Magellan Financial Group Ltd – Stellar Performance so is it time to buy?
Sep 29, 2015 | Team Kalkine
Based on the recent results, Magellan Financial Group Ltd (ASX: MFG) is reported to have a stellar performance. Although there has been a dip in the institutional flows, the retail flows seem to be quite healthy. Additionally, high exposure to USD assets has shielded the effect on funds under management (FUM), in terms of AUD, given the recent correction in equity markets.
Result Update
For the year ended 30 June 2015, MFG reported 110% rise in net profit after tax at $ 174.3 million. EPS (diluted) was up 108% at 101.8 cents per share and dividends (interim and final) were up 96% at 74.9 cents per share fully franked. As at 30 June 2015, the balance sheet was strong with a 47% increase in net assets at $ 303.4 million. There was a 55% increase in funds under management to $ 36.4 billion, a 32% increase in total staff to 91 and a fully diluted NTA per share of $ 1.78 compared to $ 1.24 as at 30 June 2014. Total revenues grew by 92% to $ 284.9 million and expenses by 43% to $ 54.6 million so that profit before tax grew by 108% to $ 230.3 million. Profit after tax grew by 110% to $ 174.3 million and the effective tax rate was 24.3% compared to 24.9% in the previous year. EPS grew by 105% to 109.2 cents per share and diluted EPS by 108% to 101.8 cents per share. Fully franked final dividends (final and interim) rose by 96% to 74.9 cents per share.
Net Monthly Flows and Unit Holders (Source: Company Reports)
The group was two principal business activities Magellan Asset Management (fund management) and Principal Investments. Apart from paying dividends promptly, the continuing dividend policy is to distribute 75% to 80% of net profit after tax of the Management business. The Offshore Banking Unit generates assessable offshore banking which are subject to a concessional rate of 10% in view of current legislation. The effective tax rate for FY 2015 is 24.3% and offshore International global equity constitutes 38% of the management fees for FY 2015. The average funds under management rose by 55% to $ 31 billion while the average number of employees rose by 25% to 80. The cost/income was 20.6% compared to 26.3% in the previous year and cost/income (excluding performance fees) was 24.8% as opposed to 26.7% of previous year. The highlights of the Fund Management business were solid investment performance for FY 2015 with the Magellan Global Fund returning 29.5% (outperforming the MSCI World NTR Index by 4.9%) and the Magellan Infrastructure Fund reporting 12.3% (outperforming the Global Infrastructure Benchmark by 4.8%). Other highlights were the launch of the Magellan Global Equities Fund, an ASX quoted fund, and entering into new arrangements with AMP and BT/Westpac.
Total Management and Service Fees (Source: Company Reports)
MFG is also at a comfortable position with its retail business reported to grow to take advantage of the trends of compulsory superannuation. The company will leverage independent financial advice firms because of its relationship with more than 500 of them. In the bank/AMP aligned advice markets, strong relationships and representation have been established with four of the top six major firms with approximately 6800 aligned advisors. Separate versions of the Magellan Global Fund are available at Commonwealth Bank, BT/Westpac and AMP. As at 1 August 2015, the group is represented in more than 120 model portfolios across Commonwealth Bank, BT/Westpac and AMP. There is strong advisor support and the total number of advisers using the Global Fund has increased from 7500 to 9500 over the past year. In addition, there is a highly experienced team of 11 account managers at Sydney, Melbourne, Brisbane and Auckland.
Total Revenue and Cost/Income (Source: Company Reports)
Risks and Stock Performance
The risks entail fluctuating equity markets and foreign exchange rates. Nonetheless, we believe that the strong points for MFG have been the performance of the flagship Magellan Global Fund and the outstanding results that are going to be important in attracting new Funds under Management business. When one looks at the current growth momentum in the Funds under Management, the outstanding investment performance and the earnings potential under the business model, we consider that the present P/E ratio undervalues the stock and there is room for considerable price growth. We have no hesitation in recommending a Buy for this stock at the current price of $18.34.
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