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Treasure Chest: MA Financial, Mini Macquarie?

Treasure Chest | Oct 11 2023

This story features MA FINANCIAL GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: MAF

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Today's idea relates to MA Financial Group.

Whose Idea Is It?

The analyst at Morgans.

The subject:

Morgans has initiated research coverage on MA Financial Group ((MAF)), becoming the third broker monitored daily by FNArena with a Buy (or equivalent) rating.

Over the last year, shares in the diversified financial services firm have been trading in a range between $3.60 and $5.20. Morgans begins with a 12-month target of $6.25, which suggests 35% upside to the current $4.60 share price.

If that premium is not enough to entice investors, the broker sees clear similarities between MA Financial Group and Macquarie Group ((MQG)).

The likeness centres on a diversified business model based around a strong alternative asset management franchise, along with a profitable domestic banking operation, explains the analyst.

Similar to Macquarie Group, the broker points out MA Financial also has a general focus on more niche investment areas and building differentiated platforms. Perhaps most importantly, a history of producing excellent returns is noted.

Apart from managing alternative assets with a diverse range of strategies (e.g. credit, retail and hospitality), MA Financial specialises in lending, corporate advisory and equities with a strong focus on growth and innovation, observes Morgans.

There are three main businesses: Corporate Advisory and Equities (CA&E) which advises companies on complex deals/restructurings; the newly formed Lending and Technology (L&T) business; and the Asset Management franchise, which houses alternative assets.

There are more than 600 employees spread across locations in Australia, China, Hong Kong, Singapore and the US. The business produced revenue and underlying profit of $302m and $61m, respectively, in FY22.

Staff are strongly aligned with the business, notes Morgans, owning around 30% of the group, with strategic partner Moelis and Company holding around 13%, down from 40% at the time of the group’s initial public offering in early-2017.

The jewel in the crown for Macquarie Group is its Infrastructure and Real Assets (MIRA) business, explains the analyst. MA Financial's Asset Management division has produced comparable revenue margins over time.

While the investment banking environment remains subdued, the tougher near-term outlook provides a buying opportunity for MA financial Group, in Morgans' opinion.

More info:

MA Financial Group reported softer first half results than UBS expected, but medium-term drivers remained strong. By FY26 management targets $15bn of assets under management (AUM), an MA Money loan book of $4.0bn and Finsure managed loans of $190bn on the platform.

The Australian mortgage aggregator Finsure was acquired by the group in late-2021.

Ord Minnett suggested these ambitious operational targets were a good pointer to underlying momentum in the business. Should these targets be met, a substantial earnings and valuation uplift is anticipated for the share price.

While materially lower operating expenses in the first half spared a heavier profit fall, UBS noted the group was cycling very strong performance fees in the previous corresponding period, and pointed to the tough Corporate Advisory & Equities (CA&E) market.

After excluding lower performance fees in the first half, Ord Minnett noted underlying profit was a 6% beat against its own forecast and raised its target price to $7.60 from $7.50. Performance fees were $7.3m, down from $28.8m in the first half of FY21.

One area of caution for Morgans is the decline in the group earnings (EBITDA) margin to around 35% in FY22 from circa 45% in FY18. However, due to increasing scale, management is aiming to lift the margin back to 40% by FY26.

Back when initiating research coverage in late-2022, UBS alluded to this increasing scale. 

UBS highlighted product, distribution and track record were all in place to gain scale in the fast growing alternative assets space. This broker also noted the company's balance sheet and capital flexibility were supportive of investment in further growth opportunities in lending.

The company paid a final dividend for FY22 of 6cps. The average dividend yield forecasts for FY23 and FY24 in the FNArena database are 3.4% and 4.4%, respectively.

The average target price for MA Financial Group by the three brokers covered daily by FNArena is $6.82, suggesting around 48% upside to the latest share price.

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