Magellan Financial Group Limited

 Focussed towards expansion of the retail business:Magellan Financial Group Limited (ASX: MFG) has recently disclosed that the total FUM was reported at $70.782 billion at the end of December 2018 with a net inflow of $41 million (which was seen in December 2018) including the net retail inflow of $90 million, and net institutional outflows of $49 million. Of the total FUM, the contribution from global equities stood at A$52.451 billion while the Australian equities have contributed A$6.351 billion.

The company is expected to pay ~$54 million as distribution (net of reinvestment) in January 2019 and the adjustment will reflect in February month announcement.
 

 
MFG’s Organic FUM opportunities (Source: Company Reports)
 
What to Expect from MFG Moving Forward: Going forth, the company will keep on maintaining its focus on the expansion of the retail business and would be implementing an alternative market strategy to reach this group of investors. The group is striving to achieve the desired cost performance and hence will try to reduce its marketing cost substantially in the FY 2019. The company expects the total group expenses to be around 105 Mn for FY 2019. Further, the company reported an EBITDA margin and Net margin of 78.0% and 47.0% respectively in FY18 as compared to the industry median of 61.9% and 30.3% respectively. Further, the company is generating better returns for its shareholders than its peers as it reported a ROE of 39.7% above the industry median of 9.90%. Meanwhile, if we look at the past six months’ performance, the stock has surged by 12.69% as on 22 January 2019. Hence considering the robust ROE and in the anticipation of expansion in retail clientele we maintain our “Hold” rating on the stock at the current market price of $27.800.
 

Challenger Ltd

 
Robust capital adequacy ratios- Key growth driver: Challenger Ltd (ASX: CGF) has published its earning and guidance. As per the release, for the first half year ending 31 December 2018 (1H FY19), the company is expecting to earn a normalized net profit before tax of $270 million. These earnings have been affected by a lower cash distributions on Life’s absolute return portfolio, which were approximately $13 million lower than the distributions registered in the 1H FY18. Earnings were also impacted by the lower fund management performance fees, which were $4 million lower than the pcp.
 
The company is strongly capitalized with a Prescribed Capital Amount (PCA) ratio of 1.54 times at 31 December 2018. The PCA ratio is at the upper notch of the company’s target PCA ranging from 1.3x to 1.6x and thus results in an excess capital of $1.3bn above APRA’s minimum PCA requirement. As of 31 December 2018, the company’s CET1 ratio was 1.04 times. Both the ratios surged on account of the reduction in capital intensity within the portfolio.
 
What to Expect from Challenger Moving Forward: On account of the lower than expected 1H FY 2019 normalized net profit before tax and changes to Life’s investment portfolio to lower capital intensity, the company has reduced its FY19 guidance to a range of $545 million to $565 million. The company aim to grow its allocation towards the stable retirement incomes, provide superior investments for customers, implement sustainable business practices and plans to be the market leader in the Industry.
 
 
 

CGF’s Excess Regulatory Capital (Source: Company Reports)
 
The company has a ROE of 10.10 % which is at par with the industry median.Also, the price to book is at 1.6x for the trailing 12 months, while the broader industry trades at the median of 1.9x, hence the stock seems to be fairly valued at current juncture.

Meanwhile, the stock price has fallen by 25.38% over the past six months as on 22 January 2019. Hence, considering the capital ratios and valuations now in view of the recent result downgrade, we put a “Hold” rating on the stock at the current market price of $7.650.
 
 

Computershare limited

 
Robust EPS growth & cost optimization programmes: Computershare Limited (ASX: CPU) has, for the FY 2018, reported a revenue of 2289.90 Mn, up by 8.70% on a Y-o-Y basis. This growth was due to the cyclical improvements and the increased event-based activity. The company’s EPS rose by 14.10% and came in at 62.10 cents. This rise was on account of the better progress achieved in the mortgage services and increased activity witnessed in the stakeholder relationship management, class action suits and an improved & efficient cost management system.

CPU’s FY 2018 Financial Highlights (Source: Company Reports)
 
What Numbers One Should Look Out: The company has affirmed its FY 19 guidance stating that the company’s management EPS shall rise by 10% over the FY18, in the constant currency terms. This is anticipated on account of the contributions from mortgage services, employee share plans and margin income, and also the execution of company’s cost-out programmes. The guidance includes the contribution received from Equatex and the proceeds from the sale of stake in the Karvy.
However, the company is slated to present its revised guidance in the February 2019.
 
Additionally, the company has a ROE of 20.20 % which is above the Industry median of ~11.30%. However, the pre-tax margins of 17% is at par with the industry median of 16%. Hence, the company is growing at the industry median rate.
 
Meanwhile, the stock price has risen marginally by 0.17% over the past six months as on 22 January 2019. Hence, considering robust EPS growth & cost optimization programmes while the trading levels are slightly high, we have a wait and watch view on the stock at the current market price of $17.810. 
 

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