Company Overview: Navigator Global Investments Limited, formerly HFA Holdings Limited, is a holding company. The Company is engaged in the provision of investment management products and services to investors globally via Lighthouse Investment Partners, LLC (Lighthouse). The Company has one segment, being the United States-based Lighthouse Group, which operates as a global absolute return funds manager for the United States and Cayman Island-based investment vehicles. Lighthouse is an investment manager dedicated to managing multi-manager hedge funds for diversification and absolute return. Lighthouse has offices in New York, Chicago, Palm Beach Gardens, London and Hong Kong. Lighthouse has an investor base that spans North America, Europe and Asia, and includes high net worth individuals, family offices, endowments, foundations, trusts, investment banks, benefit plans, pension funds, healthcare and insurance companies.
 

NGI Details

December’19 Performance Sparks Optimism: Navigator Global Investments Limited (ASX: NGI) provides investment management products and services to investors across the globe through Lighthouse Investment Partners, LLC, a wholly-owned subsidiary. In FY19, NGI generated its revenue in four forms – Management fee, Performance fee, Reimbursement of fund operating expenses, and Revenue from provision of office space and services. During the year ended 30^th June 2019, the company reported a substantial increase in management fee revenue, which stood at US$105.4 million. Growth in management fees was driven by a combination of factors, including the transition of Mesirow Advanced Strategies (MAS) assets worth US$5.4 billion on 1^st July 2018 and higher average AUM on other assets. The company also generated its revenue in the form of performance fee, which reported a decline during FY19 due to lower investment performance across the portfolios. In addition, the company is also entitled to receive reimbursement for the expenses incurred on behalf of the funds. During the year, reimbursable fund operating expenses came in at US$6.3 million, as compared to US$4.7 million in the prior corresponding year. The company also provides office space facilities to external parties at its London and New York offices, which forms another source of revenue.

As per the latest performance update for the quarter ended 31^st December 2019, the company has reported a strong investment performance, that drove expectations for performance fee revenue. The company expects a higher than normal performance fee to be recognised during December, which has not been taken into account for calculating the FY20 EBITDA guidance due to uncertainty associated with the estimation of performance fee. However, the company now anticipates EBITDA for FY20 to be higher than the guidance issued. During the quarter, the company continued to strengthen its client relationships and received additional inflows worth US$385 million from a big customised solutions client. 

The company updated that the MAS assets acquired in July 2018 will continue to be accretive to the Group’s operating result. As the client relationships strengthen, it will continue to provide them with full benefits out of its platform. As a part of its strategic goals, the company will focus on differentiating its processes and products from the competitors and deliver on the investment objectives of its clients while maintaining a high quality of service.

Over the period covering FY17-FY19, the company has reported an upward trend in management fee revenue. As discussed above, FY19 management fee increased at a rate of 40% on FY18, as a result of a contribution from the transition of MAS assets to Lighthouse on 1^st July 2018. Since the acquisition, the transaction has proved to be accretive to EBITDA and is expected to continue to be accretive as the client relationships settle. EBITDA for FY19 also increased to US$37.7 million, up 10% on the previous year EBITDA of US$34.2 million. As a result of an improvement in performance, the company reported an increase in dividends by 6%. Over the last two years, dividends paid by the company have also shown an upward trend, building increased confidence in its performance.


Management Fee and Revenue (Source: Company Reports)

December Quarter Performance Update: As at 31^st December 2019, the company reported total Group AUM at US$13.37 billion. The quarter was characterised by a strong investment performance, especially for the month of December. This resulted from the strong returns delivered by global equity and relative value strategies. The positive trend across both the long and short portions of its portfolios has also continued in January, which signals an even better future. As a result of the strong investment performance, the company expects to recognise a substantial amount in performance fee for December, which could not contribute much to FY19 results due to low investment performance. The expectation for a higher than normal fee is directly attributable to multi-strategy portfolios, some customised solutions client portfolios, and diversified investment strategies across portfolios. At the end of the period, AUM from MAS funds stood at $2.0 billion, reflecting a reduction on account of net inflows worth $695 million for the quarter.

Highlights of FY19: During the year, the company achieved a milestone in terms of opening AUM of the Group. As at 1^st July 2018, opening AUM came in at $16.7 billion, reflecting an important year of asset raising by Lighthouse and the contribution from transitioning of MAS assets. During the year, the company generated total revenue amounting to US$114.87 million, up 28% on the previous year’s revenue of US$89.57 million. As a result of the acquisition of MAS assets, management fee for the year went up by 40% to US$105.4 million on the previous year. EBITDA for the year came in at $37.7 million, representing an increase of 10% on the prior corresponding year. Total dividend for the year came in at 17.0 cents per share, up by 6% on the prior corresponding year dividend of 16.0 cents. Total no of employees at the end of the period stood at 139, increasing substantially on FY18 due to the transition of MAS assets. Operating expenses for the year were higher on the previous year by $19.4 million, due to the increase in scale of operations on account of MAS acquisition and integration activities. Furthermore, the company also incurred expenses for the enhancement of investment processes and technology platforms across the business. 


FY19 Results (Source: Company Reports)

As part of its major developments during the period, the company reported good progress on the integration of the MAS assets over the past 12 months, which have proved to be value accretive for the business. Another focus area has been the evolution of the current service model to offer its managed account platform for customised use of clients. As per the recent business update released on 20^th November 2019, the company reported that it has been conducting high-quality conversations across the commingled and custom funds. As a result, it witnessed over US$300 million in inflows from existing clients and anticipates further inflows in Q1 CY20.

Cost Rationalisation: The company also talked about its cost rationalisation initiative, which included a reduction in the headcount to bring down the employee expenses. The cost restructuring was aimed at reducing the employee expenses for the 2^nd half of FY19 by ~9.7% in comparison to the 1^st half and FY20 expenses lower by ~12% or US$3.5 million in comparison to FY19.

As per the guidance issued for FY20, the company expected EBITDA for the year to be ~US$33.5 million. As a result of the strong investment performance reported in the December quarter, the company now believes that FY20 EBITDA will be slightly higher than the above-guided range, as a result of a higher performance fee revenue. However, the company has not provided for a specific monetary contribution to FY20 EBITDA from the increased performance fee, to avoid uncertainty.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 50.36% of the total shareholding. McGould (Sean) held the maximum number of shares with a percentage holding of 11.99%. As per an announcement dated 31^st January 2020, UBS Group AG and its related entities became a substantial shareholder with a voting power of 5.75%.
 

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics: In FY19, the company had a gross margin of 91.5%, slightly above the FY18 gross margin of 91.0%. Net margin stood at 23.4%, higher than the industry median of 20.7%, depicting a decent profitability position. Debt to equity multiple stood at nil for the last three years, i.e., FY17, FY18 and FY19, representing the financial stability of the business.


Key Metrics (Source: Thomson Reuters)

Outlook: The company expects an uplift in the EBITDA for FY20 as a result of remarkable investment performance reported in the December quarter. To reiterate, the company has previously provided for a guidance of US$33.5 million for FY20 EBITDA, which is now expected to be slightly higher as a result of increased contribution from performance fee. Going forward, the company will continue to look for opportunities for expanding its business, on the back of a strong balance sheet and established position in the market. 


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: Price to Book Multiple Approach

Price to Book Based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of the company generated returns of 14.70% and 30.08% over a period of 1 month and 3 months, respectively. A major highlight of FY19 was the acquisition of MAS assets, which have contributed decently to the company’s performance to date. Going forward, the assets will continue to be value accretive to the business. The company’s cost rationalisation program has also increased the financial stability, thereby increasing investor confidence. Considering the performance in FY19, contribution from MAS assets, robust investment performance in December’19, and anticipated benefits from the cost rationalisation program and MAS asset integration, we have valued the stock using Price to Book based relative valuation method, and for that purpose, we have taken the peer group - EQT Holdings Ltd (ASX: EQT), Pinnacle Investment Management Group Ltd (ASX: PNI), Pendal Group Ltd (ASX: PDL), etc. As a result, we have arrived at a target price upside of lower double-digit (in percentage terms). Considering the above-mentioned factors, we give a “Buy” recommendation on the stock at the current market price of $3.220, up 0.625% on 4^th February 2020.
 

NGI Daily Technical Chart (Source: Thomson Reuters)

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