BUY HOLD SELL -Magellan Financial Group (ASX: MFG)
Magellan Financial (MFG) – Is a specialist fund manager offering four core investment strategies - Global Equities, Global Listed Infrastructure, Sustainable, and Australian Equities (via Airlie Funds Management). The divisions target retail investors in Australia and NZ and institutional investors around the globe. The bulk of its revenues come from management fees which are derived from its funds under management (FUM), the remaining 2.3% of revenue comes from its Principal investment’s arm. At the end of May, FUM totalled $109.93bn vs $110.43bn at the end of April. FUM is a function of investment performance and client inflows. A falling FUM points to weakness in those areas and while that is not the end of the world, in the context of a market that just printed its best financial year in 34, it leaves you feeling a little unsatisfied. Performance fees are another lumpy contributor to revenue but as they are inconsistent and uneven, they are not something that should be given too much weight. Performance fees in the first half were $12.4m vs $41.7m a year earlier. Management breaks out the Warren Buffet quotes to describe its investment universe, citing ‘economic moats’ and sustainable advantages, effectively handballing all the hard work to the eighth wonder of the world – i.e. compounding. While that sounds like a cop-out, people pay for consistency. It recently released a retiree income product called FuturePay, which an independent reviewer praised for its ability to produce income and access to capital through retirement. No comment on expected flows however, which is what the market will be paying attention to. Of more interest is its Principal Investments segment, which in the last financial year bought a 40% interest in financial services firm Barrenjoey and an 11% interest Mexican restaurant franchise Guzman y Gomez for ~$95m. Whilst it is growing, it’s not yet a core earnings driver. Main Observations:
- ROE is exceptional at 39% and expected to see further improvement.
- It sits on PE multiple of 23x. Peers in JHG and CGF sit on multiples of 10.6x and 14.2x respectively so you are paying a premium.
- A gross yield of 5.3% is well above the market average of 3.8%. MFG’s policy is to pay dividends between 90 to 95% of net profit
- It has ~$1bn in net assets and says a strong balance sheet is a crucial factor in withstanding any market conditions. $114.5 million is classified as intangible and arose following the purchases of Airlie Funds Management and Frontier Group, relating to goodwill and customer relationships.