FY18 result – NPAT up 37%
Magellan Financial Group (MFG) reported FY18 NPAT of A$268.9m, up 37% on the previous corresponding period (pcp) and slightly ahead of our forecast (A$266m). A 2H18 dividend (final and performance fee div) of 90 cents was declared, significantly ahead of our forecast (65.4c) due to an increase in the payout policy.
Management fee growth of 26.8% (to A$381.1m) increased broadly in line with average Funds Under Management (FUM) (+29.3% on the pcp), with the 2H18 average base management fee slightly diluted to 63.60bp (from 65.9bp 1H18) with the inclusion of Airlie institutional FUM. Closing June-18 FUM of A$69.5bn was up 37% on the pcp and +6.2% on average 2H18 FUM. The funds management division reported NPBT of A$331.4m (up 33.5% on the pcp), driven by management fee growth (+26.8%); a higher performance fee (A$39.8m vs A$21.7m pcp); and approx. 190bp PBT margin improvement to 77.3%.
Surplus capital leads to higher div payout
MFG revised its dividend policy and provided FY19 operating cost guidance:
- Dividend – MFG has moved to a 90-95% payout of Funds Management earnings (interim and full year) and 90-95% payout of the performance fee contribution (paid annually). This represents an approx. 20% increase in the dividend payout.
- Cost guidance – MFG provided operating cost guidance of A$105m, up marginally from A$101m in FY18. In addition, A$4.2m of non-cash amortisation will be expensed in relation to the FY18 acquisitions.
Slow burn bottom up growth initiatives. Balance sheet optionality
MFG has a number of organic growth initiatives, including:
- Airlie – raising a retail fund;
- Global High Conviction Fund – increasing marketing after developing a 5-year track record;
- US Sustainable Strategies – now have an approx. 22 month track record and theoretical capacity of US$15-20m (the strategy has taken its first client into a UCITS sub-fund); and
- new products in development (which MFG alluded would compete with the industry trend of FUM moving to passive funds).
In our view, none of these strategies are likely to materially change the FY19/20 outlook. However, if the US opportunity materialises this can be a structural growth driver for the group.
MFG ended the period with approx A$226m net cash and receivables and A$274m in investments (in funds) – plenty of surplus capital. In our view, deployment of surplus capital via further acquisition presents some upside risk in the medium term.
Investment view – market direction dictates the short-term
We acknowledge that Magellan Financial Group (MFG) appears to present solid value at 16.8x FY19F PE (approx. 15% discount to its approx. 20x medium-term average); however we believe MFG is likely to sustain a lower PE until 'bottom-up' growth can be proved up (a return to retail inflows; commencement of institutional flows into new US products; or executing inorganic growth opportunities.
We increase our share price target but retain our Hold recommendation.
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