Company Overview: Magellan Financial Group Limited (ASX: MFG) is a specialist fund manager for retail investors in Australia and New Zealand and institutional investors located around the world. MFG has a track record for creating and safeguarding wealth for its investors. The company has four core investment strategies – Global Equities, Global Listed Infrastructure, Sustainable and Australian Equities (via Airlie Funds Management). The company’s Funds Management segment is its core business and is the driver of its revenues and profitability.
MFG Details
Decent Bottom-line Growth Supported by Rising Average FUM: Magellan Financial Group Limited (ASX: MFG) is a specialist fund management company that manages investments in global equity and infrastructure strategies for clients based around the world. As on 13 May 2021, the company’s market capitalisation stood at ~$8.34 billion. The company’s strategy is focused on delivering capital efficiency, solid dividends and attractive returns for shareholders. Despite the considerable uncertainty and market volatility caused by the COVID-19 pandemic, MFG saw a 25% YoY growth in its FY20 management and services fees and 5% growth in net profit after tax, demonstrating the resilience of MFG and its focus on protecting investors’ capital. Due to the increase in NPAT, MFG was able to increase its FY20 total dividends by 16% to 214.9 cents per share. From 2016 to 2020, the company’s NPAT grew at a CAGR of ~18.88%.
Looking ahead, the company is focused on maintaining a robust balance sheet in proportion to the scale of its business to ensure the continued support of its clients. The company is seeking to make investments in high quality businesses that could improve the company’s future earnings. In line with its strategy of diversifying its revenue stream, MFG has restructured Global Equities retail funds and has launched MFG Core Series for retail investors. From its recently launched, MFG Core Series, the company expects to provide investors an attractive lower cost alternative to gain exposure to MFG’s research and investment expertise. MFG is now planning to launch a retirement income product for the Australian market.
5-Year Financial Summary (Source: Refinitiv, Thomson Reuters, Company reports)
Decent Rise in H1FY21 Management and Services Fees: For the half year ending 31 December 2020, the company reported management and services fees of $311.4 million, up from 8% on the previous corresponding period (pcp). MFG witnessed 9% YoY growth in average funds under management (FUM) to $100.9 billion in H1FY21. Average Retail FUM increased by 10% and average Institutional FUM increased by 8% in H1FY21, as compared to pcp. Net profit after tax stood at $202.3 million In H1FY21, up by 3% on pcp. Total net inflows for H1FY21 stood at $3.7billion. Over the half-year period, MFG completed several important initiatives, including the restructure of its global equities retail funds, the launch of the Magellan Sustainable Fund and the MFG Core Series. The company also made principal investments in Barrenjoey Capital Partners, FinClear Holdings Limited and Guzman y Gomez (Holdings) Limited. As at 31 December 2020, the company had a cash balance of $338.8 million.
H1FY21 Results Highlights (Source: Company Reports)
Decent Performance in FY20 Amidst Challenging Environment: During FY20, MFG’s average funds under management grew by 26% to $95.5 billion, as compared to FY19. The growth in average FUM led to a 25% increase in management and services fees to $591.6 million. MFG’s net profit after tax increased by 5% to $396.2 million in FY20. One of the important highlights of FY20 was the completion of initial public offering of the Magellan High Conviction Trust, which raised around $862 million.
FY20 Results Highlights (Source: Company Reports)
Decent Dividend History: The Company’s dividend policy is to pay interim and final dividends of 90% to 95% of the net profit after tax of the Group’s Funds Management business excluding performance fees. For FY20, MFG paid a total dividend of 214.9 cents per share, up 16% on FY19. From 2016 to 2020, the company's dividend grew at a CAGR of 24.55%. For H1FY21, MFG paid an interim dividend of 97.1 cents per share (75% Franked), up 5% on pcp, reflecting the increase in the underlying profitability of the funds management business before performance fees. At the current market price of $45.41, the company’s annual dividend yield stood at ~4.82%, higher than the 5-year average dividend yield of ~4.02% and, thus, it looks like that MFG has been generating decent income for its shareholders, which might attract the attention of dividend-seeking investors.
Dividend Trend (Source: Company Reports)
Key Metrics: For H1FY21, the company reported 97.1%, higher than the industry median of 94.2%. Further, the company reported EBITDA margin of 84.6%, up from 81.4% in H2FY20. Current ratio for H1FY21 stood at 13.24x, up from 9.83x in H2FY20, demonstrating that the company has improved its ability to pay short-term obligations.
Liquidity Profile & Profitably Metrics; Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
Top 10 Shareholders: The top 10 shareholders together form around 32.86% of the total shareholding, while the top four constitutes the maximum holding. Douglass (Hamish Macquarie) and Magellan Equities Pty. Ltd. are holding a maximum stake in the company at 12.09% and 9.37%, respectively, as also highlighted in the chart below:
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
April Month Update: As at 30 April 2021, MFG had Retail FUM of $30,244 million, up from $29,033 million reported in the month of March 2021. Institutional FUM stood at $80,183 million in April month, up from $77,021 million in the previous month. MFG had a Total FUM of $110,427 million as at 30 April 2021. Global Equities, Infrastructure Equities, Australian Equities stood at $82,884 million, $18,634 million and $8,909 million, respectively.
Launch of MFG Core Series and Magellan Sustainable Fund: On 15 December 2020, MFG announced the launch of the MFG Core Series and Magellan Sustainable Fund on Chi-X securities exchange. The series is comprised of the MFG Core International Fund (Ticker: MCSG); the MFG Core ESG Fund (Ticker: MCSE); and the MFG Core Infrastructure Fund (Ticker: MCSI). The reason behind this launch is to offer investors lower cost more diversified portfolios of high-quality companies. The Magellan Sustainable Fund (Ticker: MSUF) will allow investors to invest in global equities portfolio of high-quality companies with meaningfully lower carbon factor risk than global markets.
Magellan Global Fund Partnership Offer Update: The Magellan Global Fund Partnership was closed on 23 February 2021 and MFG received applications from more than 30,000 unitholders totalling approximately $726 million. Investors who participated in the Partnership Offer will receive additional Closed Class Units worth 7.5% of their subscription; and one MGF Option (ASX: MGFO) for each Closed Class Unit allotted under the Partnership Offer. Notably, these benefits will be funded by MFG and not by the Magellan Global Fund or unitholders.
Key Risks: The company is exposed to the risks related to the fluctuations in the foreign currency exchange rates. The company is also exposed to the risks created by the COVID-19 pandemic, as it could cause deterioration in the market.
Outlook: Looking ahead, the company is focused on launching a retirement income product for the Australian market. MFG has already obtained a necessary private binding tax ruling from the Australian Taxation Office and is now working with the remaining regulators to receive all the necessary approvals for the launch. MFG is also focused on earning satisfactory returns on its Principal Investments portfolio over time while maintaining capital strength to underpin the Group’s business. For FY21, the company expect Funds Management business expenses to be at the lower end of the $110-$115 million range.
Valuation Methodology: Price-to-Earnings Multiple Based Relative Valuation (Illustrative)
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.
Stock Recommendation: Over the last six months, the stock of MFG has corrected by 25.75% and is trading lower than the average 52-week price level band of $42.010 - $66.000, offering a decent opportunity for accumulation. We have valued the stock using P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight premium to its peer average P/E (NTM trading multiple), considering the rise in average FUM, improved current ratio, and modest long-term outlook. We have taken peers like Pendal Group Ltd (ASX: PDL), Perpetual Ltd (ASX: PPT), Platinum Asset Management Ltd (ASX: PTM), etc. Considering the company’s decent H1FY21 results, improved average FUM in April 2021, launch of MFG Core Series and Magellan Sustainable Fund, current trading level and valuation, we give a “Buy” recommendation on the stock at the closing price of $45.410, up by 0.022% as on 13 May 2021.
MFG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
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