Company Overview: Navigator Global Investments Limited (ASX: NGI) provides diversified investment management products and services to global investors via its wholly-owned subsidiary, Lighthouse Investment Partners, LLC. The success of the company depends on three factors, AUM, Fee rates, and people. Lighthouse manages several multi-strategies focused funds, which utilize Lighthouse's proprietary managed accounts. These own and control the assets and liabilities and authorize external fund managers to trade the assets within specific guidelines. Customized solutions offer investors the ability to access the benefits of the managed account structure in their own customized portfolio.
NGI Details
Cost Management and Potential New Opportunities: Navigator Global Investments Limited (ASX: NGI) provides diversified investment management products and services to investors globally through its wholly-owned subsidiary Lighthouse Investment Partners, LLC. As on 17 November 2020, the market capitalization of the company stood at ~$281.32 million. Despite the onset of the global financial crisis, NGI adapted to the challenges and embraced new forms of technology to see improvement in daily business activities. However, net outflows from Mesirow Advanced Strategies (MAS) assets and Lighthouse and the impacts from COVID-19 pandemic resulted in a fall of 17% in AUM to US$11.8 billion in FY20.
In terms of operating performance, the company reported mixed results. While the global equity strategies showed resilience despite market volatility, global indices reported negative returns. This created both opportunities and risks for the company. The company worked pro-actively to retain existing assets and pursue potential new opportunities, particularly in the platform services and hedged equity space. During FY20, the company reported a fall of 15% in management fee revenue to US$87.5 million but an increase of US$4.5 million in performance fee revenue to US$5.6 million. In the same time span, the company delivered EBITDA of US$30.5 million. Despite the economic impacts of the COVID-19 pandemic, operating expenses went down by US$5.3 million as compared to the prior year, primarily due to reductions in staff, the completion of MAS transition expenses, and the reduction to occupancy expenses due to its transition to AASB 16 on 1 July 2019.
FY20 Financial Highlights (Source: Company Reports)
Despite the headwinds from the global crisis, the company reported positive investment performance in its September 2020 quarter, which further resulted in decent calendar year funds and performance fees from global long/short portfolios. The global asset management industry is a highly competitive space, and therefore NGI is more focused on the alternatives sector to benefit from the diversified investment base, specifically on the multi-manager hedge funds solutions.
Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Navigator Global Investments Limited. McGould (Sean) is the largest shareholders in the company, with a percentage shareholding of 11.99%.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
Decent Liquidity and Stable Balance Sheet: On the balance sheet front, current ratio of the company was 7.42x as compared to the industry median of 1.38x. During the year, assets/equity ratio of the company was 1.13x, lower than the industry median of 4.55x, and debt/equity ratio stood at 0.12x as compared to the industry median of 0.53x. This indicates that the business is financed with a significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet. During FY20, the company reported cash cycle days of 58.2 as compared to the industry median of negative 6,050.6 days.
Looking at the profitability side, gross margin of the company stood at 90.3% in FY20, and EBITDA margin of the company was 29.9%. In the same time span, net margin stood at 17.9%. During the year, Return on Equity was 8.8%, higher than the industry median of 7.9%.
Key Margins (Source: Refinitiv, Thomson Reuters)
Quarterly Update (For the Period Ended 30 September 2020): During the quarter ended 30 September 2020, the company reported an increase in AUM from US$11.77 billion in June 2020 to US$11.99 billion in September 2020. This was mainly due to a rise in net flows from Customized Solutions and Platform Services, offset by a slight decline in Commingled Funds. During the quarter, Lighthouse Diversified Fund Limited delivered a return of 0.35%, and Lighthouse Global Long/Short Fund Limited gave a return of 2.15%, as compared to the negative return of benchmark S&P 500 TR Index of 3.8%.
5-Year Historical Performance: Given the nature of the company’s operations, and the timing differences arising from trade receivables and payables, the company considers EBITDA to be the most relevant measure of its overall financial performance. Over the span of 4 years from FY16 to FY19, the company reported a consistent increase in cash flow from operating activities to US$37.65 million in FY19 but weakening in operating environment resulted in a fall to US$30.51 million in FY20. Despite the significant challenges posed by the COVID-19 pandemic, the Board paid a final unfranked dividend of 5.5 cents per share to shareholders, adding to the interim dividend of 8.5 cents per share. The company maintained a balance between rewarding shareholders and ensuring sufficient resources to benefit from growth opportunities with the FY20 payout ratio of 75% of EBITDA, reflecting an increase from 67% in FY16.
5-Year Historical Performance (Source: Company Reports)
Key Risks: The company is susceptible to a variety of risks, including risks related to the business and economic factors, amounts receivable from external parties, disruption in the supply chain, exposures to overseas operations, transactions, and currencies, mismanagement of cash flows. The company is also exposed to financial risks, including market risks, credit risk, liquidity risk, and other risks arising from financial instruments.
Outlook: The business of NGI is centered around the needs of its clients and is focused on finding ways to enhance its processes, systems, and products to differentiate from its competitors. The company retains a diversified client base, which will help it to increase its earnings, AUM, and introduce greater performance fee earnings component from diversified alpha sources. The company has scheduled its AGM on 18 November 2020. The company is likely to witness AUM growth from continued interest in its equity-based strategies and platform services offering. However, the company may report a reduction of ~20% in total revenue for FY21 to US$82.5 million due to lower starting point of AUM and a continued shift towards platform service and customized client AUM. NGI is focused on managing its costs for FY21 and expects EBITDA margin to be in the range of 26.5% to 29%.
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: Price to Book Value Multiple Based Relative Valuation (Illustrative)
Price to Book Value Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months
Stock Recommendation: NGI has recognized new avenues for growth, positioning the company for future accretive, organic, and inorganic growth opportunities. It has a large addressable opportunity set across asset managers globally and retains a captivating financial rationale. As per ASX, the stock of NGI is inclined towards its 52-weeks’ low levels of $1.13, proffering a decent opportunity for the investors to enter the market. The stock of NGI gave a return of 0.8772% in the past three months and a return of 11.29% in the last one month. On a technical front, the stock of NGI has a support level of ~$1.398 and a resistance level of ~$1.935. We have valued the stock using the price to book value multiple and have arrived at a target price with an upside of lower double-digit (in % terms). Taking the cue from the current trading levels, disciplined approach to capital management, decent returns in the past one month, and value-accretive business model, the stock of NGI retains a decent growth potential in long run, and hence we recommend a ‘Buy’ rating on the stock at the current market price of $1.71, down by 1.441% on 17 November 2020.
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NGI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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