Value In Magellan Financial?

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This story features MAGELLAN FINANCIAL GROUP LIMITED.
For more info SHARE ANALYSIS: MFG
The company is included in ASX200, ASX300 and ALL-ORDS

Recent acquisitions have supported growth in funds under management for Magellan Financial in the second half of FY18, although brokers disagree regarding whether this is the right time to buy the stock.

-Retail flows return to positive territory, albeit slightly
-Near-term outlook driven by market rather than organic contribution
-Are more acquisitions needed?
 

By Eva Brocklehurst

Fund flows are improving for Magellan Financial ((MFG)) and several brokers consider the valuation support is now better after the June quarter. Funds under management increased 20% in the second half, underpinned by the Airlie acquisition, positive markets and net inflows.

Retail flows returned to positive territory in June after three months of outflows. Credit Suisse suspects those outflows were temporary and triggered by investor fatigue as well as the pullback in equity markets in the March quarter, which caused some re-allocation away from equities in the retail channel.

Positive institutional inflows also concealed some outflow from the Airlie product during the half year. Funds under management for the half year to June were $69.5bn with retail sustaining -$56m in outflows and institutional $1.34bn in inflows.

Credit Suisse believes concerns regarding future flows are overstated, as there has been only temporary weakness in retail flows amid further capacity for existing institutional clients. Upside also exists if the company can leverage its distribution and build the Airlie retail business.

Morgans downgrades to Hold from Add, suggesting the retail flows are not reflecting the investment performance and instead reflect lower industry growth, heightened competition and the maturity of the company's traditional distribution channels.

The broker acknowledges the slight outflows of the retail channel, if sustained, are not material to the earnings outlook but may result in a sustained de-rating to the stock's historical valuation.

Growth Outlook

Morgans also cites a relatively low performance fee contribution, believing the near-term outlook is driven by market direction as opposed to organic growth drivers. The broker prefers to accumulate the stock closer to when organic growth returns, or there is any meaningful volatility.

In contrast, Credit Suisse considers the stock is trading at one of its cheapest points since its recent acquisition success. The stock is trading on a 13.7x the 12-month forward earnings per share estimate, and at almost a -17% discount to the market.

Hence, the broker reiterates an Outperform rating and believes the company should benefit over the medium term from a correction in Australia's underweight allocation to global equities.

UBS agrees the stock offers compelling value despite a more mature growth phase. As the key equity and infrastructure funds outperform benchmarks over the second half, the broker upgrades estimates for FY18 earnings by 3.3%.

The company's Global Fund outperformed benchmarks by 1.81% in the half year while the Infrastructure Fund outperformed by 3.01%.

Morgans accepts some growth options exist in the balance sheet along with the recent acquisitions of Airlie Funds and Frontier Partners. Airlie is expected to raise retail funds in the near term and this should add some growth.

Nevertheless, from a "bottom-up" growth perspective the broker believes the US low-carbon strategies need to attract meaningful flows, which requires increased confidence, or maybe further acquisitions are needed.

The database shows two Buy ratings, two Hold and one Sell (Morgan Stanley). The consensus target is $25.61, signalling 6.4% upside to the last share price. This compares with $27.46 ahead of the quarterly update.

Targets range from $20.00 (Morgan Stanley) to $28.00 (UBS, Credit Suisse). The dividend yield on FY18 and FY19 forecasts is 4.4% and 4.8% respectively.

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