Company Overview: Navigator Global Investments Limited (ASX: NGI) is engaged in the business of providing investment management products and services to investors, through its wholly-owned subsidiary – Lighthouse Investment Partners, LLC. The US-based Lighthouse Group operates as an absolute return funds manager for investment vehicles. It generates revenue under three divisions – Commingled Funds, Customised Solutions and Platform Services. It reported an AUM of US$11.99 billion as on 30 September 2020, an increase from 30 June 2020 levels of US$11.77 billion.
NGI Details
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Net Outflows Offset by Decent Portfolio Performance: Navigator Global Investments Limited (ASX: NGI) provides investment products and services to its investors, through its wholly-owned subsidiary Lighthouse Investment Partners, LLC. The market capitalisation of the company as on 15 December 2020, stood at ~$287.00 million. The company reported a net outflow of US$210 million during the quarter ending 30 September 2020. However, the outflow from MAS portfolios and its multi-strategy funds were offset by decent performance across all the portfolios during the quarter. It reported an increase of US$0.43 billion in portfolio performance, during the same period.
During FY20, NGI reported a decrease in revenues by 12% to US$101.50 million from US$114.87 million in FY19. Its main revenue contributor, management fee from commingled funds and customised solutions, reported a decline of 17% in income to US$87.51 million, in the same period. The management fee is derived as a percentage of a customer's portfolio value. Performance fee revenue was at ~US$5.6 million in FY20, as compared to ~US$1.1 million in FY19. The company reported an EBITDA of US$30.5 million during FY20. There was also a reduction of 8% in the net operating expenses to US$63.5 million in FY20, from US$69 million in FY19. Profit during the period decreased by 32% to US$18.15 million as compared to US$26.84 million in the previous corresponding period. Despite the challenging business conditions, the company rewarded its shareholders with a dividend of 14 US cents per share during FY20.
Going forward, NGI will continue to focus on investment strategies keeping client expectations in consideration. It will look for revenue enhancement and acquire new clients in its equity-based strategies and the platform offerings. The COVID-19 pandemic has put companies under pressure to sustain operating leverage. In this regard, NGI will review its costs structure and try to implement cost savings wherever possible. The Group will also look to diversify its income through strategic acquisitions, which will give synergy advantage and earnings visibility in the long run.
FY20 Income Statement (Source: Company Reports)
Acquisition of Portfolio from Dyal Capital: NGI had proposed to acquire a portfolio of strategic investments from funds managed by Dyal Capital Partners. It will acquire the portfolio in a structured transaction manner and will initially receive a minimum annual preferred portion of cash flows from the portfolio in exchange for a 40% interest in Navigator. The company will make an additional single payment to acquire the remaining interests in the cash flows from the portfolio, after a period of five years. This acquisition is expected to aid the company’s future earnings and dividend profile, given the track record, the Dyal portfolio has got to deliver decent returns.
Details of Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 50.89% of the total shareholding. McGould (Sean) is the largest shareholder in the company, with the percentage holding of 11.99%. Eley Griffiths Group Pty. Ltd. holds the second maximum interests in the company at 9.08%.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
Key Metrics: The company reported resilient business performance in FY20, despite the impact of COVID-19. However, its margins were somewhat impacted, and it reported a decrease in most of the key metrics. There was a decrease in EBITDA margin to 29.9% in FY20 from 32.8% in FY19. Net margin also decreased to 17.9% from 23.4%, during the same period. ROE during the period was at 8.8%. Cash cycle increased to 58.2 days in FY20 as compared to 49.8 days in FY19. The company had a cash balance of US$27.03 million with a debt-to-equity ratio of 0.12x as on 30 June 2020.
Key Margins (Source: Refinitiv, Thomson Reuters)
Key Business Drivers: The company owes it success towards its clients, revenue generated from them and its people, who work on giving the best possible investment strategy to maximise returns. As on 30 June 2020, Assets Under Management was at US$11.8 billion. Customised Solutions constituted 47% of the AUM basket, Commingled Funds constituted 32% and Platform Services was at 22% of the overall AUM portfolio.
NGI's average management fee was at 0.66% per annum during FY20. The decrease in trend might be due to a continued shift towards platform service and customised client AUM, which generally has a lower fee rate. The company reported a decrease in employee count from 139 in FY19 to 114 in FY20, mainly on account of the business rationalising its cost structure.
Key Business Driver Metrics as on 30 June 2020 (Source: Company Reports)
Key Risks: The company has been exposed to COVID-19 impact; however, it is much less when compared to industries in other vertical. The slowdown in economies and businesses had an impact in NGI’s core operations. The volatility in global markets led to a drop in the investment performance of its multi-strategy funds and resulted in losses to the market value of assets across its portfolio. While it has recovered in the past few months, investors would want to limit their exposure in this segment over the next 12 months. NGI receives its revenues mainly through its products and historically had a low default rate on its receivables. The Group’s functional currency is USD, and all its revenue, assets and liabilities are denominated to it. As such, it is exposed to significant currency risks. It is dependent on the AUM of the business for its revenue, and any increase or decrease in it might impact the cash flow generation ability of the company. The company also has to take care of the credit risks arising out of the need to borrow capital. In this regard, it has renewed its existing US$15 million credit facility for a further period of two years until 27 July 2022.
Outlook: The COVID-19 pandemic has impacted all the major economies, but markets have shown signs of stabilisation in the past few months. As per the company, Lighthouse will continue to work to meet client expectations and will also seek opportunities in investments created by the market volatility. NGI will also focus on producing consistent and low volatility returns, enhanced by its data analytics offerings. It will look to pursue new clients in its equity-based strategies and the platform services offerings. NGI is anticipating some future redemptions across its MAS and Lighthouse portfolios, but expect it to be offset by increased interest in equity-based strategies and offerings from platform services. Global equity strategies were resilient during the market volatility period and delivered positive returns. As per the company, its multi-strategy products have delivered decent returns from the difficult period of March 2020, and hence recovered a good proportion of its earlier losses.
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: The company reported decent AUM growth during Q1FY21, despite the COVID-19 impact on the business environment. AUM as on 30 September 2020, stood at US$11.99 billion. The company also expects to benefit from the acquisition of the portfolio from Dyal Capital Partners. As per ASX, the stock of NGI is trading below its average 52-weeks’ levels of $1.130-$3.640, proffering a decent opportunity for the investors to enter the stock. The stock of NGI gave a return of 10.90%in the past three months and a return of 1.76% in the last one month. On a technical analysis front, the stock of NGI has a support level of ~$1.426 and a resistance level of ~$1.935. We have valued the stock using a price to book value multiple based illustrative relative valuation and have arrived at a target price of lower double-digit upside (in % terms). For the purpose, we have taken peers such as EQT Holdings Limited (ASX: EQT), Pinnacle Investment Management Group Limited (ASX: PNI), Pendal Group Limited (ASX: PDL), to name a few. Considering the current trading levels, growth in AUM and acquisition of quality portfolio holdings, we recommend a ‘Buy’ rating on the stock at the current market price of $1.730, down by 2.260% as on 15 December 2020.
NGI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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