Magellan Financial Group Limited

MFG Details

Overvalued at the current juncture: Magellan Financial Group Limited (ASX: MFG) provides fund management services with the objective of offering international investment funds to high net worth and retail investors in Australia and New Zealand, and institutional investors globally.

The company recently communicated that Magellan Financial Group Limited and its related bodies corporate have been ceased to be a substantial holder in Spark Infrastructure Group. MFG also updated that Magellan Financial Group Limited and its related bodies corporate has become a substantial holder in Atlas Arteria with the voting rights of 6.02%.

The company recently updated the market with Funds Under Management (FUM) and performance fee details as at 30 June 2019.


FUM and Other Details as at 30 June 2019 (Source: Company Reports)

The company witnessed a net inflow of $488 million during the month of June 2019. Net inflows consisted of net retail inflows of $132 million and net institutional inflows of $356 million. Magellan funds will pay distributions, net of reinvestment, of ~$604 million in the month of July 2019. This amount will be placed in FUM numbers in July’s FUM update. The company is authorized to estimated performance fees of ~$83 million for FY19, ended 30 June 2019. Being correlated with the performance, it may vary widely from period to period. Average FUM for FY19 came in at $75.8 billion as compared to $59 billion in FY18.

Outlook: The Group expects a substantial reduction in marketing costs in the financial year of 2019. Group expenses (excluding non-cash amortisation) is expected to come in at ~$105 million in FY19 as compared to the total Group expenses (excluding MGG net offer costs and non-cash amortisation) of $101 million in FY18. The Management expects the non-cash amortisation charges to be at ~$4.7 million in FY19, pursuant to the finalisation of the acquisition accounting of Frontegra Asset Management Inc. However, this non-cash expense is not included in the Fund Management business segment and will not impact dividends, moving forward.

Stock Recommendation: At the current market price of $61.42, annual dividend yield stands at 2.68% and the stock is trading at a price to earnings multiple of 32.27x, which is higher than the industry median of 12.4x. On the price to book value front, the stock is trading at 16.4x of its book as compared to the industry median of 1.3x, indicating the overstretched valuations at the current level. The stock has risen sharply in the last 1-month, 3-month, 6-month and 1-year with 20.82%, 43.24%, 118.04%, and 144.79%, respectively. Thus, we presume that most of the positive factors are factored in at the current level. Given the backdrop of sharp rise in the stock price in recent past coupled with aforesaid facts and stretched valuation, we give a “Sell” recommendation on the stock at the current market price of $61.420 (up 0.606% on 25 July 2019), and we belive that investors can look the profit at the current level. 


MFG Daily Chart (Source: Thomson Reuters)
 

Automotive Holdings Group Limited

AHG Details

The momentum likely to cool down:Automotive Holdings Group Limited (ASX: AHG) is the largest automotive retailing and logistics group in Australasia with three key segments- (a) automotive retailing, (b) refrigerated logistics, and (c) other logistics. The company as on 25 July 2019, updated the market that ACCC (Australian Competition and Consumer Commission) has approved the merger in respect of AP Eagers' takeover offer to acquire all the shares in AHG that it does not already own, subject to the condition. The approval will come into effect on 16 August 2019 in the absence of any third party applying for a limited review of the ACCC’s decision. The current closing date of the Offer remains 16 September 2019.

However, ACCC has authorised AP Eagers’ (ASX: APE) proposed acquisition of AHG with forcing a condition for AP Eagers to sell its existing new car dealerships in the Newcastle and Hunter Valley region to a third party. ACCC, earlier had the concerns over this merger as AHG and AP Eagers are the closest competitor in the Newcastle and Hunter Valley region and had the merger been allowed, it would have substantially reduced the competition in the mentioned territories, resulting in less pricing power for customers.

As earlier communicated by APE, the merged entity will be in a better place than a "standalone" to face the challenges from the automotive retailing sector.


Estimated Numbers for Merged Entity (Source: Company Reports)

Stock Recommendation:The stock has seen substantial movement in the past with ~91% gain over the last 6-months. With ACCC’s determination to grant the merger of the two, news-driven rally is likely to end at the current level. The merged entity will bring in cost and EBITDA synergy benefits to each other. Gross margin and EBITDA margin for 1H19 stand at 22.7% and 2.6%, which are lower than the industry median of 25.11% and 9.2%, respectively. Looking at the valuation, the stock is trading at EV/EBITDA of 11.9x against the industry median of 6.7x. Price to cash flow multiple for the stock at 9.4x is also above the industry median of 8.2x. Currently, the stock is trading at close to a 52-week high level of $2.950 with an annual dividend yield of 2.34%. Hence, Considering the aforesaid facts, we recommend a “Sell” rating on the stock at the current market price of $2.940, up 1.379% as on 25 July 2019.


AHG Daily Chart (Source: Thomson Reuters)

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