Magellan Financial Group Limited

Average funds under management up 35% to $72.1 billion:Magellan Financial Group Limited (ASX: MFG) was incorporated in 2006 with the objective of generating attractive returns for the clients by investing in global equities and global listed infrastructure while protecting their capital. Recently, the company reported a good set of results in 1HFY19 wherein its average Funds Under Management (FUM) was up 35% to $72.1 billion, adjusted net profit after tax was up 62% to $176.3 million. Based on the good set of numbers, the Board of Directors declared an interim dividend of 73.8 cents per share (franked to 75%) which will be paid on February 28, 2019, representing a dividend rise of 66% as compared to the previous corresponding period. Further, the company announced its dividend policy for Interim and Final dividends based on 90%-95% of the profit of funds management segment (excluding crystallized performance fees) and Annual Performance Fee Dividend of 90%-95% of net crystallized performance fees after tax.Valuation-wise MFG looks impressive with Net Margin at 63.1% in 1HFY19 compared to 27.4% in 1HFY18 and it is higher than the industry median of 22.7%. Return to the shareholders has also been good with ROE coming in at 27.1%, which is higher than the industry median of 3.8%. Similarly, gauge of liquidity- Current ratio is at 9.81x compared to the industry average of 1.46X. Cost-to-income ratio significantly decreased from 26.7% to 17.7% in 1HFY19 over the prior corresponding period, showing a healthy operating performance. It was mainly driven by a reduction in US marketing fees and Group marketing expenses.

1HFY19 Financial Metrics (Source: Company Reports)
On the other hand, the company runs a well-balanced FUM portfolio with 73% from Retail FUM and 27% from Institutional FUM and has a base fees of 47% from Institutional fees and 53% from retail fees. As of now, the Company aims to earn a satisfactory return for its shareholders and the Board has established a pre-tax return hurdle of 10% per annum over the business cycle for the Principal Investment. Meanwhile, the share has risen 31.93% in the past three months as at 26 February 2019 and is trading slightly towards 52-weeks higher level. Based on aforesaid facts and current trading level, we maintain our “Hold” position on the stock at the current market price of $34.720 (up 2.238% on 27 February 2019).
 

Harvey Norman Holdings Limited

Removal from S&P/ASX 100 Index: Harvey Norman Holdings Limited (ASX: HVN) is a mid-cap company with the market capitalization of circa $4.2 Bn as of 27 February 2019. Recently, the group disclosed that one of its Director Mr. Gerald Harvey who had a direct interest in the company, had disposed 25,000 Performance Rights under the 2016 Long Term Incentive Plan via lapsing of 25,000 unvested Tranche 1 Performance Rights. On the financial front, the top-line grew by 8.8% to $1,993.76 Mn in FY18 over the prior year. However, PAT declined by 16.0% on a YoY basis and amounted to $380.05 Mn in FY18 from $452.96 Mn in FY17. The Company had $170.54 Mn in cash balance at the end of the 30 June 2018. On the other hand, the company disclosed an Aggregated Sale of around $2.88 Bn for the period from 1 July 2018 to 23 November 2018 which is 2.7% higher than the prior corresponding period. Over the same period, Comparable Aggregated Sale increased by 3.0% on a PCP basis. The aggregate sales were supported by 6.2% appreciation in the Euro, a 7.0% appreciation in the UK Pound, a 7.0% appreciation in the Singaporean dollar, a 11.1% appreciation in the Malaysian Ringgit and a 0.2% appreciation in the New Zealand dollar for the period from 1 July 2018 to 23 November 2018 as compared to the period from 1 July 2017 to 23 November 2017.


Aggregated Sales of Total Sales and Comparable Sales (Source: Company Reports)

Further, the group has recorded Net margin of 12.1% as at June 2018, which is below industry median of 18.9%. RoE and ROIC stood at 13.2% and 10.6%, respectively in FY18.It is also worth noting thatHVN has been removed from S&P ASX 100 Index effective December 24, 2018, as per the latest S&P Dow Jones Indices rebalance. Moreover, the HVN’s stock remains most shorted share on ASX as per the ASIC report of 21 February 2019. It is indicative of over 9.1% of short position. The stock price thus had fallen in the last one year and was down by 19.25 per cent but up by 18.27% per cent in the past three months (as at 26 February 2019). By looking at aforesaid facts and volatility in the stock, it might be better to wait and watch the stock at the current market price of $3.560.
 

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