Stocks’ Details

Magellan Financial Group Limited

Strong Investment Performance: Magellan Financial Group Limited (ASX: MFG) is engaged in the fund management business with a market capitalisation of ~$10.38 Bn as on 21^st September 2020.

Investment in New Business Venture: Recently, the company announced that it has become a foundation investor in newly established Australian-based full-service financial services firm “Barrenjoey Capital Partners”. The company added that Barrenjoey would provide corporate and strategic advisory, equity and debt capital market underwritings, cash equities, research, prime brokerage, and traditional fixed income services to Australian and international clients. In the month of August 2020, the company reported net inflows of $566 million, which included net retail inflows of $208 million and net institutional inflows of $358 million.

August Net Inflows (Source: Company Reports)

Revenue Growth Supported by FUM: During FY20, the company experienced robust growth of 26% in average funds under management to $95.5 billion and 25% in management and services fees revenue to $591.6 million. These metrics has supported revenue growth of 20%, which amounted to $674 million. In addition, the Funds Management business have operated efficiently with a cost to income ratio of 19.7% against 21.3% of FY19. The company declared a 2H FY20 dividend of 122.0 cents per share, franked to 75%. This comprises of a final dividend of 91.6 cents per share and a performance fee dividend of 30.4 cents per share. This took the final dividend to 214.9 cents per share.

Outlook: For FY21, the company anticipates Funds Management business expenses in the range of $110-$115 million due to no bonus deferral for FY20 as well as outstanding deferred bonuses paid out in FY20. The company has scheduled to conduct its Annual Shareholders Meeting on 22^nd October 2020.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: Debt to Equity of the company stood at 0.02x in FY20 as compared to the industry median of 0.56x. The stock of MFG has moved up by 53.28% in the past six months. As a result, the stock is slightly above the 52-week low-high average of $30.100-$74.910, respectively. On a technical front, the stock of MFG has a support level of ~$54.570 and a resistance level of ~$60.170. We have valued the stock using the P/E multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Platinum Asset Management Ltd (ASX: PTM), ASX Ltd (ASX: ASX), to name few, and arrived at a target price with correction of low double-digit (in percentage terms). Therefore, considering the valuation, current trading levels and price movement in the past months, we give an “Expensive” rating on the stock at the current market price of $54.990 per share, down by 3.408% on 21^st September 2020.

IOOF Holdings Limited

Focus on Shareholders Return: IOOF Holdings Limited (ASX: IFL) is involved in providing financial advice and distribution, along with portfolio and estate administration, and investment management solutions. The market capitalisation of the company stood at ~$1.75 Bn as on 21^st September 2020.

Completion of Capital Raising: On 21^st September 2020, the company has finished the retail component of its fully underwritten 1 for 2.09 accelerated non-renounceable entitlement offer and non-underwritten share purchase plan. This took the total capital raising to around $1,043.8 million. Previously, the company also finished equity raising of A$734 million through an institutional entitlement offer. The company would use the proceeds from the offer to partly finance the acquisition of NAB’s wealth management business (MLC) for A$1,440 million, which is subject to completion adjustments.

Sources and Uses of Funds (Source: Company Reports)

Growth in Gross Margin During FY20: During FY20, the company reported statutory NPAT amounting to $147 million and funds under management, advice, and administration (FUMA) of $202.3 billion. During the year, the company received net proceeds of $105 million from divestments of non-core subsidiaries. Over the year, the company’s gross margin increased by 16.3% to $577.6 million. The company recently declared a fully franked dividend of 11.5 cents per share.

Outlook: The company is likely to deliver EPS accretion in excess of 20% on the FY21F pro forma basis. The company is aiming to return on funds employed of around 15% by the third full year of ownership. The company is likely to release its Q1 FY21 FUM update on 29^th October 2020.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: Debt to equity of the company stood at 0.33x in FY20 as compared to the industry median of 0.56x. The stock of IFL has corrected 22.59% and 31.76% in the past one and three months, respectively. As a result, the stock is trading towards its 52-week low levels of $2.505, offering decent opportunities for accumulation. On a technical front, the stock of IFL has a support level of ~$3.023 and a resistance level of ~$4.34. We have valued the stock using the P/E multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Challenger Ltd (ASX: CGF), AMP Ltd (ASX: AMP), Pendal Group Ltd (ASX: PDL), to name few, and arrived at a target price of low double-digit upside (in percentage terms). Therefore, considering the recent capital raising, deleveraged balance sheet, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $3.100 per share, down by 0.958% on 21^st September 2020.

VGI Partners Limited

FUM Growth to Support Future Growth: VGI Partners Limited (ASX: VGI) is a global equity manager, who manages capital for high net worth individuals, family offices and two listed investment companies. The market capitalisation of the company stood at $445.9 Mn as on 21^st September 2020.

Decent Growth in 1H FY20 Performance: For the half-year ended 30^th June 2020, the company reported Funds Under Management of $2.9 billion. Net management fees for the period stood at $22.2 million, reflecting a rise of 77% on 1H FY19. The increase indicates higher average FUM and the end of the VGI Partners Global Investments Limited (VG1) fee waiver in April 2019. Normalised and Statutory NPAT for the period amounted to $9.9 million and $3.6 million, respectively. The company has paid an interim dividend of 5.0 cents per share on 14^th September 2020, reflecting a payout ratio of 97% on statutory earnings and a 36% payout ratio on normalised earnings.

Key Metrics (Source: Company Reports)

Growth Strategies: The primary focus of the company revolves around managing its portfolios in the ever-changing environment. The company works on two investment strategies, which include global strategy with a 12-year track record and Asian strategy, which was launched in 2019.

Stock Recommendation: Current ratio of the company stood at 9.0x in 1H FY20 as compared to the industry median of 1.38x. This reflects that the company is in a decent position to address its short-term obligation. VGI has EV/Sales multiple of 10.7x as compared to the industry average (Investment Banking & Investment Services) of 11.2x on TTM basis. In addition, VGI has EV/EBITDA multiple of 17.4x against the industry average (Investment Banking & Investment Services) of 33.9x on TTM basis. The stock of VGI is inclined towards its 52-week low level of $6.120. Thus, it seems that the stock is undervalued at current trading levels. On a technical front, the stock of VGI has a support level of ~$6.142 and a resistance level of ~$6.931. Hence, considering the decent performance in 1H FY20, sound liquidity position, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $6.270 per share, down by 1.878% on 21^st September 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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