Holding onto its Values
Since our last coverage of the Magellan Financial Group (ASX:MFG) in November (FAT-AUS-847), there have been quite a few announcements from the fund manager, with the most notable being updates on acquisitions as well as interim results. The company has also terminated its sponsorship deal with Cricket Australia following the recent ball tampering scandal which it believes was ‘inconsistent’ with company values. That aside, the company’s share price over a rolling 12-month period have been on quite a roller coaster ride, in the face of market volatility as well as the varied pace of fund inflows which can be observed on the chart below. Prices are now flirting with support around the $23 mark.
Another major factor for the recent price volatility has been fears of an escalating trade war following US President Trump’s rhetoric and China’s responses. This in turn has many investors assuming a knock-on impact to fee income and reduced fund inflows on a flight to safety. Nevertheless, we believe these concerns to be overblown and normality will return given that countries worldwide have become far too interdependent to resort to trade prohibitions. Moving on, the company has also announced two acquisitions in early February which it expects to be moderately earnings accretive and diversify sources of retail funds in Australia as well as strengthen its institution distribution in North America. The company has budgeted circa US$15 million in cash as well as approximately 4.5 million shares.
On that note, the first acquisition is US-based Frontier Partners, which has been the company’s distribution partner in North America since 2011. Frontier is a registered investment advisor focussed on distributing specialist funds to North American institutional investors. This joint alliance (pre-acquisition) has brought in circa $12.8 billion in FUM and has been pivotal to Magellan’s presence and expansion in North America.
We expect this acquisition to further expand the company’s distribution operations in the US and eliminate US marketing and consulting fees, as it can mainly focus on distributing Magellan funds. The acquisition would mainly be funded on cash and some 640,000 shares. Though the acquisition was completed on 05 February 2018, the broker-dealer and mutual fund platform operations are still undergoing regulatory approval and the deal expected to complete over the course of this year.
The second acquisition
is Airlie Funds Management. Airlie, which is a specialist equities fund manager, has over $6 billion in FUM (Funds Under Management) and mainly targets institutional and high net worth clients. Airlie has an impressive track record of growth given its relatively short span of operations (~6 years).
Following the acquisition, Airlie and Magellan will launch an active exchange-traded fund (ETF) which will be called the Airlie Industrial Share Fund. The acquisition will be 100% and will be funded through the issuance of circa 3.86 million ordinary shares at a price of circa $27.225 indicating a value of $105 million.
Finally, Magellan (ASX:MFG) has revealed it is withdrawing from its three-year partnership with Cricket Australia following the ball tampering scandal. Earlier in August, the company announced that it had budgeted circa $11 million for marketing expenses related to this, given a strong alignment in terms of income and demographic.
Source: Fox Sports
Based on the footage (and graphic above) it has been reported the team tampered with the ball and had the full knowledge (and likewise consent) of the team’s leadership. Magellan CEO Hamish has this to say about the withdrawal: “a conspiracy by the leadership of the Australian Men’s Test Cricket Team which broke the rules with a clear intention to gain an unfair advantage during the third test in South Africa goes to the heart of integrity. Regrettably, these recent events are so inconsistent with our values that we are left with no option but to terminate our ongoing partnership with Cricket Australia.”
Though the company’s move to withdraw from its partnership with Cricket Australia will have a minimal impact on FY18 results, its strong stance on fair play and integrity reflects well on the company and will preserve its reputation in the long run.
Moving on, we look at the company’s interim results and latest trading update.
Interim 2018 Results and Trading update
Starting from the top and revenues came in much higher up 27.6% year-on-year to $195.8 million given solid inflows and much higher average FUM (+24.4% yoy) over the time period to $57.87 billion. This is summarised in the graphic below.
We also believe that a substantial portion of the growth in the top-line were following the launch of the Magellan Global Trust (MGT) which saw inflows of some $1.57 billion from retail investors for its income focus. We also like that the fees from this fund are more predictable given its close-ended structure.
Source: 07 February 2018 Company Presentation
Moving on to the expense line, statutory expenses surged (3.28 times) to $132.6 million mainly due to the one-off net offer costs of the MGT launch amounting to $55.7 million. However, adjusting for this, expenses only rose 31.3% to $53.04 million, mainly driven by increased marking (domestic and US) expenses of circa $5.8 million.
Going forward, we expect marketing expenses to be lower as the year progress given the acquisition of Frontier as well as a ceasing of the partnership with Cricket Australia. That said, the second biggest cause of the increase was due to Employee related expenses amounting to 17.6% due to performance incentives despite the reduced headcount (-4 employees) to 104.
Despite the increases, the cost-to-income ratio improved year-on-year and remains efficient at 26.7% (+20 bps) and excluding performance fees, would make it 28.1% (+100 bps). Note that this is substantially lower than peers in Australia (~48%) and the US (~64%), keeping Magellan at sector leading levels.
All in all, statutory NPAT (w/ MGT costs), fell 38.6% year-on-year to $53.45 million however, adjusting for the MGT costs, this would be a 25.4% improvement year-on-year to $109.15 million, a significant underlying improvement. Ultimately, we view the MGT launch to be worthwhile despite the short term hit as it broadens the company’s reach while providing another highly scalable product offering.
Following the interim results, the company also provided yesterday an update on its FUM ended 29 March 2018. For the month, total FUM had grown to $65.279 billion, slightly down from $65.363 billion from the previous month, mainly due to a net outflow from retail.
However, on a year-on-year basis, this was still a substantial 36.8% improvement from the March 2017 FUM of $47.709 billion. With the largest gains in FUM seen in the Institutional space contributing 78.64% of the growth, or some $13.817 billion, and half of which from the Australia institutional funds (+142.9% yoy). The table below summarises the changes:
Source: Magellan Financial Group (ASX:MFG) 09 April 2018 Company Filing
Turning to the monthly chart, support continues to be largely respected around the 61.8% Fibonacci retracement (blue set of retracements). Prices are flirting though with this level, and need to hold their ground to avert a move towards the next layer of support at $20.
Summary
There have been some interesting developments at Magellan (ASX:MFG) with the acquisition of two companies which we expect to be earnings accretive. That aside, the recent interim results provide insight into the positive impact of the newest closed-end trust launch. Finally, the company has also made an announcement on its stance with the recent Cricket Australia scandal and stood its ground based on company values. Recent market volatility has taken its toll on the fund manager’s share price, but we are of the view that the global correction is nearing its end.
Over the longer term, with its established track record, growing product range and business infrastructure, we believe Magellan Financial Group (ASX:MFG) can continue to grow earnings strongly. As such Magellan Financial Group will remain firmly held in the Fat Prophets Portfolio.
Disclosure: Magellan Financial Group (ASX:MFG) is held within the Fat Prophets Concentrated Australian Share and Small & Mid Cap Models.
