Shares in Magellan Financial Group (ASX:MFG) have taken a hit with the rest of the market. Yet their recent result was well received by the analyst community. Could we be seeing a great buying opportunity here?
Magellan Financial Group is a specialist investment management business. They are focused on global equities and global listed infrastructure strategies for high net worth, retail and institutional investors.
Magellan Financial Group’s key strengths include access to a large retail distribution network via independent financial advisers and a low-cost base. Since its inception, Magellan Financial Group has focused on two asset segments (global equities and global listed infrastructure) and has built a specialist reputation in these two segments.
During the week, Magellan Financial Group reported its results for the six months to 31 December 2017 (1H18). The result was mostly in line with market expectations and supported by growth in Funds Under Management (FUM), stable base management fees and higher performance fees.
Following the launch of the Magellan Global Trust in 1H18, the Company has announced two strategic acquisitions. They are Airlie Funds Management (providing capability in Australian equities) and Frontier Partners Group (to secure improved distribution in the US). The earnings growth from these acquisitions is compensating for lower organic growth. In particular, average monthly retail net inflows were soft in 1H18 and well down on the average of the previous five years. Magellan Financial Group views the greatest impact to monthly Global Fund retail flows was the switching impact associated with the raising for the Magellan Global Trust. It also expects its core global funds to see solid inflows. Notwithstanding, retail inflows into the global equities funds over the next 18 months are expected to be relatively subdued in comparison to previous periods.
In light of the recent derating in the share price to a 1-year forward P/E multiple of ~18x, Magellan Financial Group is worth considering. Whilst the most recent acquisitions in some way points to slowing growth in the core business, the acquisitions have strategic merit. These acquisitions are expected to be EPS accretive, and further diversify the group’s operations. Further, while consensus EPS growth forecast for FY18 is relatively modest at ~7%, reflecting increased costs associated with marketing expenditure, the EPS growth profile improves significantly in FY19, to ~25%.
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The share price has done well during the last few months, but the recent market sell down has put the short-term trend in danger. However, looking at a 5-year chart instead, it becomes evident that the longer-term trend is still positive. We can see here that the stock has bounced off some great longer-term support. We therefore have a very good chance that Magellan Financial Group should head higher from here and current levels represent a buying opportunity.
Michael Gable is managing director of Fairmont Equities.
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