Financial Services: Fund managers – mark to market

About the author:

Scott Murdoch
Author name:
By Scott Murdoch
Job title:
Senior Analyst
Date posted:
18 January 2022, 12:30 PM
Sectors Covered:
Diversified Financials, Professional Services

  • We mark-to-market forecasts for GQG Partners (ASX:GQG), Magellan Financial Group (ASX:MFG), Pendal Group (ASX:PDL) and Pinnacle Investment Management Group (ASX:PNI).
  • Market moves in 1H22 include: ASX200 Accumulation +3.8%; MSCI World +7.1%; MSCI World AUD +11.3%; S&P500 +10.9%; FTSE +4.9%; AUDUSD -3.1%.
  • Our sector recommendations are: GQG (Add): preferred sector pick with attractive valuation relative to flows momentum, earnings quality and growth potential; PDL (Add): soft near-term flows outlook, but oversold on ~10x FY22F PE; PNI (Hold): high quality and value starting to re-emerge, but Hold on valuation grounds; MFG (Hold): risk of accelerated outflows still present.

GQG Partners (GQG) – Add

GQG ended Dec-21 with US$91.2bn FUM, up +4.5% on the month, +6.3% for the quarter and +7.6% for the half.

Net inflows for 2H21 of US$6.2bn (US$3.0bn in 4Q21) beat prospectus expectations of US$3.9bn. We expect some slowdown in flows (FY22F US$6.9bn, FY23F US$6bn). Relative investment performance is strong for International (all periods) and EM (3-year), but lags in Global and US Equity.

Minor changes to forecasts. GQG commenced FY22 with average starting FUM +4% on the 2H21. We view GQG’s valuation (~14.5x) as compelling versus current flows momentum and growth prospects.

Magellan Financial Group (MFG) – Hold

MFG ended Dec-21 with A$95.5bn FUM, down -18% on the month; and -5.8% on the pcp. Excluding the SJP mandate loss (A$23bn), remaining FUM was ~1.8% higher on the back of investment performance (offset by further outflows).

Excluding SJP, MFG reported net outflows of A$1,552m for the quarter: net retail outflow of A$1,093m; and net institutional outflow of A$459m.

Forecasts increased by ~2.8%. MFG’s headline valuation looks attractive (~10x FY23), but we require increased confidence in the stability of the FUM/fee base before assessing MFG on valuation grounds.

Pendal Group (PDL) – Add

PDL ended Dec-21 with A$135.7bn FUM, down 2.5% for the quarter. Investment performance (+A$3.8bn) was more than offset by outflows (-A$6.8bn) and adverse FX moves (-A$0.5bn). JOHCM recorded a A$43.4m performance fee (flat on pcp), contributing A$22.4m to PDL’s FY22 NPAT.

PDL recorded net outflows of A$6.8bn, including A$5.1bn in EUKA Insto (primarily pre-flagged mandate losses in the Global Opportunities strategy). Remaining flows were generally small outflows across all regions/segments, excluding A$0.8bn of inflows in US Pooled Funds.

FY22 forecasts largely unchanged; FY23 onwards >8% EPS downgrades. PDL’s persistent outflows are disappointing and the flows outlook remains challenged in the near term. However, we think the stock is oversold (~10x FY23F PE).

Pinnacle Investment Mgmt – Hold

PNI recently announced 1H22 performance fees (PNI NPAT share) of A$6.2m (A$11m pcp), in line with expectations. Four affiliates crystalised fees (we assume Hyperion and Spheria the largest two). Net returns on Principal Investments will be ~A$2m (A$0.8m pcp).

We expect solid momentum in retail flows to have continued. We forecast Dec-21 FUM at A$93.1bn, up 4.1% for 1H22.

Minor changes to forecasts. After meaningful share price retracement, improved value has emerged for PNI. However, we retain a Hold. There is potential upside from acquisitions (indicated as near term).

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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