Magellan to raise capital for future growth after reporting strong result

James Gerrish

Market Matters

Negative leads from overseas had the ASX on the back foot early. However, buyers stepped into the fray and bought stocks into weakness, pushing the index up near parity in morning trade. But alas, the strength failed and the market drifted into the close to finish about 20 points down – not a bad effort really given the US market was off ~1.5% overnight.

Reporting was headlined by Challenger Financial (CGF) and Magellan (MFG) today, both covered below while MFG also announced a capital raise. That weighed on the other fund managers in the sector with Pendal (PDL) down -3.13% and Janus (JHG) also down by -2.53%, testing new lows again.

When a sector member halts to raise capital which MFG have done today, managers who don’t want to increase their sector weighting will sell other names to fund the purchase of new shares, generally getting a discount in the new offer. MFG is a particularly thin stock to trade and getting set in size can be hard, so demand for this raise was very strong. Funds typically don’t carry a lot of cash hence market calls are a relative proposition, and today we’ve seen selling pressure across most diversified financials to fund the MFG placement. In terms of JHG specifically, a test of the recent low is now happening. Ideally it goes and makes a new low where it finds support. On 7x FY20 earnings versus MFG on 28x the divergence is huge.

Around the region today, Asian markets were down, Hong Kong the worst of them losing ~1.4% as political activism continues to bubble away and cause further flight cancellations, with the Australian PM the latest to ask the HK Chief Executive to listen to protesters. There was also an incident in Sydney just near our office where a man stabbed a woman and was apprehended by passers-by – no doubt a lot on the news tonight about that with some dramatic footage captured.

US Futures were up for most of our session but have just rolled over to be trading marginally lower.

Overall, the ASX 200 lost -21 points today or -0.33% to 6568. Dow Futures are now trading down -44 points /-0.18%.

ASX 200 Chart

ASX 200 Chart


Stocks today … Some confusion on the below table in the last few days, most likely because the open / high / low price feeds were incorrect. This has now been fixed. The table looks at the day only share price performance of companies that have reported during the session – let me know if still not clear and we can amend. (MFG in trading halt today so no trade).

Magellan (MFG) -trading halt; released FY19 results today + announced a $275m capital raise. The results were strong, which they needed to be given the lofty heights of the current share price. However, as is becoming MFG custom, they beat already high expectations. Underlying profit was a 2% beat, pretty much the same quantum across the board.

Average funds under management increased 28% during the period to $78.5bn – a big number, with performance of most funds tracking ahead of their benchmarks, although John Sevior's Airlie Funds, their recent acquisition managed just a 3.8% return for the year versus the ASX which was up 11.5% in accumulation terms.

MFG talked up their approach to more partnerships in the future which is the reason for the capital raise that is being done at $55.20, a 6% discount to the dividend-adjusted last traded price. It's fully underwritten. The funds will be used to launch a new ASX-listed fund, fund a new retirement product, and seed new investment strategies. The raise makes sense with the stock on nearly 30x FY20 earnings versus its longer term average of 17x. We’re meeting with MFG first thing tomorrow morning.

Magellan (MFG) Chart

Challenger Group Financial (CGF) + 2.46%: Shares in the annuity businesses have traded higher today with an inline result enough to please the market's downbeat expectations – although early buying tapered off into the afternoon. The result saw normalised net profit before tax sneak in to the bottom end of guidance, marginally below consensus expectations.

Shares in Challenger have been under pressure with lower interest rates reducing the appeal of annuity products. Their pre-tax profit did manage to edge higher in FY19. However, on today’s guidance, it is expected to be down in FY20. NPBT guidance was given as $500m-$550m – a 10% spread from top to bottom and the higher hurdle of guidance in line with the FY19 result. On a statutory basis, Challenger looks a little worse for wear with the company taking a $88m negative investment experience hit. They were able to hold the dividend, as many expected and have guided to a flat payout amount for next year. The outlook remains muted, and sales growth seems to be slowing.

Challenger (CGF) Chart

Broker moves;

  • Amcor GDRs Rated New Neutral at UBS; PT A$16.15
  • Aurizon Cut to Underperform at Macquarie; Price Target A$5.28
  • Australian Finance Cut to Hold at Morgans Financial; PT A$2.30
  • Contact Energy Downgraded to Neutral at Goldman; PT NZ$8.40
  • JB Hi-Fi Downgraded to Equal-weight at Morgan Stanley; PT A$28
  • JB Hi-Fi Upgraded to Hold at Bell Potter; PT A$28.50
  • Ansell Downgraded to Neutral at Credit Suisse; PT A$28
  • Teranga Gold Rated New Buy at Eight Capital; PT C$10
  • NRW Holdings Upgraded to Buy at Citi; PT Set to A$2.65
  • Cochlear Downgraded to Neutral at Goldman; PT A$212
  • Cooper Energy Upgraded to Outperform at RBC; PT A$0.70

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James Gerrish
Portfolio Manager
Market Matters

James is the Lead Portfolio Manager & primary author at Market Matters, a digital advice & investment platform with over 2500 members that offers real market intel & portfolios open for investment. He is also a Senior Portfolio Manager at Shaw and...

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