an important step to raise brand awareness and they can extend the sponsorship for 2 more years. However, this might have a heavy impact on the Group’s marketing expense which is expected to increase materially in 2018 (approximately $11.0-$11.5 million) and its total marketing expense represents approximately 3% of its revenue. On the other hand, the increased marketing spend is in line with focus to increase penetration with self-directed investors and brand advertising efforts to build awareness of and grow the market for investing in global equities, a sponsorship (and supporting initiatives) with Cricket Australia, television and search advertising and the development of new website focussing on digital aspects. MFG management also expects employee cost growth into FY18 to be at the lower end of the previously guided 5-8% range.
 

Investment Performance (Source: Company Reports)
 
Stock Performance: Partnership with Frontier and Bill is seen to be of real significance for the group, and this along with Airlie are expected to add to the Magellan’s earnings per share in its first full year of ownership. The group has also declared to pay a dividend of 44.5c per share in February 2018, which will be fully franked, and this is up against the 38.4 cents paid for the half year ended 31 December 2016. MFG pays interim and final dividends of 75% to 80% of the net profit after tax of the Group’s Funds Management business (excluding crystallised performance fees); and in addition to this, the group will pay an annual Performance Fee Dividend of 0% to 100% of the net crystallised performance fees after tax, annually alongside the final dividend while being subject to available franking credits and corporate, legal and regulatory considerations, and capital needs of the group. Given the recent price correction and long-term potential, we recommend a “Buy” on the stock at the current price of $25.24
 

MFG Daily Chart (Source: Thomson Reuters)

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