Australia | Aug 10 2018
After a particularly robust FY18 result, Magellan Financial has outlined changes to its distribution policy, given a large tick by brokers.
-Substantial reduction in marketing costs likely
-Could the revised dividend policy drive a re-rating of the stock?
-Is the market ignoring the prospect of retail flows going negative?
By Eva Brocklehurst
Magellan Financial ((MFG)) has underscored the merits of its recent acquisitions, signalling plenty of cash in hand and a substantial increase in its dividend pay-out. The company produced a robust FY18 result, particularly in the funds management division.
A fully franked final dividend of $0.90 per share comes with a change in the distribution policy, with pay-out raised to 90-95% of fund management net profit, from 75-80%, and 90-95% of the performance fee contribution. This represents around a 20% increase in the dividend being paid out and the FY18 dividend is fully franked.
There are a number of growth initiatives including Airlie, the Global High Conviction Fund and US sustainable strategies. Morgans suggests none of these strategies are likely to materially change the outlook but if the US opportunity materialises this could be a structural growth driver. On this basis, the broker considers the valuation multiple undemanding and the near-term earnings outlook driven predominantly by market direction, rather than "bottom-up" growth drivers.
The results were predictably strong, Ord Minnett suggests. FUM at the end of FY18 underpins around 96% of forecasts for management fee revenue, and indicates pre-tax profit growth of 15% for FY19. The broker believes the company's pay-out increase is a significant positive, given it has surplus cash. As the relative performance is now in an uptrend Ord Minnett maintains a Buy rating.
Net profit beat UBS estimates because of a combination of lower funds management costs and stronger principal investment returns. Given the cessation of the company's Cricket Australia sponsorship and a reduction in US marketing fees following the acquisition of Frontier Group, a substantial reduction in costs is expected in FY19.
Combined with lower investment team numbers, costs are expected, ex-amortisation, to rise just 4% in FY19, and this is a driver of the broker's upgrade to FY19 estimates. Along with a lift in the pay-out policy, UBS forecasts a lift in dividends in FY19 to $1.50 per share, a 5.4% yield.
Morgan Stanley is not convinced, despite the better cost control and the lift in base fee rates. Retail flows continued to languish and the $100m of inflows in July, the broker suspects, were driven by seasonal reinvestment of retail distributions. Morgan Stanley forecasts $30m in monthly outflows in FY19 and, in the context of $130m in monthly average retail inflows in FY11-17, believes this raises de-rating risks for the stock.
Macquarie suggests, rather, that the revised dividend pay-out ratio could drive a positive re-rating of the stock. While its dividend yield is within the range of ASX-listed fund manager peers, and a return to the 4% yields of previous times is unlikely, a 5% yield is considered plausible. If the yield was to move in line with a five-year average of Platinum Asset Management ((PTM)) of 5.2%, given a similar pay-out ratio, this would imply a share price of $32.00 at a peer multiple of 7.7x, on the broker's calculations.
Yet Morgan Stanley asserts the market is not pricing in the prospects of retail flows going negative and maintains an Underweight rating. Factors which will underpin the ebbing retail flows, in the broker's view, include a maturing business, increasing breadth & quality of competition, and a normalising of the investment performance in global equities. The company also has a narrow business mix with just three core global strategies and no product with emerging market exposure.
FNArena's database shows three Buy ratings, two Hold and one Sell (Morgan Stanley). The consensus target is $28.61, signalling 4.4% upside to the last share price. Targets range from $21.50 (Morgan Stanley) to $32.00 (Ord Minnett). The dividend yield on FY19 and FY20 forecasts is 4.6% and 5.0% respectively.
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