Magellan Financial Group Limited

Better than Expected Pay-Outs: Magellan Financial Group Ltd (ASX: MFG) is a specialist fund management group involved in the development of globally-focused investment funds for retail and institutional investors. As at 31 October 2018, the company has funds under management amounting to $72,981 Mn, of which $19,725 Mn is from retail investors and the rest from the institutional investor. It represents that the company has more than 72% exposure towards global equities. The company has posted strong numbers for the year ended June 30, 2018 characterized by a 29% growth in the average funds under management which stood at $59 Bn for the 12 months to June 30, 2018. This growth in FUM was on account of net inflows post distributions of $4.1 Bn, Investment performance of $8.5 Bn & $6.3 Bn from Airlie’s corpus. The revenues for the FY 2018 came in at $452.6 Mn scaling a rise of 34% on PCP. It was mainly driven by the strong growth of management and services fees, performance fees, and other revenue which accounted for 26%, 83%, and 188%, respectively in FY18. PAT has shown a rise of 8% and stood at $211.8 Mn. This was on the back of robust investment portfolio performance in the core global equities & infrastructure projects segments. Also, the cost to income ratio was recorded at 25% vis-a-vis 26.8% for the PCP, on account of the efficient conduct of operations.

Moreover, the management has done a critical review of the financial position & capital requirement of the company and has arrived at a conclusion that the pay-out ratio shall be increased to 90-95% of the NPAT from the previous payout ratio of 75-80%, representing a rise of 20%. Moreover, the company has paid a total dividend of 134.5 cps exhibiting a hike of 57% on PCP. This was inclusive of an annual performance fee dividend of 14.9 cps along with final dividend amounting to 75.1 cps. However, the management clarified that the future dividends would be partially franked due to the higher pay-out ratio decided by the management & considering the group’s current average tax rate of 22% which is below the firm’s tax rate of 30%.

 

Number of Active ETF Unitholders Quarterly Trends (Source: Company Reports)

Meanwhile, the share price has fallen 4.23% in the past three months as at November 20, 2018 and traded at reasonable PE multiple of 21.54x. Currently, it has a market capitalization of $4.65 billion while its annual dividend yield stood at 5.62%. Considering the hefty dividend pay-outs and robust Investment portfolio performance, we maintain our “Buy” recommendation on the stock at the current market price of $25.570.
 

BHP Billiton Limited

Constant Rise in Commodity Prices – Key Catalyst: BHP Billiton Limited (ASX: BHP) informed the market about to change its name followed by the shareholder approval to “BHP Group Ltd” and “BHP Group Plc” from the previous name of BHP Billiton Limited and BHP Billiton Plc, respectively, effective from 19 November 2018. In connection with the name change, on 23 November 2018, ticker on each of the LSE and JSE will change to “BHP”.  Besides this, the company has reached to settle the longstanding transfer pricing dispute in relation to the marketing operation in Singapore. To resolve its dispute with ATO, BHP will have to pay around AUD$529 million in additional taxes and out of which it has already paid A$328 million. However, BHP’s marketing operation will continue in Singapore and remain an important part of BHP’s value chain. These marketing operations will contribute to BHP’s ability to compete in the global marketplace and to the value of Australia’s natural resource. On the financial front, the revenues for the FY 2018 came in at US$43.6 Bn a growth of 21 % on PCP. This growth was achieved on the back of higher average realized prices across most commodities. However, this was partially offset by lower volumes at Olympic Dam & challenging operating conditions at Queensland coal mines. Underlying EBITDA stood at US$23.2 Bn, exhibiting a growth of 20% on a Y-o-Y basis. This was on account of robust operating performance at Escondida and western Australia Iron ore. These operations lead to a productivity gain of US$ 374 Mn. Also, the higher commodity prices driven by volume growth of 8% aided the cause.

Going forth, we believe that the company is committed to the objective of appreciation in shareholders wealth which is evident from the recent developments regarding sale of its non-continuing operation of the On-shore US shale assets for US$10.5 Bn, the proceeds of which will be returned to the shareholders in the form of a buyback and special dividend as a part of the firm’s “Shareholder return program”. Thus, considering the strong free cash flows and constant volume growth across its core segments, the future operating performance seems to be very promising & considering the Moody’s Investor services had upgraded its long-term issuer rating of the company from A3 to A2, and the short-term commercial papers ratings from P-2 to P-1, with a stable outlook.

 

Financial Metrics (Source: Company Reports)

Meanwhile, the stock has had a decent run on the bourses, generating a YTD return of 10.14% and currently has an annual dividend yield of 4.87%. The share price is trading at decent Zone. Considering the hefty distribution and strong operating performance, we reiterate our “Hold” recommendation on the stock at the current market price of $31.60.
 

Scentre Group

Strong Fundamentals: Scentre Group (ASX: SCG) owns and operates a portfolio of shopping centres in Australia and New Zealand. The Company's strategy is to invest in quality regional shopping centres and to invest in these assets through redevelopment, capitalizing on its vertically integrated operating platform to undertake development, design and construction, leasing, management and marketing of the centres. Recently, the company stated that Mr. Steven Lowy would retire from the Board in April 2019 and not seek re-election as a Director of the group.

In another release on ASX, the company posted Q3 CY18 operational update wherein the group has achieved an occupancy of more than 99.5% across its portfolio with a total lettable area of 3.7 million Sq. Meter which shows that high-quality retail space is in demand. The firm is also holding a strong portfolio in the re-development space where it has successfully opened more than $1Bn worth redevelopment work across 4 Australian states. In Q3 CY18, the company completed 2,083 Lease Deals. The total specialty in-store sales of the company were up by 1.8% for the 9 months and 2.0% for the year. The total stable portfolio in-store sales were up by 1.5% for the 9 months and 1.6% for the year. The firm has reiterated its group forecasts stating that the FFO growth for the 12 months ending 31 December 2018 would be approximately 4.0%. Also, the distribution for the same period is expected to be 22.16 cents per security, an increase of 2%. The company has completed the $ 80 Mn redevelopment of Westfield plenty valley, which is a leisure property and it has been well accepted by the community thus trading strongly.

 
 

SCG’s Speciality In-Store Sales Numbers (Source: Company Reports)

Meanwhile, the share price has fallen 9.56% in the past three months and trade at lower PE multiple of 4.830x, showing undervalued at the current juncture. Moreover, valuation-wise SCG looks impressive with Net Margin at 171.3% in CY17 compared to 119.9% in CY16. Return to the shareholders has also been good with ROE coming in at 20.1%. Considering the stable real estate and constant growth in the funds from operations, we maintain our “Buy” recommendation on the stock at the current market price of $3.890.
 
 

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