Should Investors Pursue these Stocks in the Financials Space for Long Run- MFG, AFG

Magellan Financial Group Limited

MFG Details

Recent Material Updates: Magellan Financial Group Limited (ASX: MFG) is involved in the fund management business. it operates segments namely Fund Investments, Funds Management, and Magellan Capital Partners.

1HFY22 (31 December 2021) Results:

• The company posted an overall ~15% Y-o-Y rise in adjusted revenue, including other income in 1HFY22 led by an increase in management and services fees (up ~13% Y-o-Y) and other income and revenue (up ~116% Y-o-Y).
• The NPAT rose to ~$251.6 million in 1HFY22 up by ~24% YoY from ~$202.3 million in 1HFY20.
• MFG has declared an interim dividend of ~110.1 cents per share (cps) for 1HFY22 (~75% franked) and up by ~13% on pcp.

Growth in Key Metrics; (Analysis by Kalkine Group)

Key Risks: The company faces the risk of adverse market movements, monetary policy changes, interest rate changes, forex headwinds, net cash outflows from retail and intuitional players.

Outlook:

• MFG focuses on the need to sharpen the investment processes and improve investment performance. It plans to accelerate client engagement across its retail and institutional client base via scheduled in person meetings (in the US/UK during March 2022), webinars with financial advisers and brokers, and a national roadshow in March 2022, etc.
• The company plans to implement significant capital management measures, such as a bonus issue of options to its shareholders and staff, an on-market share buy-back in the next 12 months, DRP suspension, etc depending on market conditions to increase shareholder value.

Valuation Methodology: Price to Book Value Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of MFG gave a negative return of ~47.24% in the past three months and a negative return of ~63.11% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $13.760 - $56.180. The stock has been valued using the Price to Book Value-multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ average P/BV multiple, considering the recent decline in FUM, net outflows, and recent challenges due to the termination of the SJP’s mandate and expected fall in FY22 revenue. For this purpose of valuation, a few peers like Perpetual Ltd (ASX: PPT), Pendal Group Ltd (ASX: PDL), Platinum Asset Management Ltd (ASX: PTM), and others have been considered. Considering the current trading levels, rise in NPAT, revenue in 1HFY22, plans to implement capital management initiatives, improve investment performance, improve operational excellence, and indicative upside in valuation, we give a ‘Speculative Buy’ rating on the stock at the current market price of $14.870, as of 10 March 2022, 10:30 AM (GMT+10), Sydney, Eastern Australia. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

MFG Daily Technical Chart, Data Source: REFINITIV 

Australian Finance Group Limited

AFG Details

Recent Update: Australian Finance Group Limited (ASX: AFG) Australian Finance Group Limited (AFG) is a mortgage broking firm operating segment of wholesale mortgage broking and home loans.  On 7 March 2022, Director, Annette King, acquired ~60,000 shares for ~$132,000 in an on-market purchase of shares.

Record NPAT & Continued Diversification in 1HFY22 (ended 31 December 2021):

• The reported NPAT increased by ~20% Y-o-Y to ~$30 million in 1HFY22 depicting the successful implementation of AFG’s diversification strategy across asset classes and business lines.
• AFG declared to pay a record interim dividend of ~7.0 cents per share, up by ~19% YoY from ~5.9 cps in 1HFY21.
• The company posted ~36% Y-o-Y growth in AFG securities loan book up to ~$4 billion and ~47% Y-o-Y in the residential settlements up to ~$30.8 billion in 1HFY22.
• AFG invested in its own technology and acquired Fintelligence and its proprietary platform to optimise growth avenues and enhance the scale of broker networks across multiple asset classes.

Growth in Half-Yearly NPAT; (Analysis by Kalkine Group)

Key Risks: The company faces forex rate changes, interest rate sensitivity, regulatory changes, fluctuation in equity prices, and acquisition risk.

Outlook:

• AFG is positive about the prospects of the residential mortgage market and the opportunity received with the acquisition of Fintelligence to build diversified scale and efficiency.
• The company plans to improve the broker and customer proposition as it is pivotal to its growth strategy. AFG continues to build and invest in technology platform and expects to expedite the migration of brokers in 2HFY22.
• The shift of profit mix from aggregation to a higher -margin lending is driving growth and AFG plans to accelerate this growth via the development of an asset finance lending product.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of AFG gave a negative return of ~26.33% in the past three months and a negative return of ~30.57% in the past six months. The stock is currently trading below the 52-weeks’ average price level band of $ $1.775 - $3.080. The stock has been valued using the Price to Earnings-multiple-value based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ mean P/E multiple, considering an uptick in the debt-to-equity ratio, decline in net cash from operating activities, and the risk of realising benefits from the acquisition of Fintelligence. For this purpose of valuation, a few peers like Bank of Queensland Ltd (ASX: BOQ), Australia and New Zealand Banking Group Ltd (ASX: ANZ), Resimac Group Ltd (ASX: RMC), and others have been considered. Considering the current trading levels, a growing loan book, expanded asset finance distribution network, a growing digital ecosystem, indicative upside in valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $1.840, as of 10 March 2022, 10:30 AM (GMT+10), Sydney, Eastern Australia. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

AFG Daily Technical Chart, Data Source: REFINITIV  

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine and its related entities do not hold interests in any of the securities or other financial products covered on the Kalkine website unless those persons comply with certain safeguards, procedures, and disclosures.

Kalkine Media Pty Ltd, an affiliate of Kalkine Pty Ltd, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.