2 Beaten Down Financial Stocks to Buy for Long-term - MFG, VGI
Magellan Financial Group Limited
MFG Details
Recent Business Updates: Magellan Financial Group Limited (ASX: MFG) is a fund management company and operates in three segments, namely, fund investments, funds management, and Magellan Capital Partners. It was incorporated in 2004 and provided services to HNI (High Net Worth Individuals) and retail investors.
- 21 March 2022: The company announced the resignation of Hamish Douglass from the Magellan Board, effective from 19 March 2022. His medical leave of absence reasoned the resignation.
- 16 March 2022: MFG announced the launch of an on-market buy-back of up to 10 million ordinary fully paid shares, representing up to 5.4% of issued shares. The buy-back aims to deliver solid dividends, capital efficiency, and attractive returns for shareholders.
- 11 March 2022: MFG had funds under management of circa $69.1 billion relative to its last reported FUM of $77.2 billion, comprised of a $39.2 billion position in Global Equities, $20.4 billion positions in Infrastructure Equities, and $9.5 billion positions in Australian Equities.
- Quick Financial Summary: Profit before tax and performance fees of the Funds Management segment went up by 15% to $293.6 million. Adjusted NPAT stood 16% higher on PcP at $248.1 million. Interim dividend increased 13% to 110.1 cents/share.
H1FY22 Financial Summary; Analysis by Kalkine Group
Key Risks and Challenges
- Competition Risk: Rising transparency and several existing investment professionals and companies with new tailored products may expose MFG to high competition risk.
- Systematic Risks: High reliance on global equities exposes MFG to high market movements.
Outlook
MFG has undergone considerable capital management initiatives, including the intention to process a 1 for eight bonus issue, issue of 10 million unlisted options to MFG staff, and implementation of an on-market buy-back. MFG holds a solid financial position with no debt and net tangible assets worth $992.8 million, resilient margins, and operating cash inflow, enabling the company to continue support and investment.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
Source: Analysis by Kalkine Group
*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock’s historical trading multiples versus peer average/median, and investment risks.
Stock Recommendation: The stock of MFG gave a negative return of ~67.093% in the past year. The stock is currently trading lower than the 52-weeks average price level band of $13.220 - $56.180. The stock has been valued using the Price to Book Value multiple-based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). Considering the competitive market and systematic risks, the company might trade at some discount to its peers’ Price to Book Value multiple average. For valuation, few peers like EQT Holdings Ltd (ASX: EQT), Perpetual Ltd (ASX: PPT), Platinum Asset Management Ltd (ASX: PTM), and others have been considered. Given the decent financial position, leverage free balance sheet, investment initiatives, current trading levels, upside indicated by valuation, and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the closing market price of $15.010, up by ~7.137%, as of 29 March 2022.
Markets are currently trading in a highly volatile zone due to certain macro-economic issues and prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing.
MFG Daily Technical Chart, Data Source: REFINITIV
VGI Partners Limited
VGI Details
FY21 Business and Financial Updates: VGI Partners Limited (ASX: VGI) functions as the equity investment manager for VGI Partners Global Investments Limited (VG1), VGI Partners Asian Investments Limited (VG8), VGI Partners Master Fund, and VGI Partners Offshore Fund. On 29 March 2022, VGI confirmed the negotiation of the terms of the binding merger agreement, subject to final board approvals of Regal and VGI, remains ongoing.
- Bottom Line Update: Statutory NPAT for FY21 stood at $42.7 million, and normalised NPAT stood at $51.2 million. Profits have surged over the prior period, driven by performance fees earnt during H1FY21 amid solid investment performance.
- Performance Fees Update: In FY21, performance fees stood at $50.8 million, consistent with VGI’s announcement on 14 January 2022. The board declared a final dividend of 6.0 cents/share (fully franked at 30%) to be paid on 16th March 2022.
- Financial Position: VGI’s balance sheet remained robust with a $39.6 million cash balance and no debt as of 31 December 2021. Total cash, liquid assets and investments stood at $97.1 million on the same date.
FY21 Revenue Break-up; Analysis by Kalkine Group
Key Risks and Challenges
The company risks not absorbing existing synergies from the proposed merger, regulatory changes, interest rate changes, liquidity crunch, and other financial risks emerging from investing in equities.
Outlook
After year-end, on 31 January 2022, VGI announced its entry into an exclusive non-building term sheet with Regal Funds Management Pty Limited, a specialist alternative investment manager, in a matter of a proposed merger.
Stock Recommendation: The stock of VGI gave a negative return of ~53.737% in the past year. The stock is currently trading lower than the 52-weeks average price level band of $3.500 - $7.920. On a TTM basis, the stock of VGI is trading at an EV/EBITDA value multiple of 3.7x, lower than the industry (Investment Banking & Investment Services) median of 5.0x, indicating undervaluation. Given the current trading levels, growth in financial performance, common debt positions, decent merger prospects, undervaluation indicated by the TTM method, and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the closing market price of $3.560, down by ~1.112%, as of 29 March 2022.
Markets are currently trading in a highly volatile zone due to certain macro-economic issues and prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing.
VGI Daily Technical Chart, Data Source: REFINITIV
Note 1: The reference data in this report has been partly sourced from REFINITIV.
Note 2: Investment decisions should depend on the investors’ appetite for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the Valuation has been achieved and is 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 a 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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