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

Strong Growth Stemming from Higher FUM and Base Fees: Magellan Financial Group Ltd (ASX: MFG) ended FY 2018 with average funds under management or FUM of $59.0 billion representing a year on year (YoY) increase of 29%. This strong growth was aided by the net inflows, investment performance as well as the acquisition of Airlie Funds Management. In the same period, the company generated revenues amounting to $452.6 million reflecting the YoY growth of 34% mainly helped by the robust growth momentum in other revenues. However, the company witnessed double-digit growth in the management, service as well as performance fees on the YoY basis.

Further, the Group’s statutory profit after tax grew by approximately 8% to $211.8 million against the prior year. Besides this, the board of Magellan Financial Group has reviewed the capital requirements and stated that the company presently enjoys the strengthened balance sheet and that lower amount of capital is required to help the business activities as well to witness the organic growth. Moreover, the company expects that there are substantial opportunities to grow organically and that the company has enough capital to tap the opportunities. It might also opt for recycling of the capital from the principal investments. In FY 2018, Magellan Financial Group encountered total net inflows amounting to $4.4 billion and the company saw higher inflows from the institutional clients. However, the company saw retail net inflows amounting to $1.9 billion while institutional net inflows stood at $2.5 billion. Magellan Financial Group is currently trading at P/E of 21.34x; but given the good growth rate in the business across all the regions and continuous good performance in the past few years, the stock is estimated to be valued at about 17x P/E (5-year average 1 year forward multiple) on FY20E EPS of about $1.8. This indicates a target price upside of low double digit in terms of percentage. Key risks include permanent capital loss, the impact of equity market challenges, investor inflows and company earnings, and changes in the regulatory framework.

Key Financial Metrics:

 

Marginal Decline in September 2018 FUM: Magellan Financial ended September 2018 with total FUM of $74.5 billion which represents a marginal decline month-over-month. In August 2018, the company ended with FUM of $74.6 billion. This decline was witnessed mainly because of lower inflows from the Institutional investors in the Australia/NZ as well as North America. In FY 2018, the company saw an increase of 29% with respect to management, service as well as performance fees. The company’s FUM at the end of June 2018 was the primary contributor to this growth (72%). However, net inflows and Airlie acquisition had contributed 21% and 7%, respectively. The management of the company has regarded the 2018 year as a “busy one” mainly because it has done the acquisitions of Frontier as well as Airlie.

They stated that these acquired businesses are complementary to the business of Magellan. In FY 2018, the company got through with the initial public offering or IPO of Magellan Global Trust and has raised the sum of $1.57 billion. The company believed that it could be highly beneficial for the shareholders.


MFG’s growth drivers for fees (Source: Company Reports)

Revised Dividend Policy Could be an Attraction for Shareholders: MFG in FY 18 has revised the dividend policy and uplifted the payout ratio in between 90% and 95% of the funds management business net profit after tax from the prior payout of 75-80%. This new policy reflects approximately a 20% rise in total cash dividends as compared to the old dividend payout policy. In FY 2018, the company has managed to distribute total dividends of 134.5 cents per share which implies the YoY growth of 57%. Moreover, the payment of dividends will be subjected to corporate, legal and regulatory considerations. Furthermore, the combination of the new higher payout ratio and the current average tax rate of approximately 22% (due to the Offshore Banking Unit, OBU) will imply that future dividends are probably going to be partly franked. In our view, this revised version of dividend policy could be an attraction for its new and existing shareholders to retain a long-term relationship with the company.


Total Dividend Paid and Payout Ratio Trend (Source: Company Reports)

Geographical Contribution towards Magellan’s Fees: In FY 2018, Magellan Financial managed to generate total management, service as well as performance fees amounting to $425.5 million which implies the YoY growth of 29.4%. In FY 2017, it generated $328.8 million. This rise was helped by increased fees from all the regions. Wherein Australia region contributed $283.3 million while the United Kingdom & Ireland have made a contribution of $73.8 million to the total management, services as well as performance fees and the remaining contribution for total management, services and performance fees accounted from U.S., Canada, and Asia regions.


Geographical Contribution towards Magellan’s Fees (Source: Company Reports)

Improving Cost-to-Income (CTI) Ratio: Overall, the funds management business operated efficiently with a cost to income ratio (excluding performance fees) of 22.7% in 2018 compared with 24.6% in FY17, representing income surged at higher rate than costs. Hence, we believe that the company will continuously to improve its cost-to-income ratio on the back of strong investment performance, net inflows and the acquisition of Airlie.



Higher Return Ratio than Industry Median: Historically, the company maintained its RoE above 39% which is higher than the industry median of 10.5%, signifying consistently higher fund growth over the period. In our view, MFG will improve RoE from current level in years ahead on the back of decent growth in Retail and Institutional FUM.

 


Drivers for Future: MFG is well-positioned to witness a strong momentum moving ahead primarily because of the strong balance sheet. The company’s decision to increase the dividend pay-out ratio might aid it in attracting the attention of the market participants. Moreover, the company’s decision of acquiring Frontier as well as Airlie is expected to pay-off moving forward. The company’s balance sheet was further strengthened as a result of the acquisitions.

The management of Magellan Financial believes that the company enjoys robust capital base which would help it to maintain the balance sheet in line with the business’s scale. Moreover, the management stated that this strong capital base would also help in the product development as well as to undertake the new initiatives. However, there could be minor headwinds for the company moving forward. The company’s net inflows might witness the negative impacts because of the disturbed global business environment as well as dampened investors sentiments. On the other hand, the management is confident that the movements in the funds under management would be dominated by the investment performance. Needless to say, these factors i.e. inflows and investment are directly related to the funds under management of the company.
 

PE Band (Source: Company Reports and Thomson Reuters)

Stock Performance and Outlook: Over the past six months, Magellan Financial has delivered a decent return of 12.54%. The company’s stock price would remain sensitive to the global macro events and to the investors’ sentiments. Any global impacts which would hurt the investors’ sentiments could impact the company’s funds under management which would, in turn, reflect in the stock price. However, group’s fundamentals still remain strong and can withstand the challenging environment to a significant extent.

On the daily chart of Magellan Financial, two technical indicators have been applied i.e. Moving Average Convergence Divergence or MACD and Exponential Moving Average or EMA by considering the default values. As per the observation, the MACD line has crossed the signal line and is moving downwards. The stock price has crossed the EMA and is witnessing a declining momentum. This looks to be influenced by the prevailing weak environment at broad level.

Magellan Financial Group is currently trading at P/E of 21.34x. At present, the group has a very solid balance sheet with sufficient capital which will support the ongoing growth of the business and seed future new initiatives. Given the good growth rate in the business across all the regions and continuous good performance in the past few years, the stock is estimated to be valued around 17x P/E (5-year average 1 year forward multiple) on FY20E EPS of about $1.8. The stock price upside is thus indicated to be about low double digit in terms of percentage. We recommend a “BUY” on the stock at the current price of $24.74. Key risks are permanent capital lost, the impact of an equity market, investor inflows and company earnings, and changes in the regulatory framework.
 

MFG Daily Chart (Source: Thomson Reuters)

 
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