With Magellan Financial Group (MFG) trading in-line with our valuation (and medium-term PE of 21x), we move to a Hold recommendation (previously Add). In early July 2017, Magellan Financial Group (MFG) is likely to report June-17 Funds Under Management (FUM) down approximately 3% based on market/fund performance, capping off a strong year overall (FY17 FUM up approximately 25%).
Our review of June performance across the Global and Infrastructure funds implies 2H17 outperformance to May-17 has been eroded. The funds were tracking to approximately 250bp outperformance (as at May-17), however we now factor in approximately 100bp outperformance on average given our expectations of performance in June.
We have lowered our 2H17 performance fee assumption (from A$36.2m to A$18.1m), which reflects approximately 1% outperformance over eligible FUM. Whilst we expect lower FY17 performance fees, if the Global Fund has underperformed its benchmark in 2H17 this will increase the potential for performance fees to contribute to FY18. Our FY17 NPAT falls 5.9% to A$207.2m and our FY18/19 NPAT forecasts are reduced by approximately 3.8%.
Near term, negative June performance (impacting closing FY17 FUM); lower than consensus expected FY17 performance fees; and further market volatility could see share price weakness (active investors can take profits).
Longer term, MFG's growth is supported by exceptional retail distribution (consistent net inflows); new product launches (US low carbon funds); and a positive industry backdrop. Key risks include a major market correction; loss of key institutional mandates; and sustained investment underperformance leading to net FUM outflows.
By Scott Murdoch, Analyst, Sectors Covered: Contractors/Developers, Consumer, Diversified Financials. (VIEW LINK)