GQG Partners Shrugs Off Adani

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

While there was an immediate rush to the exits following the recent Adani news, funds are flowing back into GQG Partners and brokers point to longer term performance success.

-GQG Partners suffers initial outflows due to Adani
-December to date shows funds flowing back in
-Longer term outperformance solid
-Targets trimmed but mostly Buy ratings

By Greg Peel

Last month, boutique fund manager GQG Partners ((GQG)), headquartered in Fort Lauderdale, Florida, saw its shares plunge by -20% following news that Adani Group companies, of which GQG is a major backer, was facing indictment charges from US authorities over an alleged bribery scheme.

Jarden estimates GQG has invested around 4-6% of funds under management (FUM) into Adani companies. While both Adani and GQG each lost an immediate -20% in share price on the news, since the Adani founder was accused of having participated in a bribery scheme, Adani stocks are down by -6% (to Tuesday), with GQG down by -16%, reflecting not only its Adani exposure, but also, in Jarden’s view, fears that net funds flows will deteriorate.

The outsized GQG fall has also been attributed to a move by UBS, early this month, to downgrade GQG to Neutral from Buy.

UBS anticipated a period of cyclical weakness in fund flows ahead for the asset manager, but noted the downgrade was not inspired by the much-publicised Adani exposure with which UBS felt “comfortable”. UBS’ research had discovered funds flows into GQG’s International Opportunities fund had pretty much ground to a halt recently.

The broker suggested positive outperformance over three and five year horizons will be somewhat diluted by one-year underperformance as stronger historical performance numbers roll off. UBS slashed its target price as a result, to $2.30 from $3.30.

There were otherwise three Buy or equivalent ratings from the four other brokers monitored by FNArena covering GQG and one Hold. There was a collective holding of breath ahead of the release of GQG’s November performance update.

And Exhale

GQG reported net inflows of US$0.1bn for November, lower than the average of US$2.0bn for the calendar year to date, but a positive given the issues around Adani, Ord Minnett suggests. GQG reported gross inflows of US$4.2bn in the month, a higher level compared to the same month in the previous three years, signifying strong demand for its products.

While November net inflows appear weak, Jarden’s analysis of around 65 listed GQG funds suggests net inflows deteriorated immediately after the Adani allegations were made public on November 20, troughed on November 22, and recovered through to December 3. Indeed, the data suggest GQG achieved around 4% net inflows in the first two days of December.

November is also typically a seasonally weak month, and Jarden’s analysis of daily flows over a longer period suggests flows rapidly deteriorated due to negative macro news but quickly recovered thereafter.

Morgans’ assessment of some of GQG’s funds under management (FUM) also shows some outflows likely occurred directly post the Adani news. Based on fund performance, Morgans does not expect this to persist for an extended period.

The Emerging Markets fund, which is more than 10% exposed to Adani, outperformed its benchmark by around 1% in November, Morgans notes. Over the timeframes one to five years, all strategies have outperformed benchmarks meaningfully, ranging from 180 basis points to 920bps.

While GQG flagged gross inflows remained strong through and immediately following the Adani incident, the November performance numbers imply to Goldman Sachs the slowdown in net flows relates to perhaps more elevated outflows around that time period. The broker thinks most of the slowdown appears to be driven by Emerging Market Equity and International Equity funds.

From Here?

Another piece of news from the November update which will not have helped the share price was GQG’s decision to cancel its planned share buyback, previously due to begin on December 6, due to uncertainties relating to US withholding tax requirements.

To provide some offset, GQG’s much lauded “gun” chief investment officer, Rajiv Jain, indicated he intended to make further share purchases himself.

Jarden’s analysis suggests GQG has impressively outperformed relevant benchmarks by an average of around 3.5% over the last seven years, although relative performance has been volatile, with some sizeable peaks and troughs over this period.

While the broker typically finds peer net flows are highly correlated with relative fund performance, this relationship does not look to apply to GQG, with low levels of correlation suggesting flows could rather be a reflection of GQG’s strong distribution footprint and the many investment vehicles which GQG is able to offer investors across its strategies.

Longer term, GQG is structurally well placed to benefit from improved markets with long-term investment performance intact, Morgans suggests, while medium term, there is optionality from GQG’s execution of growth strategies. GQG is acutely aware of the “key man risk” with reliance on Rajiv Jain, but the broker believes the risk can be diluted over time.

Attractive

In responding to the cancelled buyback, for which GQG could be required to withhold 30% of the proceeds from shareholders selling into the buyback, UBS suggests this is likely to raise further debate as to broader capital management efficiency and therefore appropriate valuation for the stock.

While GQG pays a strong dividend yield, it is unfranked and subject to US withholding tax. With buybacks also subjected to withholding tax, this implies GQG appears structurally disadvantaged in distributing capital back to shareholders tax efficiently, UBS suggests.

UBS thus retains its Neutral rating on GQG. It has raised its previously slashed target price post the November update, but only to $2.32 from $2.30.

Morgans has nevertheless upgraded its rating to Add from Hold, retaining a $2.47 target.

While the November performance was a relief in the face of the Adani-inspired turn of events, brokers have mostly trimmed earnings forecasts following what in isolation was a weak month for GQG. This has led to some target price cuts.

Overall, the impact of the Adani related issues on the GQG business appears to be modest at this point, Ord Minnett suggests. This broker remains constructive on the outlook given a generally strong investment performance and expanding distribution network.

Valuation remains appealing to Ord Minnett, with the stock on an FY24 PE of 10x and an unfranked dividend yield of 9.5%. Hence, a retained Buy rating, with a target cut to $3.00 from $3.35.

Macquarie declares a yield greater than 10% in suggesting an attractive valuation, while cutting its target to $3.00 from $3.15 and retaining Outperform.

Goldman Sachs lowers its target to $2.80 from $3.00 to reflect the relatively muted impact on flows to date despite an outsized share price reaction resulting in a forward PE of less than 9x on this broker’s forecasts. Goldman has moderated flow expectations, reflecting some slowdown, albeit manageable in the broker’s view.

Hence, Goldman Sachs retains Buy.

Jarden has also retained Buy, while cutting its target to $3.15 from $3.30.

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