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. The investment objective of the company’s Global Equities strategy is to achieve attractive risk-adjusted returns over the medium to long term while reducing the risk of permanent capital loss. The company was listed on ASX on 1st July 2004.

MFG Details

2021 AGM Highlights: On 21 October 2021, MFG held its 2021 Annual General Meeting (AGM), wherein, the company’s management highlighted that MFG has around $30 billion of funds under management across five different areas, namely, Infrastructure, Australian Equities (Airlie), ESG/Sustainable, MFG Core Series and FuturePay. The management also highlighted several key points, which are as follows:

• Making Investments for the Future: To add additional earnings streams and create a more robust and diverse business, MFG has made a number of investments outside its Funds Management business, including investments in Barrenjoey Capital Partners Group, Guzman y Gomez (Holdings) Limited; and FinClear Holdings Limited.
• Large Institutional Business: At the AGM, the management highlighted that MFG has a very large institutional business with over $80 billion in funds under management across more than 130 relationships globally.
• New Products Launched: During FY21, MFG launched several new funds, including MFG Core Series, Magellan Sustainable Fund, and Magellan FuturePay.

Key Takeaways from FY21 Results Highlights:

• 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. Notably, from 2017 to 2021, the company’s Average FUM has increased at a CAGR of 22.8%.
• Rise in Total Group Revenue: MFG’s total group revenue for FY21 stood at $715.01 million, up from $693.95 million in FY20.
• Rise in Profit Before Tax and Performance Fees: Profit before tax and performance fees of the Funds Management business stood at $526.6 million in FY21, reflecting a growth of 10% over pcp, supported by a rise in average funds under management as well as cost efficiencies. From 2017 to 2021, the profit before tax and performance fees has grown at a CAGR of 23.4%.
• Decline in Statutory NPAT: MFG witnessed a 33% YoY decline in statutory net profit after tax to $265.2 million, mainly due to the significant rise in transaction costs related to strategic initiatives, and lower performance fees.

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

Decent Dividend History: From FY17 to FY21, the company’s total dividend grew at a CAGR of ~25.33%, demonstrating the company’s focus on rewarding shareholders through dividends. For H2FY21, the company paid a total dividend of 114.1 cents per share, which comprised a final dividend of 102.6 cents per share and a performance fee dividend of 11.5 cents per share. This took the total dividend for FY21 to 211.2 cents per share. 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. At a CMP of $36.24, the company’s annual dividend yield stood at 5.93%, higher than the average 5-year dividend yield of 4.0%.

Dividend History (Source: Analysis by Kalkine Group)

Key Metrics: EBITDA margin for FY21 stood at 85.9%, up from 83.3% in FY20. Gross margin for FY21 stood at 97.2%, slightly down from 97.3% in FY20. Debt to equity ratio for FY21 stood at 0.01x in FY21 vs 0.02x in FY20. Cash cycle for FY21 stood at 64.8 days, down from 69.5 days in FY20. Current ratio for FY21 stood at 1.59x, down from 9.83x in FY20.

Profitabilty Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 32.71% 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 12.00% and 9.30%, respectively, as also highlighted in the chart below:

(Source: Analysis by Kalkine Group)

Funds Under Management Update: As on 30^th September 2021, the company reported total funds under management of $113,304 million, as compared to $117,955 million as on 31^st August 2021. During the September 2021 quarter, the company recorded net outflows of $1,527 million, which consist of $617 million of net retail outflows and net institutional outflows of $910 million. On 20 October 2021, the company announced the appointment of John Eales AM as Chair of the Remuneration and Nominations Committee.

Key Risk:

• Market Movement Risk: The company’s financial results are exposed to the risks related to the fluctuations in both equity and currency markets.
• 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.

Outlook: Looking ahead, the company is focused on expanding its core Funds Management business outside of its global equities franchise to further enhance the quality of its business. Due to the roll out several new funds and strategic initiatives, the company seems well placed to address the market needs. Further, the company believes that the new funds have the potential to provide financial benefits in the long-term. For FY22, the company expects its Funds Management business expenses in the range of $125-$130 million.

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: The stock of MFG has corrected by ~32.25% in the last three months is currently trading lower than the average 52-week price level band of $31.34 -$63.48. 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 benefits from 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 improving average FUM, large institutional business, additional earnings streams expected from recent investments, current trading levels, valuation, and key risks associated with the business, we give a “Speculative Buy” rating on the stock at the current market price of $36.24, as on 21 October 2021, 11:06 AM (GMT+10), Sydney, Eastern Australia).

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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