We recently researched HMC Capital (ASX:HMC) in The Dynamic Investor on 24 September. We concluded that weakness in the shares presented an attractive entry point given HMC’s growth profile. The shares have since recovered strongly and are trading near all-time highs.
With this in mind, we assess whether current levels still present an entry opportunity.
About HMC Capital
HMC Capital is an Australian diversified large-scale alternative asset manager with over $12.7b in Assets Under Management (AUM) as at 30 June 2024. The Company primarily manages real estate assets, particularly convenience-based assets via the listed fund HomeCo Daily Needs (HDN) and the unlisted Last Mile Logistics (LML) fund. HMC moved into healthcare assets via the HealthCo listed fund (HCW) and the unlisted Health & Life Sciences fund.
The Company has investments across five platforms/verticals that underpin a medium-term AUM target of $20b: i) Private Credit (~+$5b); ii) Energy Transition (~+$2b); iii) Real Estate (~+$14b); iv) Private Equity (~+$2b) and v) Digital Infrastructure (~+$2b).
Key Fundamental Drivers
Ambitions to Growth AUM
Assets Under Management (AUM) has grown rapidly, from $1.2b in FY20 to $12.7b at the end of FY24. AUM for FY24 increased from $9.7b in FY23 and includes $1.6b from the recently-announced new venture Payton Capital Partners. The Payton venture focusses on private credit.
The Company has a plan to grow AUM to $20b over the medium term. The two verticals with the largest upside factors contributing to the growth in AUM over the medium term are Private Credit (to ~+$5b from $1.6b at present and Real Estate (to ~+$14b from $9.6b at present).
Growth in AUM towards the medium-term target of $20b is also expected to come from two key areas:
i. The Energy Transition platform – HMC has acquired a controlling interest in StorEnergy, a specialist developer, owner & operator of utility-scale Battery Energy Storage Systems with a 1.4GW development portfolio (~$2b). The rationale for the entry into Energy Transition is the expected 5x increase in investment required to achieve global net-zero emissions by 2050. A 2nd investment opportunity in advanced due diligence. HMC is also on-track to launch fundraising in 1H25 for an institutional-focused investment platform which is seeking to raise up to $2b.
ii. Digital Infrastructure – In March 2024, HMC announced the acquisition of 100% of StratCap for US$28.5m in cash and scrip. StratCap is a North American based asset manager which specialises in digital infrastructure including data centres and telecom towers. StratCap manages ~$0.7b of fee-paying AUM across multiple retail and institutional funds.
HMC has a long-term aim to becoming a $50b platform – implying significant future earnings growth.
Strong Investment in Capability
HMC continues to invest in the business particularly resourcing to support new fund initiatives. This includes key personnel across its platforms as well as enhancing its capital raising capability. FY24 saw a material increase (+18% vs FY23) in both corporate expenses and salaries & wages as the Company invests in the platform for growth. However, it is worth noting that expense growth remains well below revenue growth of 42% and operating margin is >60%.
A Well-Capitalised Balance Sheet To Drive Growth
HMC has a net cash position and $1.4b of available liquidity (including liquid assets). Ther Company is expected to continue focusing on using its balance sheet to take advantage of high ROE opportunities which will grow AUM (via asset warehousing; underwriting; and Merger & Acquisitions).
To this end, potential acquisitions remain on the horizon. The Company confirmed in an ASX release on 4 October that it is undertaking due diligence to acquire various data centre assets (including Global Switch Australia).
Fundamental View
Notwithstanding the gain in the share price since our report, we highlight several strong fundamental drivers:
i. Each of the five platforms has the potential to scale beyond $10b in AUM over the next five years – implying significant upside to future EPS growth.
ii. There is greater clarity on the path to the $20b AUM medium-term target following the acquisitions of Payton Capital, StratCap, and StorEnergy.
iii. Management continues to demonstrate its capability in finding investment opportunities. In particular, the ability of the Company to raise capital reflects its unique offering.
Charting View
HMC has been trending well since last year. It recently bounced off the uptrend line and has moved to an all-time high. The trend remains strong, but it is now reaching the top of its trading range. Investors can look for a dip back towards $8 for a better entry point.
Michael Gable is managing director of Fairmont Equities.
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