Solid FUM performance through a period of high volatility
Magellan Financial Group (MFG) ended 1H19 with A$70.78bn Funds Under Management (FUM) up 1.8% over the six months, comprising:
- Retail FUM – A$19.03bn (-0.8% on opening FUM); and
- Institutional FUM – A$51.76bn (+2.8% on opening FUM)
1H19 average FUM of A$72.07bn is up 12% on 2H18 (or up approximately 9.7% excluding the addition of Airlie Funds). Total net inflows in 1H19 were A$1,435m (Retail A$475m, Institutional A$960m). Whilst retail flows typically lag performance (and volatility), the strong relative performance of MFG's primary funds should limit the risk of a sustained period of outflows in our view.
MFG's 1H19 performance fee of A$42m outperformed our expectations, driven by fee generation in undisclosed institutional mandates (institutional performance fee generating FUM of approximately A$8.5bn).
Expecting a strong 1H19 result versus the pcp
We forecast 1H19 NPATA of A$169.2m, up 53% on the previous corresponding period (pcp) driven by:
- management fees up 27.5% (which includes the addition of Airlie Funds);
- increased performance fee contribution (A$42m vs A$9.6m in the pcp); and
- cost/income improvement (ex-performance fees) of approximately 520bp (in part due to the acquisition of Frontier in 2H18).
We forecast DPS of 71.2 cents per share (based on a 92.5% payout ratio of underlying fund management earnings).
Overall, MFG's result should hold few surprises given FUM and performance fees are known and FY19 expense guidance has been provided. In combination with a strong result, any update on the demand for MFG's sustainable strategies; or further utilisation of the balance sheet (seeding new funds and/or acquisitions) could be a positive short-term catalyst.
Forecasts – FY19 up on performance fees
We upgrade NPATA by 8.9% which is driven solely by MFG's 1H19 performance fee result. Our FY20/21 forecasts remain largely unchanged (0.7-1.6% upgrade). Our June-21 FUM forecast is 12.4% higher versus Dec-18 (approximately 5% per annum increase).
While short-term market volatility continues to pose a threat, we believe MFG's valuation is now attractive considering the prospects of a strong 1H19 result, and the longer-term optionality from MFG's balance sheet (including executing acquisition opportunities and new product development). Key risks include a severe market downturn and sustained fund underperformance leading to material outflows.
We upgrade our recommendation from Hold to Add.
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