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

Superior Net inflows make MFG a consistently Profitable Company in Australia: Magellan Financial Group Limited (ASX: MFG) is a consistently profitable fund management company in Australia in terms of net profit in the last five years wherein the company accounted for 26.4% CAGR NPAT over FY14-18. The company had FUM of $72.11 Bn as at November 30, 2018. The FUM offers a broad suite of investment products across equity segment which currently includes an offering of various schemes classified into global equity funds, infrastructure funds, and Australian Equities. Recently, the company has experienced net inflows of $522 Mn in November 2018, which included net retail of $72 Mn and institutional net inflows of $450 Mn. The application of the same represents that the company has more than 75% exposure towards global equities and ~16.0% exposure towards Infrastructure equities, and rest from Australian equities. In our view, the company will maintain its retail net inflows and institutional net inflows over the medium to long-term on the back of strategic investment approach, build up customer relationship via its synergistic acquisition with Airlie Fund Management Pty Limited and Frontier Group, consistently increasing ETF unitholders since March 2015, and healthy cash & liquidity position with nil debt. Currently, MFG is trading at P/E multiple of 19.74x and gives an attractive opportunity to investors at the current juncture. Given the backdrop of strong investment performance of its core global equities and infrastructure strategies, efficiently run business, driving shareholder value, high dividend payout ratio of around or above 87% and high RoE of ~ 40% shall keep the valuation at premium levels. However, by looking at current market scenario and expecting decent net flows in coming months, we have valued the stock using P/E multiple and have arrived at the target price that may see an upside of the low double-digit in percentage term, ascribing a valuation of five-year average P/E of ~16x on FY20E EPS. Key risks are permanent capital lost, the impact of an equity market, investor inflows and company earnings, and changes in the regulatory framework.

Key Financial Metrics:



Magellan’s Existing FUM Underpinned Robust Growth in Fees: Magellan Financial Group ended FY 2018 by encountering the rise of 29% with respect to the management, services as well as performance fees. The majority of the contribution to this growth was from the company’s present FUM or funds under management. Exploring the drivers in detail (as depicted in the below chart), of the total growth, 72% was because of the company’s present FUM while the Airlie acquisition had made the contribution of 7%. Finally, the net inflows which were encountered in FY 2018 had made the contribution of 21%. Over the past five years, Magellan Financial Group has been witnessing the robust performance in its important parameters. Over the past five years, the company had witnessed the CAGR of 31.12% in its total FUM to FY 2018 at $69.5 billion. Generally, the net inflows, as well as the investment performance, are the primary factors which effect the total FUM. Higher net inflows would lead to a rise in the FUM.
 
 
Revenue Growth Drivers (Source: Company Reports)

The company had also witnessed the decent performance in the past five years in its top-line numbers. Magellan Financial has witnessed a CAGR of 32.22% in its total revenues on the previous five years to June 30, 2018. In the FY 2018, the company’s total revenues amounted to $452.6 million. In our view, the company is well-positioned to witness robust growth momentum primarily on the back of robust balance sheet position, opportunities with respect to the retail space as well as the significant size of its average FUM. There are expectations that the company would continue to be supported by its fund's management business, acquisitions as well as updated dividend policy. Of the total FUM of Magellan Financial Group as of June 30, 2018, the retail category constitutes 28% while the institutional category makes up 72%.

Growth in Australian Equities FUM Month-over-Month: Magellan Financial Group had already published their November report with respect to the funds under management or FUM. The company had ended November 2018 with total FUM amounting to $72.1 billion which implies the marginal decline as compared to the previous month. At the end of October 2018, the company had FUM amounting to $72.9 billion. On the month-over-month basis, there has been a fall in the company’s institutional as well as retail FUM.

 
Magellan’s November 2018 FUM (Source: Company Reports)

Magellan Financial Group witnessed net inflows amounting to $522 million in November 2018. Of these inflows, net institutional inflows amounted to $450 million while the net inflows from the retail category contributed $72 million. Even though, the company’s FUM related to the global equities witnessed a fall from $55.5 billion in October 2018 to $54.1 billion in November 2018, there has been a rise in the Australian equities from $5.9 billion in October 2018 to $6.3 billion in November 2018.

Updated Dividend Policy Might Attract Market Players’ Attention: The top management of Magellan Financial Group had recently made the revision with respect to its dividend policy. As per the updated dividend policy, the payout ratio of the company now stands at 90-95% of the net profit after tax which the company would be generating from its funds management operations (excluding performance fees). It would be important to know that the new pay-out ratio happens to represent an increase when compared to the previous payout ratio which was 75-80%. Thus, the payout ratio decided by the company’s top management represents growth of around 20% as compared to the previous payout ratio.  Further, there are expectations that the dividends might be partially franked in the upcoming period. The revision with respect to the dividend policy of the company comes after the company had conducted the evaluation with regards to the capital requirements. The updated dividend policy provides further confidence that the company possesses robust cash flows as well as balance sheet. The company had stated that the strong position would extend the support with respect to business as well as it would also help in the organic growth opportunities.  

In FY 2018, the company had paid total dividends amounting to $157.9 Mn which implies the YoY growth of 23.9%. This represents a payout ratio for the full year of 86.8%, which is in line with dividend policy of between 75% and 80% of NPAT. The annual dividend yield of MFG is about 4.1% on a five-year average basis (FY14-18) and current dividend yield trades at 5.59%. Hence, we expect that the company will continue to maintain dividend yield more than 4% in future.


Rising Dividend Payout Ratio (Source: Company Reports)

Needle on Key metrics of Magellan Financial: In FY 2018, Magellan Financial witnessed robust momentum in the management and service fees as well as funds under management. The company ended FY 2018 with average FUM of $59 billion which implies the growth of 29% on a YoY basis. During the same period, the company witnessed a YoY rise of 26% with respect to the management and service fees and stood at $385.8 million. The company’s average FUM were supported by the net inflows, Airlie Funds Management acquisition as well as investment performance.


Magellan’s Key Metrics (Source: Company Reports)

In FY 2018, the company witnessed net inflows amounting to $4.4 billion while the acquisition of Airlie had made the contribution amounting to $6.3 billion. Of the FY 2018 inflows, $1.6 billion is because of MGG offering. However, investment performance supported the company’s average FUM by making the contribution amounting to $8.5 billion.

Growth in Total Management Fees Aided Magellan’s Funds Management Business: In FY 2018, Magellan’s funds management business managed to garner revenues of $428.7 million which implies the YoY growth of 30%. The increase in the revenues was witnessed on the back of growth which was encountered in the total management fees because of the robust momentum witnessed in average FUM. The performance of the company’s funds management operations was decent and, in FY 2018, its cost to income ratio stood at 25% (with the exclusion of the performance fees) while in FY 2017 the ratio was 26.3%. It represents income surged at higher rate than costs.


Magellan’s Funds Management Business (Source: Company Reports)

Magellan to Get Benefited by Infrastructure Opportunities: In Magellan Financial Group’s presentation related to the annual general meeting for FY 2018, the company reflected that the listed infrastructure has been witnessing favorable momentum on the global basis. According to them, with regards to the infrastructure space, the company happens to be in a robust position which could support in terms of growth aspects. It possesses a robust institutional pipeline as well as, in FY 2018, it also witnessed consistent inflows with regards to the retail category. This category happens to reflect significant opportunities, and the company’s infrastructure fund (i.e., Magellan Infrastructure Fund) also allows for the self-directed retail market.

Retail Channel Possesses Robust Opportunities: As depicted by the 2018 AGM presentation, the self-directed retail channel happens to reflect robust opportunities as it has been estimated around $500 Bn by the company. Of which, the company holds $1.3 Bn which represent substantial room for growth in future. With regards to the self-directed space, the opportunity related to the global equities have been estimated by Magellan Financial between $50-75 billion. The self-directed investors who are present in the Australian region happen to be less exposed to the global equities. Moreover, the changes with regards to the marketing strategy are also expected to support topline growth of the company moving forward. 


Historical P/E Band (Source: Company Reports)

Stock Recommendation and Outlook: In the last three months, the stock has fallen 13.66% (as at December 19, 2018) and trading close to its lower level thus posing an attractive opportunity for the investors to acquire the stock at these levels. From the technical standpoint, a technical indicator, Relative Strength Index or RSI, has been applied on the daily chart of Magellan Financial Group and default values have been considered. As per the observation, the 14-day RSI has reached the oversold region, and soon there are expectations that it would encounter a rebound. Therefore, moving forward, there are expectations that the stock price might witness a favorable momentum. On the other hand, there have an improvement in the company key ratios. In FY 2018, the company posted gross margins of 95.8% while in FY 2017, the gross margins were 94.6%. There has been an improvement in the company’s EBITDA margin also from 75.9% in FY 2017 to 78% in FY 2018. These improvements in the ratios coupled with the benefits which acquisitions might provide as well as robust balance sheet further strengthens the confidence about the company’s performance. By looking at current market scenario and expecting decent net flows in coming months, we have valued the stock using P/E multiple and have arrived at the target price that may see an upside of the low double-digit in percentage term, ascribing a valuation of five-year average P/E of ~16x on FY20E EPS. Based on aforesaid tailwinds, we give a “Buy” recommendation on the stock at the current market price of A$23.07 (down 4.194% on December 20, 2018).
 

MFG Daily Chart (Source: Thomson Reuters)

 
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