Magellan Financial Group: Associate losses will turn the corner
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Date posted:
- 18 August 2021, 9:00 AM
- Sectors Covered:
- Contractors/Developers, Diversified Financials
- Adjusted NPAT of A$412.7 (down 6%) was dragged lower from share of Associate (Barrenjoey; B*) losses. Adjusted NPAT pre-Associates was up 4%.
- Share of Associate losses in FY21 was A$41.7m. MFG expect a substantially lower loss in FY22 and material profitability on a 3-5 year time horizon.
- MFG’s beneficial tax rate will cease from FY24, reverting to ~30% (21.4% FY21).
- Add maintained. MFG is trading on ~18.7x FY22 PE (including B* losses) versus ~21x med-term average. We see value on a long-term view, however acknowledge proof of an investment performance turnaround (relative numbers) will likely be required to improve weak sentiment (which may take time). In our view, the investments made in Associates presents solid future optionality rather than a meaningful risk (distraction) to the underlying business.
Solid FY21 result
MFG’s FY21 results comprised: adjusted NPAT down 6% to A$412.7m; adjusted NPAT excluding share of Associate losses up 3.7% to A$454m; Funds Management PBT flat at ~A$557m; Funds Management PBT pre performance fee contribution up 10% to A$527m.
The Funds Management division result was driven by management fees up 8% (broadly in-line with average FUM) and cost/income of 16.9% (19.7% pcp).
Share of Associate losses (primarily B*) was A$41.8m (2H21 A$36m).
Closing June-21 FUM of A$113.9b was +17.2% on the pcp and up 9% on average FY21 FUM (A$103.7bn).
Outlook reasonably solid but clouded by Associate losses and tax changes
MFG provided formal FY22 Funds Management expense guidance for A$125- 130m (A$107m FY21). Whilst it looks like a step-up, FY21 expenses were artificially lower due to no bonuses paid during covid. Guidance implies ~11% increase in group expenses from FY20 (FY22F EBITDA margin flat on FY20).
Barrenjoey in focus: 2H21 share of Associate losses were A$36m; not unsurprising given the ramp up of B* which now has ~250 staff. Whilst not specified, MFG stated that the loss is likely to be meaningful reduced in FY22.
We view the outlook for performance fees as remaining solid with the majority of PF eligible FUM above HWM. We expect flows to remain subdued and forecast minor retail net outflows in 1H21. MFG stated that early insto mandates are expected in the Sustainable Funds near-term.
Forecast update: downgrades on Associate losses; tax higher
FY22-24 Underlying EBIT changes within +/-2.5%. FY22/23 EPS is downgraded ~5% on the back of higher Associate losses ( A$30m/A$10m in FY22/23)
FY24 EPS is downgraded by 13.7% from: tax rate reverting to ~30% (removal of the OBU concession) and impact from DRP shares (~1% pa).
Investment view: Add maintained; short-term patience required
MFG is trading on ~18.7x FY22 PE (or ~17.7x excluding Associate losses).
We acknowledge that relative investment performance needs to improve to shift sentiment; and market direction / investment performance largely dictates near-term earnings trajectory.
However, we believe MFG’s earnings base is resilient with long-term growth supported by optionality within the Associate investments.
Price catalysts: performance and traction of new products
The key catalyst is a reversal of the short-term investment underperformance, alleviating market concerns of meaningful outflows.
Risks: performance is key
Further relative investment underperformance (in Global) is the key near-term risk, which would heighten outflow risk and weaken sentiment.
Downside: market volatility / material fall; sustained underperformance of major funds leading to material FUM outflow.
Upside: higher-than-expected inflows into new product launches; acquisitions; higher-than-expected fund performance and performance fees.
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