Awaiting GQG Partners’ Operational Leverage

This story features GQG PARTNERS INC. For more info SHARE ANALYSIS: GQG

Analysts suggest GQG Partners’ strong investment performance should lead to ongoing positive net flows, but when is that operational leverage ready to kick in?

-GQG Partners reported a strong H1, in line with forecasts
-Strong investment performance, growing FUM
-Do rising performance fees impact earnings quality?

By Mark Woodruff

The combination of an excellent ongoing investment performance and a modest valuation after recent share price weakness has prompted broker Ord Minnett to upgrade boutique funds manager GQG Partners ((GQG)) to Buy from Accumulate and join four other brokers with an equivalent rating in the FNArena database.

The recent release of interim financials showed funds under management (FUM) grew by US$35bn to US$155.6bn, helped along by US$11.1bn of net inflows thanks to accelerating net inflows in the Wholesale and Sub-Advisory channels of US$6.4bn and US$6.1bn, respectively, while Institutional experienced outflows of -US$1.3bn. 

Across these three primary channels, the asset manager boasts strong distribution capabilities, notes stockbroker Morgans, leading to strong diversification not only by channel, but also by client and geography.

Longer-term, management expects to leverage this distribution capability to assist fund raising for the affiliated managers.

A “very strong” investment performance (in the periods spanning greater than 12-months) should support ongoing net inflows, according to this broker, on top of exceptional flows so far in 2024.

GQG Partners manages equity portfolios across four core strategies: Global Equity; International Equity; Emerging Markets; and US Equity.

As the company is US-based, Global refers to all markets developed and emerging, while International is the same but excluding the US.

Around 39% of the company’s FUM sit within this International strategy, with Global, Emerging and US strategies comprising 25%, 28%, and 9%, respectively.

By region, the Americas saw US$10.5bn of inflows in the first half, with Australia and the EMEA region achieving US$0.4bn each.

Management acquired the seed assets of its newly formed PCS division in the half and will now raise external funds to deploy into acquiring stakes in boutiques that will sit in the fund, explains Morgans.

An earnings contribution from PCS is not expected to be meaningful in the medium-term.

Reported profit and operating income rose by 56% and 54.9% in the first half, respectively, on the previous corresponding period, and management fees climbed by 49.4% with the margin up by around one basis point year-on-year to 49.3bps.

Following a “strong” investment performance across strategies/composites, according to Morgan Stanley, performance fees for the half were US$19.4m – when consensus was expecting US$12m – which left Macquarie and UBS questioning the ‘quality’ of the result.

Ord Minnett was less concerned, highlighting these fees contribute only around 5% to group revenue.

Hoping for more operating leverage, Macquarie notes a disappointing amount of first half cost growth, but this broker also concedes rising costs are a by-product of either a strong performance or future revenue generation.

GQG Partners ended the half with US$104.8m in cash and US$93m of debt, and the 6.4 cent interim dividend (representing a 93% dividend payout) aligned with the consensus forecast.

The earnings quality

UBS describes a lower-quality beat as stronger revenues (particularly performance fees) were offset by higher-than-expected operating expenses.

This broker explains management regularly misses when it comes to costs, and this time around compensation costs grew by nearly 50% on the previous corresponding period due to headcount growth, sales commissions, and deferred remuneration.

The revised cost base will be an around -3% headwind to consensus earnings, according to Macquarie.

Operating expenses of -US$89.9m for the first half came in above forecasts by the broker and consensus for -US$80.7m and -US$81.1m, respectively, primarily driven by compensation of around -US$7m and general and administrative (G&A) expenses of circa -US$2m.

As management is pointing to a declining infrastructure spend, UBS hopes peak headcount growth has passed, paving the way for improved operating leverage going forward.

According to Morgans, higher operating costs are reasonable in the context of investment performance, inflows, and growth investments.

Goldman Sachs agrees noting investment in the PCS business and an Abu Dhabi office should result in better growth ahead. Further, it’s thought some of these costs could be reduced in a more challenging growth environment.

Outlook

The current valuation for GQG Partners remains compelling, in Ord Minnett’s view, given a 24% EPS compound annual growth rate (CAGR) over three years.

While short-term market direction has a considerable influence on FUM levels, flows and share price, Morgans believes the company is structurally well placed to benefit from improved markets with long-term investment performance intact.

In the medium-term, this broker points to optionality via execution of growth strategies, in particular the PCS division.

Following the first half results, the average target in the FNArena database of the five Buy-rated (or equivalent) covering brokers rose slightly to $3.32 from $3.28 suggesting nearly 23.50% upside to the latest share price.

Outside of daily coverage, Goldman Sachs has an unchanged Buy rating for GQG Partners and a $3.05 target.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms