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

Magellan is focussing on increasing its business diversity with more growth options and better bolt-on acquisitions. Further, the distribution channel in the US can help the group witness a transformational growth wave, with Frontier Partners is set to expand MFG’s North American distribution capabilities. Diverse products and mutual fund growth can be key to this. MFG also planned to use a trust instead of the company’s capital structure, as generally seen for many Companies, to deliver a cash distribution yield to its investors, which usually global equity portfolios don't exercise quite often. The group planned to launch an Active ETF on the ASX; and has been continuously focusing on developing a solid and a growing self-directed retail investor base. To achieve this, MFG has already taken a lot of initiatives and raised an IPO and has also inked a partnership with Cricket Australia. It believes that building and growing a broad retail presence is very important for the long-term robustness of its business. It is mindful in managing the interplay between capacity and the performance for its clients and ensures that its retail business grows over the period.

Productive first half of 2018: The Group reported an increase of 25 per cent in the underlying net profit after tax for the period of six-months ending on 31 December 17and this amounted to $109.2 million, excluding the one-off costs of raising the Magellan Global Trust. This was largely driven by an increase of 25 per cent in average funds under management as compared to the previous corresponding period. The interim dividend increased by 16 per cent and amounted to 44.5 cents and MFG also changed its dividend policy and started paying performance fees as a performance fees dividend with final dividend. Its monthly average net Retail inflows (excluding the proceeds of the Magellan Global Trust) were approximately $55 million per month over the six-month period (ending on 31 December 17) as compared to $207 million of average net inflows per month over the previous corresponding period. It reported profit after tax of $53.5 million which was down from $87.0 million for the previous six months ending on 31 December 16. Its diluted earning per share (excluding the MGG net offer cost) increased by 25 per cent and amounted to 63.4 cents per share. Revenue for the period (six-months ending on 31 December 17) increased by 26 per cent ($189 million) which was due to an increase in management fees and in performance fees.


Half year Result (Source: Company Reports)
 
Other Operating and Financial Updates: In February, Magellan generated net inflows of $276 million (for the six months ending 31 December 17) and which included net retail inflows of $14 million and net institutional inflows of $262 million. The Group issued 3,856,748 securities at an issue price of $27.55 per share and this move was undertaken to raise consideration for the acquisition of Airlie Funds Management Pty Limited. The Group completed the $1.57 billion of initial public offering of the Magellan Global Trust. It also became the naming rights sponsor for men’s Domestic Test Cricket. It recently established a small debt facility of $50 million to support the overall liquidity management and this is currently undrawn. The Group has a total net Principal Investments of $243.5 million and it includes investments in Magellan’s listed and in unlisted funds. To reiterate its dividend policy, the Company pays an Interim and Final dividend of 75-80 per cent of the Funds under Management (excluding crystallised performance fees). The net MGG offer costs after tax were $55.7 million and were funded out of available cash and these costs were not included in the Funds Management segment and do not affect the profitability of the Funds Management business.
 

Investment Performance for Funds (Source: Company Reports)
 
Two strategic Acquisitions: MFG had indicated its interests to acquire 100 per cent of the Frontier Partners (a privately -owned group of companies), which has been Magellan’s distribution partner in North America since 2011. At present, the Group has $12.6 billion of funds under Management in North America which included some prestigious institutional investors like state plans, marquee foundations and family offices and large corporations. Post this acquisition, MFG will stop paying the success fess to Frontier in US and will derive a benefit of $10 million per annum from the current position of funds under management. Overall, MFG believes that this acquisition will help in enhancing its distribution and management capabilities in the North America market. The second acquisition is of Funds which are under the management of Airlie and this was the result of past discussions which both the entities were a part of since ages. John Sevior, Matt Williams and David Cooper became the partners and supported in further developing the Airlie business and they decided to exchange their equity in Airlie for the equity in Magellan. MFG is now planning to launch the Airlie Industrial Share Fund which will be an Active ETF quoted on the ASX which reflects the potential power of both the entities and will leverage Airlie’s pre-eminent expertise in Australian equities and Magellan’s operational expertise to its earning per share. It is anticipated that this will provide an attractive return on capital and this transaction will be modestly EPS accretive in the first year of acquisition. The total consideration comprised of US$15 million in cash and approximately 4.5 million of Magellan shares which represent 2.6 per cent of Magellan’s issued capital.

Launch of Magellan Global Trust and Cricket Australian sponsorship: The Group remains focussed on developing its retail business and on executing its self-directed investor strategy. Magellan Global Trust is an important part of its self-directed strategy and the group raised $1.57 billion in October 17 from more than 32,000 investors. As on 31 December 17, the Magellan Global Trust and its three Active ETF’s had approximately of $2.8 billion of combined funds under management with over 50,000 of unitholders. Its partnership with Cricket Australia was to sponsor the men’s domestic test cricket series for 3 years which provides an important platform to raise the brand awareness and it has the option to extend the sponsorship for a further 2 years. This will increase the Group’s marketing expense by approximately $11.0 million-$11.5 million and its total marketing expense represents approximately 3 per cent of the Group’s revenue.
 

Global Equities Fund (Source: Company Reports)
 
Outlook for 2018: While MFG expects its employee cost (largest contributor to expenses) to increase at the lower end that is by 5-8 per cent on its guidance, it aims to earn satisfactory returns for its shareholders and the Board has established a pre-tax return hurdle of 10 per cent per annum over its business cycle for the Principal Investment which it has achieved till date. A value-based investment approach will produce lumpy periods of outperformance over the time. Notwithstanding the contribution from additional funds and the staggering of measurement periods will help to dampen the yearly performance fee volatility over time. Its capital management approach will remain intact in the coming years. The acquisitions of Frontegra Strategies LLC and Frontegra Asset Management, Inc. (institutional clients of Frontier Partners Inc.) are expected to be completed through the course of 2018 and are subject to regulatory approvals.

Stock Performance: The Group continues to maintain a strong balance sheet and the Net Tangible Asset per share was $2.54 as on 31 December 17 and includes the effect of the one-off MGG IPO costs. The business continues to operate efficiently and produces cost to income ratio of 28.1 per cent (excluding performance fees). Its funds under management earning before tax for 2017 increased by 15.5 per cent which is broadly in line with increased Funds Under Management. The stock prices were up by 1.77 per cent in the past six months and were down by 9.9 per cent in the past three months indicating an investment opportunity. While expenditure is surging up, the efficiency levels also seem to be on the uplift with many developments expected to play a positive role in the long term. We give a “Buy” on the stock at the current market price of $24.07
 

MFG Daily Chart (Source: Thomson Reuters)

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