This morning international equities manager Magellan Financial Group Ltd (ASX: MFG) reported its financial result for the full year ending June 30, 2017.
Below is a summary of the result with comparisons to the prior corresponding year.
- Net profit after tax of $196.2 million, down 1% on prior year
- Profit before tax and performance fees $234.6 million, up 10%
- Management and services fee revenue up 15% to $307.2 million
- Total performance fees down 55% to $21.7 million
- Expenses up 13% to $80.9 million
- Average funds under management (FUM) $45.7 billion, $39.4 billion in prior year
- Cost-to-income ratio of 24.6%
- Staff costs forecast to climb 5%-8% in FY18
- Final dividend of 47.2 cents per share, total dividends of 85.6 cents
- Basic earnings per share of $1.169
The stock is down 3 per cent to $26.90 in morning trade after a result that is largely in line with analysts' expectations given the group previously guided as to what performance fees to expect ($18 million) for the six-month period ending June 30, 2017.
Investors will note the 55% plunge in performance fees had a giant impact on the bottom line, but what's important is the potential for Magellan to harvest large performance fees over the 12 months ahead.
That of course is an unknown, but it's worth noting the commodity bull market of 2016 didn't help the relative investment performance of a manager that generally avoids ownership of the commodity giants.
Yesterday, the group announced plans to launch a large new ASX-listed global fund that could instantly add another 10% to FUM and with the group's operating leverage it could lift the bottom-line even higher.
Magellan has also decided to tap into one of the favourite pastimes of overpaid, middle-aged Australian males in watching cricket.
It will sponsor the upcoming Ashes Test series and whether spectators can expect a similar style to KFC's sponsorship of the Big Bash fried-chicken cricket is yet to be seen.
The future is more important for Magellan than past results, so should you buy?
At $26.90 the stock trades on 23x trailing earnings with a 3.2% dividend yield plus the tax effective benefits of full franking credits. This looks about fair value given the group is likely to post another year of robust growth as it's now cycling off much higher FUM levels (around $50 billion) with the potentially lucrative opportunity to crank performance fees.
Unknowns include the strength of equity markets, investment performance, FUM growth, and the direction of the U.S. dollar. As such I would rate the stock a hold for now, although this remains a high-quality founder-led business that on a better valuation should be at the top of investors' shopping lists.
