GQG Partners: Having energy helps performance

About the author:

Author name:

By Scott Murdoch

Job title:

Senior Analyst

Date posted:

12 August 2022, 7:00 AM

Sectors Covered:

Diversified Financials, Professional Services

• GQG Partners (ASX:GQG) reported 1H22 in-line with expectations: management fees +18% on pcp to US$216.5m; operating profit +18.3% to US$174.2m.
• Net inflows have remained solid (1H US$6.2bn), despite some pressure in the Insto channel. Strong relative investment performance (vs benchmark and peers) solidifies a net inflow outlook for 2H22/FY23 in our view.
• Growth initiatives are currently incremental (product and distribution channel expansion). Although longer dated, we continue to believe GQG has the operating infrastructure to add further investment teams under the brand.
• We view GQG’s ~13x FY23 PE as attractive versus its quality of earnings; current flows momentum; and growth optionality. Add maintained.

Event: 1H22 result in-line

Management fees of US$216.5m, were up ~18% on pcp, however slightly (~2%) below MorgansF (US$221.1m) and prospectus (US$224.7m). Management fee margin compressed 47.6bps (pcp 49.5bp; 2H21 48.6bp), due to FUM composition (greater decline in higher margin EM FUM; higher skew to lower fee Int’l Equity). 

Performance fees of US$6.2m were higher than expectations (MorgansF US$1m; prospectus nil), driven by outperformance in Global and US strategies. 

Operating profit of US$174.2m (+18.3% pcp; in-line with US$173.3m forecast); NPAT US$125.3m (+17.8% on pcp; in-line with forecast). Operating cash flow was US$123.3m (98.4% conversion of NPAT) and GQG ended with US$19.3m cash (no debt). Dividends of US4.1cps (1Q 2.09cps; 2Q 1.98cps) were declared.

Investment performance has helped against a tough market backdrop

Performance: strong 1-year relative performance (to June-22) has been achieved across all strategies (see pg 4). Since inception, GQG’s strategies rank (vs peers; eVestment data): Int’l top 1%; US top 1%; Global top 2%; and EM top 15%.

Flows: GQG delivered US$6.3bn in net flows (1Q US$3.4bn; 2Q US$2.8bn), maintaining the run-rate from 2H21. 1H flows composition was Wholesale (US$3.7bn); Sub-Advisory (US$2.1bn) and Institutional (US$0.5bn).

Within sub-advisory, the GS International fund achieved US$2.7bn (implied outflow of US$0.6bn in other sub-advised mandates).

The Institutional channel recorded outflows of US$0.6bn in 2Q22, with mgmt stating that they had achieved high gross inflows, however increased outflows as clients rebalanced.

GQG noted this dynamic is expected to continue near-term, however expects outflows to moderate in time and the channel to return to growth/ positive flows. Strong momentum is being achieved in the Wholesale channel, with ~US$0.8bn in UCITS net inflows.

Product and distribution: GQG added two new sub-advisory relationships (US Equity in Canada; Global Equity in Australia) and has launched the US Equity strategy via a Retail SMA structure. Distribution has been expanded in Australia, increasing total headcount to 12 (from 8).

Investment offering expansion: GQG remains active in seeking new investment team opportunities, however noted the ‘bar is high’.

Forecast and valuation update

FY22/23 EPS is downgraded by 2.9%/4.4% from adjusted revenue margin assumptions (FUM mix) and slightly higher opex. DPS payout ratio lowered to 90%.

Investment view

We see GQG’s recent (and longer-term) investment performance track record as solidifying the near-term flows outlook.

The earnings base is diversified earnings (by strategy and clients), which we believe provides a solid cash yield; leverage to improving market performance; and optionality around GQG’s execution of medium-term growth strategies (in particular adding new investment teams).

The key risk is the reliance on Rajiv Jain (CIO), however with the business acutely aware of this, we believe the risk can be diluted over time.

Price catalysts and risks

Stronger than expected net inflow; additional investment teams (diversity) added.

Downside: investment underperformance leading to sustained outflows; key man risk; key client risk/concentration.

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