Magellan Financial Reflects Lofty Expectations

Australia | Aug 15 2019

Magellan Financial has outlined a plan to increasingly use a partnership model to engage directly with retail investors.

-Brokers generally consider the stock too expensive
-Closed-end fund improves the quality of earnings
-Magnitude and potential success of opportunities remain unclear


By Eva Brocklehurst

Magellan Financial ((MFG)) has called attention to its future growth initiatives with the launch of a closed-end fund and an equity raising. The company intends to increasingly use and leverage its partnership model with direct investors, raising capital to invest in listed products with loyalty bonuses funded by the manager in order to maintain an increasingly sticky retail base.

The partnership offer will capitalise on the gap in the retail wealth segment created by the exit of the banks, and Morgan Stanley also suggests this provides an alternative to the growing strength of industry super funds.

Nevertheless, more capacity is required to deliver on its growth aspirations. To this end Magellan Financial has announced a $275m institutional share placement with proceeds to be directed towards a high conviction trust as well as to seed new investment strategies. Is?

This includes $50m to support a new retirement income product. Details are limited and the company has reiterated that the retirement product will not be capital intensive nor an annuity so Citi adopts a wait-and-see approach.

While the deployment of capital to fund investor discounts for such funds makes strategic sense, the increasing capital intensity of flows is also an indication to UBS that Magellan Financial is entering a more mature growth phase. With partnership costs becoming a more recurring feature and the stock trading at 28x FY20 price/earnings (PE) estimates the broker envisages downside risks to valuation.

Morgan Stanley suspects the capital raising could dilute earnings per share and, given a PE ratio around such levels, considers the stock too expensive. A closed-end fund may improve the quality of earnings but the broker points out the retirement income product is light on capital and will not require an APRA licence, while also being 6-12 months away.

Growth Driver?

A competitive response is also expected should the product be successful. Ord Minnett supports the strategy but believes the manager-funded priority offer will be no more than an incremental driver of growth, taking into account the company's $90bn funds under management base.

Still, the company maintains an ability to deliver solid inflows over FY20/21 on the back of sustainable US strategies and US$6bn of remaining capacity in the infrastructure fund, Morgans suggests, while acknowledging the stock is susceptible to any meaningful pullback in the market. Morgans retains a Hold rating given the quality of earnings and the growth options.

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