With the fast-paced recoveries witnessed in Australian markets, the managed funds industry is all set to touch all-time highs. Funds under management rose to ~$4.11 trillion, up by 2.8%, primarily attributed to an upswing in Pension Funds (+3.1%) and Public Offer Unit Trusts (+2.3%) in March 2021. In the same quarter, funds sourced from resident and non-resident investment managers observed an up-tick from ~$1.50 billion to ~$1.63 billion and from ~$1.45 billion to ~$1.65 billion, respectively, on a YoY basis. From an asset allocation front, equity allocation remarked a sharp spurt from 13.8% as of 31 March 2020 to 18.0% as of 31 March 2021, and allocation in overseas assets has improved consistently with global confidence and diversification requirements. As detailed out below, the asset allocation shifts back to pre-COVID levels, with investors assuming greater risk in investments.
Figure 1. Managed Funds Strives to Diversify and Assume Pre-COVID Risk Profile:
Source: Australian Bureau of Statistics, Analysis by Kalkine Group
Total unconsolidated assets of life insurance corporates took a nosedive of 1.4% and stood at ~$126.6 billion in the March 2021 quarter on a QoQ basis. For the year ended 21 March 2021, the insurance industry booked Net Profit After Tax (NPAT) of ~$1.1 billion, significantly down by 28.3% relative to the prior year, according to The Australian Prudential Regulation Authority (APRA).
The COVID-19 pandemic scenario broadly drove the unfavorable financial outcomes, and redemptions on the business interruption insurance claim policy, and decline in industry’s investment income which was critically down by 20.8%, relative to the prior year. In addition, natural catastrophe claims cost increased, predominantly by claims against Halloween hail storm and Queensland flood events. Despite adverse outcomes, aggressive capital raising strategies improved the industry PCA coverage ratio to 1.71x in the year ended 31 March 2021 relative to 1.66x in the prior year. On 3 May 2021, the Insurance Council of Australia (ICA) announced relief for dissatisfied policyholders with a provision to escalate complaints to the Australian Financial Complaints Authority (AFCA) with claims up to ~$1.085 million. The APRA mentioned that the capital coverage ratios of general insurance took a hit during the catastrophes.
Figure 2: Catastrophes Surround Capital Coverage Ratios:
Source: The Australian Prudential Regulation Authority, Analysis by Kalkine Group
Australian superannuation funds registered one of the highest growth rates, which places the value of Australian superannuation funds (~US $2.3 trillion) as the world's fifth-largest. As of 31 March 2021 quarter, the fund’s total unconsolidated assets inclined by 3.1% (QoQ) and reached $3.19 trillion, predominantly attributed to an upswing in equity shares and overseas investment by 5.1% and 7.0%, respectively, partially offset by a 4.9% decline in derivative assets on QoQ basis. A swift recovery is perceived in net contribution flow amidst an increase to ~$10.2 billion, up by 25.2% on a QoQ basis.
Despite the low population size of Australia, the country's asset pool of managed funds grew by 9% CAGR (FY00 – FY20), partly attributed to COVID-19 early release of the super program, which enabled pension holders to withdraw funds to counter COVID-19 challenges, which presented a $36 billion outflow. The program, in turn, cushioned the economy from steep falls in household income and employment. In addition, the Australian Prudential Regulation Authority (APRA) put forth a Liquidity Management Plan (LMP) to regulate the superannuation funds in placing prudent liquidity monitoring and management. As shown below, the superannuation witnessed a sharp outflow during the peak of the pandemic, following the early release scheme, as per the data by APRA.
Figure 3: A Fast-Pace Recovery & Early Release of Super Impact on Net Contribution Flow:
Source: Australian Prudential Regulatory Authority, Analysis by Kalkine Group
Despite a marginal decline in asset quality in recent months, banks have recovered their profitability matrices with generous funding and liquidity. The Common Equity Tier-1 (CET1) capital ratio improved by ~$16.9 billion (+100bps), attributed to improved profitability in the banking system and NAB’s ~$4.25 billion in capital issuance. With the introduction of the Term Funding Facility (TFF), banks’ funding costs have curtailed, and liquidity has spiked. Under refinancing tasks, Banks have withdrawn a sizable $81 billion, with a facility to draw an additional $109 billion by June 2021, which may facilitate increased demand for loans and capital expenditure. As per the Reserve Bank of Australia (RBA), APRA has approved banks to shrink their allocations under the Reserve Bank Committed Liquidity Facility (CLF), reducing total available CLF by ~$84 – 139 billion, which is considered enough to offset the High-Quality Liquid Assets.
Key Risks and Challenges: Although managed funds have diversified into offshore assets, the global pandemic situation has not yet ceased, and therefore systematic risks are dominant. Recent toppling in the insurance industry due to the business interruption insurance claim policy, investment income decline, and AFCA's claim relief for policyholders may delay segment recovery. The $36 billion outflows from superannuation funds with respect to COVID-19’s early release of the super program may obstruct the funds’ long-term operations. Financial operations in a low-interest-rate environment may present repricing risk to the insurance industry subjected to the increased discounted value of insurers' future liabilities.
Figure 4: Key Risks and Challenges
Source: Analysis by Kalkine Group
Outlook: Australia’s business cycle is transitioning from recovery to expansion phase with Gross Domestic Product (GDP) expectations of 4.75% in FY21 and 3.5% in FY22, which may uphold equity investments by managed funds. The Victorian Government's Budget announced $517 million allocations for multiple bushfire risk reduction projects, mitigating catastrophe-related claims against insurers. The Department of Finance has put together a Commonwealth Investment Framework to promptly execute investment proposal & business case development, investment governance, investment implementation, investment management in investment funds, and civilian superannuation schemes. Considering the improvement in managed funds in Australia, we have figured out 4 stocks on ASX that are set to see the momentum.
(1) AMP Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 3.95 billion, Annual Dividend Yield: 0.0%)
Resilient Financial Performance despite Market Volatility: AMP Limited (ASX: AMP) provides wealth management services with its three operating divisions: AMP Australia, AMP Capital, and New Zealand wealth management. During FY20, AMP reported an increase of 1.0% in net interest income (NII), which stood at ~$391 million. However, total revenue declined by 12.6%, amounting to ~$2,331 million, predominantly attributed to underperformance of the Australian wealth management (AWM) segment, which plunged from $1,262 million to $1,062 million, in turn, caused by significant investment volatility. Nevertheless, substantial uncertainties in the investment portfolio, statutory NPAT stood at $177 million, a remarkable recovery from FY19 loss of $2,467 million.
During Q1FY21, assets under management (AUM) of AWM increased by $1.6 billion due to improved investment markets. In addition, the AMP Bank segment reported enhanced performance in issuing owner-occupied loans, which lead to an increase in loan book to $20.8 billion relative to $20.6 billion in Q4FY20. In contrast, AUM of AMP Capital declined by 1.7% and stood at ~$186.5 billion, primarily driven by the segment's net cash outflows from divestments in global companies' capability and NZ REIT Precinct Properties New Zealand Limited.
Outlook: AMP aims to deliver $300 million in cumulative gross cost savings in FY22 and $130 million in FY21. The company focuses on expanding its private market footprint in the asset management domain via continued investments of over $4 billion in quality infrastructure and real estate opportunities. With a techno-centric view, AMP shall establish a viable and competitive business model in Australian Wealth Management.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs AMP (Source: REFINITIV)
Stock Recommendation: Over the last six months, the stock of AMP went down by ~32.47%. The stock made a 52-weeks low and high of $1.050 and $1.970, respectively. The stock underperformed the market volatility index. We have valued the stock using the Price/Book Value multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). We believe that the stock can trade at a slight discount as compared to its peer median Price/Book Value (NTM trading multiple) considering the recent decline in AUM of AMP capital and top-line unsustainability in FY20. We have taken peers like Bank of Queensland Ltd (ASX: BOQ), Challenger Ltd (ASX: CGF), Earlypay Ltd (ASX: EPY), to name a few. Considering the decent performance in Q1FY21, achievable targets on cumulative gross cost savings, investment diversification to infrastructure and real estate, current trading levels, and valuation, we give a ‘Buy’ rating on the stock at the current market price of $1.175, up by 2.173% as on 7 June 2021.
(2) Moneyme Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 258.01 million, Annual Dividend Yield: 0.0%)
Fundamentals Outrun Prospectus Forecast: Moneyme Limited (ASX: MME) is involved in retail consumer finance. For FY20, revenue stood at ~$47.7 million, considerably up by 49% YoY. Pro-forma EBITDA and loan originations outran prospectus forecast and stood at ~$3.2 million (+10.5% YoY) and ~$179 million (+53% YoY), respectively. Average revenue earned per loan inclined to ~$1,600 in FY20 relative to ~$920, and subsequently, average loan value improved from $3,400 in FY19 to $6,100 in FY20, exceeding prospectus forecast.
In H1FY21, receivables growth witnessed a steep uptick of 32%, touching record gross receivables of ~$167.5 million. Revenue stood at ~$23.9 million, up by 12% on a pcp basis. MME’s operating efficiencies improved due to a 24% decline in cost of funds, a 14% downfall in net charge off, and core operating costs (% of customer receivables) stood at 11.8% relative to 13.2% in H1FY20.
Outlook: MME looks forward to scaling up their operations with new product launches coupled with expansion in distribution for MoneyMe+ into buy now pay later business model. Provisioning reduced to 7.9% during H1 FY21 as a result of improved macroeconomic outlook.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs MME (Source: REFINITIV)
Stock Recommendation: Over the six last months, the stock of MME went up by ~5.63%. The stock made a 52-weeks low and high of $0.920 and $2.000, respectively. The stock performed well over the market volatility index. We have valued the stock using the Price/Book Value multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). We believe that the stock can trade at some premium as compared to its peer average Price/Book Value (NTM trading multiple) considering significant upswing in lending activities, actuals outrunning prospectus forecasts, and higher operational adaptability. We have taken peers like Plenti Group Ltd (ASX: PLT), Zip Co Ltd (ASX: ZIP), Credit Corp Group Ltd (ASX: CCP), to name a few. Considering the outperformance in H1FY21, lower provisioning with a positive macroeconomic outlook, improving operational efficiencies, current trading levels, and valuation, we give a ‘Buy’ rating on the stock at the current market price of $1.500, down by ~0.333% as on 7 June 2021.
(3) Bendigo and Adelaide Bank Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 5.95 billion, Annual Dividend Yield: 2.59%)
Improved Commercials have Past Recovery Phase: Bendigo and Adelaide Bank Limited (ASX: BEN) provides retail banking such as personal, business, wealth, and community banking. Amidst the COVID-19 crisis during FY20, BEN's cash earnings nosedived to $301.7 million from $415.7 million in FY19, and NPAT nosedived to $192.8 million from $376.8 million in FY19, primarily attributed to increased credit expenses, increased staff costs due to organizational restructuring and stimulated investments in the technology front. Contrarily, an uplift in lending activities magnified net interest income (cash basis) by 2.9% on a YoY basis, while Net Interest Margin declined from 2.36% in FY19 to 2.33% in FY20.
H1FY21 sought significant improvements despite COVID-19 in the backdrop. Total lending and total deposit growth increased by 9.2% and 16.9%, respectively—subsequently, net interest income inclined to $711.4 million, up by 5.2% on pcp basis. As a result, after-tax cash earnings outpaced to $219.7 million relative to $215.7 million reported in pcp. Favorable financial and operating performance was attributed to growth in lending portfolios, 15.9% decline in credit expenses, and increased hedging revenue.
Outlook: BEN aims for cash operating expenses to stay flat to slightly below $1,021.5 million in H2FY21. CET1 ratio is expected to range between 9% and 9.5% amidst continued growth in lending activities. On the asset quality front, BEN seeks improving house prices, lower unemployment, stability in GDP, and improving commercial property prices in a base case scenario which may uplift asset quality.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs BEN (Source: REFINITIV)
Stock Recommendation: Over the six months, the stock of BEN went up by ~16.79%. The stock made a 52-weeks low and high of $5.800 and $11.680, respectively. The stock outperformed the market volatility index. We have valued the stock using the Price/Book Value multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). We believe that the stock can trade at a slight premium as compared to its peer median Price/Book Value (NTM trading multiple) considering significant upswing in lending activities, under-controlled credit expenses, and increased hedging revenue. We have taken peers like Bank of Queensland Ltd (ASX: BOQ), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ), to name a few. Considering the improving asset quality, controlled cash operating expenses & CET1 ratio, current trading levels, and valuation, we give a ‘Hold’ rating on the stock at the current market price of $10.780, down by ~1.011% as on 7 June 2021.
(4) Platinum Asset Management Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.80 billion, Annual Dividend Yield: 4.81%)
Offshore Funds kept Resilience Intact: Platinum Asset Management Limited (ASX: PTM) is engaged in asset management, financial planning, and financial advisory services. During FY20, funds under management declined by 6% and stood at $23.7 billion. Total revenues remained almost flat with a decrease of less than 1% due to a 7% decline in base fee revenue being offset by a higher performance fee. PTM took a robust portfolio management approach which significantly increased performance fees from ~$30,000 in FY19 to ~$9.08 million in FY20.
In H1FY21, closing FUM improved by 10% relative to H2FY20 and declined by 6% relative to H1FY20. As a result, net outflows declined from $1,292 million in H1FY20 to $1,047 million in H1FY21. The management fee declined by 12% (on a pcp basis) due to an 11% decline in average funds under management. On the contrary, performance fees increased by ~$3.7 million, primarily driven by solid performance in the Asia Ex-Japan portfolio. Further, compelling returns in all UCITS strategies and $9.4 million from Cayman funds and platinum trust holdings resulted in an 8.5% increase in total revenue.
Outlook: Platinum international portfolio and platinum Asia portfolio outperformed benchmarks for the three, six, and twelve months to 31 January 2021. The operations and fund management is expected to stay resilient with a strong position in the Australian Market.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs PTM (Source: REFINITIV)
Stock Recommendation: Over the last six months, the stock of PTM went up by ~9.13%. The stock made a 52-weeks low and high of $3.020 and $5.140, respectively. The stock performed well over the market volatility index. We have valued the stock using the Price/Book Value multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). We believe that the stock can trade at a slight premium as compared to its peer median Price/Book Value (NTM trading multiple) considering its diversification to offshore portfolios, and improved earnings results. We have taken peers like Magellan Financial Group Ltd (ASX: MFG), Pinnacle Investment Management Group Ltd (ASX: PNI), Hub24 Ltd (ASX: HUB), to name a few. Considering the strong fund performance, international diversification, improving operational efficiencies, current trading levels, and valuation, we give a ‘Hold’ rating on the stock at the current market price of $4.780 as on 7 June 2021.
Comparative Price Chart (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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