Vinva Partnership And Global Expansion May Improve Future Prospects, But Fee Pressures And Outflows Could Challenge Profitability

Key Takeaways

• New leadership and strategic execution could enhance business stability, client trust, and earnings.
  
• Strategic partnerships and geographic expansion may boost revenue and asset growth, leveraging a strong balance sheet.
  
• Ongoing fee pressures, outflows, and risks in client retention and strategic partnerships threaten Magellan's revenue and earnings stability with potential margin compression.

Catalysts

A publicly owned investment manager.

• The appointment of Sophia Rahmani as CEO and the stabilization of leadership positions MFG for enhanced business stability and client trust, potentially improving earnings through better management and strategic execution.
  
• Strategic partnerships, particularly with Vinva Investment Management, are poised to significantly drive MFG’s next phase of growth, likely increasing revenue and expanding the firm’s AUM through new fund offerings.
  
• Successful geographic expansion into North America, the U.K., and EMEA regions may drive revenue growth by enhancing global client reach and diversifying the client base.
  
• A strong balance sheet with no debt provides a stable foundation for strategic investments and growth, which could enhance earnings by leveraging new opportunities across global markets.
  
• Robust performance in investment returns across various funds suggests potential for increased management and performance fees, which directly impact revenue and profitability.

Magellan Financial Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Magellan Financial Group's revenue will decrease by 11.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 59.2% today to 52.7% in 3 years time.
• Analysts expect earnings to reach A$142.3 million (and earnings per share of A$0.8) by about March 2028, down from A$228.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$166.6 million in earnings, and the most bearish expecting A$91.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.8x on those 2028 earnings, up from 6.0x today. This future PE is lower than the current PE for the AU Capital Markets industry at 14.4x.
• Analysts expect the number of shares outstanding to decline by 0.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.06%, as per the Simply Wall St company report.

Magellan Financial Group Future Earnings Per Share Growth

Risks

• The decrease in adjusted net profit after tax by 10% due to reductions in management fees and other revenues indicates pressure on revenue streams, which could negatively impact future earnings if the trend continues.
  
• Management's admission of an ongoing fee pressure trend and the decrease in the average base management fee from 70 bps to 63 bps signal potential margin compression that could erode future net margins.
  
• The outflows, especially in Global Equities and infrastructure strategies, alongside the $1.2 billion retail outflows in July 2024, could continue to negatively impact revenue growth if inflows do not sufficiently counterbalance them.
  
• The performance and client retention risks in the Listed Infrastructure strategy, exacerbated by the departure of senior team members, could lead to further AUM outflows and negatively impact revenue and earnings stability.
  
• While strategic partnerships have grown in significance, reliance on contributions from these ventures introduces variability and dependency, which could impact MFG's earnings consistency and predictability.

Valuation

• The analysts have a consensus price target of A$9.204 for Magellan Financial Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$10.57, and the most bearish reporting a price target of just A$8.2.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$270.3 million, earnings will come to A$142.3 million, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 7.1%.
• Given the current share price of A$7.64, the analyst price target of A$9.2 is 17.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.