Company Overview: Magellan Financial Group Limited (ASX: MFG) is a specialist fund manager that offers investment opportunities to high net worth and retail investors in Australia and New Zealand, and institutional investors globally. The company has four core investment strategies – Global Equities, Global Listed Infrastructure, Sustainable and Australian Equities (via Airlie Funds Management). The company was listed on ASX on 1^st July 2004.

MFG Details

Committed to Provide Returns Over 9% Per Annum

• Decent Investment Track Record: Over the past 14 years, MFG has consistently achieved its investment objective of providing a return of over 9% per annum. Since 1 July 2007, MFG has delivered a return of 11.9% per annum (net of fees).
• Improving Top Line: Supported by the growing average FUM and increasing management fees, the company’s top line has increased at a CAGR of ~20.58% from FY17-FY21.
• Established Dividend Reinvestment Plan: In order to gain additional funding flexibility, MFG recently established a Dividend Reinvestment Plan (DRP) to allow shareholders to reinvest all or portion of their dividends at a small discount to the market price with no brokerage charges.

5-Year Financial Summary (Source: Analysis by Kalkine Group)

FY21 Financial Results Highlights: On 17 August 2021, the company released its financial results for the year ended 30 June 2021. The highlights of the results are as follows:

• Launch of New funds and Strategic Initiatives: During FY21, MFG launched various strategic initiatives and several new funds, including MFG Core Series, Magellan Sustainable Fund and Magellan FuturePay.
• Increase in Average FUM: Average funds under management (FUM) for FY21 stood at $103.7 million, up by 9% on FY20, underpinned by decent performance of funds management business.
• Decline in NPAT: Due to the significant rise in transaction costs related to strategic initiatives, and lower performance fees, MFG witnessed a 33% decline in net profit after tax to ~$265.2 million.
• Increase in Investment Assets: As at 30 June 2021, the company’s investment assets (cash and cash equivalents, financial assets, and investments in associates) stood at $902.9 million, up from $836.0 million as at 30 June 2020.

Track Record of Paying Decent Dividends: For H2FY21, MFG has declared a dividend of 114.1 cents per share (75% franked), comprising a final dividend of 102.6 cents per share and a performance fee dividend of 11.5 cents per share. This took the total FY21 dividend to 211.2 cents per share, down by 2% on FY20. The final dividend has a record date of 24 August 2021 and a payment date of 23 September 2021. From FY17 to FY21, the company’s dividend grew at a CAGR of ~25.33%. At CMP of $44.36, the company’s annual dividend yield stood at 4.76%, higher than the average 5-year dividend yield of 4.0%. MFG’s dividend policy of distributing 90%-95% of profit of Funds Management business (excluding crystallised performance fees) and its recently announced Dividend Reinvestment Plan are some of the key investment points for dividend-seeking investors.

Dividend Trend (Source: Analysis by Kalkine Group)

Key Metrics: Gross margin for FY21 stood at 97.2%, slightly down from 97.3% in FY20. EBITDA margin for FY21 stood at 85.9%, slightly higher than 83.3% in FY20. Current ratio for FY21 stood at 1.59x, down from 9.83x in FY20, mainly due to the decline in loans and receivables and increase in current financial liabilities. Debt to equity ratio for FY21 stood at 0.01x, lower than the industry median of 0.51x.

Profitability Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 32.95% of the total shareholding, while the top four constitute the maximum holding. Douglass (Hamish Macquarie) and Magellan Equities Pty. Ltd. are holding a maximum stake in the company at 12.09%  and 9.36%, respectively, as also highlighted in the chart below:                           

(Source: Analysis by Kalkine Group)

Key Risk:

• Competition Risk: There are several existing investment professionals and new companies regularly developing new products and establishing funds management businesses, exposing the company to competition risk.
• Foreign Currency Risk: The fair value or cash flows arising from revenues could fluctuate due to changes in foreign exchange rates.

Outlook: The objective of the company’s global equity strategy is to achieve a minimum average return of 9% per annum net of fees over the medium to long term while minimising the risk of a permanent capital loss.  For FY22, the company expects Funds Management business expenses to be in the range of $125-$130 million. MFG is of the view that its newly launched funds are uniquely positioned to address different issues that its clients face. Further, the company believes that the new funds have the potential to provide financial benefits in the long-term.

Valuation Methodology: P/E  Multiple Based Relative Valuation (Illustrative)

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: MFG recently became a substantial holder of Nobleoak Life Limited with ~5.03% of voting power and ~4,223,603 ordinary fully paid shares. The stock of MFG has been corrected by ~14.87% in the last one month and ~7.0% in the last three months. The stock is currently trading lower than the average 52-week price level band of $42.01 -$64.44. The stock has been valued using P/E multiple based illustrative relative valuation method and have arrived at a target price of a low double-digit upside (in % terms). The company can trade at a slight premium to its peers, considering the rise in average FUM, expected long-term financial benefits of newly released funds, and modest outlook. For the valuation purpose, peers such as Pendal Group Ltd (ASX: PDL), Perpetual Ltd (ASX: PPT), Platinum Asset Management Ltd (ASX: PTM), etc., have been considered. Considering the company’s track record of providing a return of ~9% per annum, rewarding shareholders via dividends, long-term financial benefits of newly released funds, increasing investment assets, current trading levels, and valuation, we give a “Buy” rating on the stock at the current market price of $44.36, down by ~2.911% as on 26 August 2021.

MFG Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: 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.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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