Magellan Financial Group: Flows uncertainty still outweighs capital position
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Senior Analyst
- Date posted:
- 21 February 2022, 2:30 PM
- Sectors Covered:
- Diversified Financials, Professional Services
- Magellan Financial Group's (ASX:MFG) 1H22 result was in-line with expectations: management fees +14% on pcp; Funds Management PBT +13%. The result would have been ~14% lower excluding SJP.
MFG announced an options issuance for staff (retention incentive) and shareholders (stability mechanism). The board is considering a buyback.
Other key messages from management included: MFG will not cut retail management fees; the dividend policy won’t change; strong capital position (~A$1bn NTA); no further investments will be made in MCP; and Hamish Douglass is expected to return to the business (no timeframe). MFG gave a business as usual message, however conceded further outflows were likely and investment performance (in Global) needs improving.
- MFG is trading on ~13x FY24 PE on our base case; however a wide range of scenarios is possible from this point. Meaningful outflows look inevitable; and until the more severe downside risks are removed and there is increased certainty in the FUM base, we don’t view the risk/reward as favourable.
Solid 1H22, but mostly backward looking; solid balance sheet position
MFG’s 1H22 results comprised: adjusted NPAT up 15% to A$248.1m and Funds Management PBT up 13% to A$304.8m. The result would have been ~14% lower excluding St James (SJP): A$212.5m NPAT vs A$248.1m reported.
DPS was +13% to A$1.10ps with the 90-95% payout policy confirmed. Share of Associate profit (primarily Barrenjoey) was A$3m (MorgansE no contribution). FY22 funds mgmt. expense guidance (A$125-130m) reaffirmed (1H A$62.3m).
Current FUM (as at 9-Feb-22) is A$87.1bn, down -6.8% from Jan-22 (A$93.5bn); and down -8.8% from Dec-21. Revenue margin (bps on FUM) has increased to ~64bps (from 62bps) given the higher skew to retail (on insto mandate losses).
MFG’s capital position is solid with ~A$1bn cash/investments/financial assets.
FY22 outlook is positive; clear strategy in place to take the business forward
MFG announced share options to be issued, including 10m (~5% of current shares on issue) unlisted options (A$35m strike) to staff as a retention program. The shareholder options (1 for 8) looks more for improving sentiment than adding value.
MFG noted the Board is considering an on-market share buyback. However, given the high payout ratio (and cash balance largely required for upcoming div), surplus capital would need to come from divestments near-term. If MFG divested its fund investments (~A$400m), this would be ~7.5% EPS accretive (FY23).
FUM stability (flows/mandate losses) is still clearly the key risk, with MFG stating “there will be some outflows”. Insto outflows are logical with a CIO change (the early mandate losses mostly from specific CIO clauses), with asset consultant decisions likely to see further outflows. Retail outflows in Global (which had already commenced) we see as likely to also accelerate post the CIO changes (even if temporary). The ratings response from retail fund researchers will influence this (Zenith dropped one down to ‘recommend’).
We see it unlikely of a highly negative rating response from Morningstar/Lonsec, however this would also accelerate outflows. Investment performance (relative) in Global remains under pressure, with some further (relatively small) underperformance in Jan and Feb to-date.
Forecast and valuation update
We downgrade FY22/23/24 EPS by 4%/15%/13%. Forecast outcomes for FY23/24 are wide based on: the extent of outflows; any divestments and subsequent capital management; and associate profitability or divestment gains.
MFG’s capital base is solid, however we still see earnings risk to the downside. Until a clearer investment case can be made (FUM stability), we don’t view the risk/reward as favourable.
Price catalyst and risks
Downside: accelerated outflows, which could come from further investment underperformance, retail rating agency downgrades, investment consultants;
Upside: capital management; better/faster than expected stabilisation in the FUM base; a major improvement in fund performance; significant value realization or
contributions from MCP investments.
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