Magellan Beats Estimates; Outlook is Very Positive

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Magellan Financial Group reported underlying profit of AUD 48.5 million for fiscal 2013, up substantially from AUD 13.7 million in fiscal 2012 and above Morningstar’s forecast of AUD 45.7 million by 6.1%. The final fully-franked dividend of AUD 16.5 cents per share (cps) took total fully-franked dividends to AUD 21.5 cps up significantly from AUD 4.5 cps in 2012.

As at June 2013, institutional to retail funds under management (FUM) was split 70:30, with a total of AUD 14.69 billion FUM, a substantial increase from the AUD 4.06 billion in June 2012. The growth stems from the company’s stellar investment performance and investors looking to take advantage of the falling Australian dollar. With rapidly growing institutional FUM, future management fees should be diluted but pricing power allows the company to price institutional mandates at higher basis points relative to peers.

Magellan’s narrow-moat rating and stable trend remain. The emerging brand, strong investment outperformance, deep industry connections and demand for large global cap “value” investing underpin the firm’s differentiated distribution capabilities. With barriers to entry relatively low, but competitive hurdles coming in the form of an established track record, entrenched sales relationships and investor trust, we view this as particularly important for Magellan as it allows the company to remain competitive.

The Australian wealth management sector lacks wellknown retail-focused international equity money managers with Magellan and Platinum Asset Management the standouts. However, our view is that competition will intensify as rivals move to service the growing demand for international equities. Notwithstanding, we believe Magellan will weather this, continuing to leverage its outstanding performance, brand and sales relationships. Encouragingly, the company’s venture in global UCITS is a testament to the company’s thriving distribution and marketing capabilities. We expect further European institutional flows on the back of this.

The competitive retail landscape will be further impacted by the spate of financial adviser regulatory reforms. Previously, we highlighted Magellan to be a theoretical winner of the requirement of advisers having to act in their client’s best interests and the introduction non-commissionbased financial advice. We also pointed out that dominant players, such as the big four Australian banks and AMP will likely legally work around these measures and retain their oligopolistic hold on the distribution of investment products. Latest data has supported our view, with an increasing proportion of independent financial advisers joining the larger networks. With that being said, Magellan’s retail flows still impress and we expect this to continue and argue that it is “business as usual”.

 

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