Magellan Financial Group ((MFG)) is expanding its options with a strategic investment in a new Australian financial services business, Barrenjoey Capital Partners. An investment banking-style joint venture will ensue, with Magellan Financial putting up $90m in cash and 1.2m in shares for a 40% economic interest.
Credit Suisse calculates, while the investment could be -1% dilutive in a start-up break-even scenario, if it meets return hurdles for the principal investment business it should be 2% accretive, with a potential 4% in a more bullish scenario.
The investment is rather small as it represents only 1.5% of Magellan Financial’s market capitalisation, although should provide upside if Barrenjoey Capital becomes a profitable operation.
The investment will lie within the principal investment division and Magellan will have no involvement in the day-to-day operations. While, the company has signalled the investment has attractive returns, Goldman Sachs points out no details were provided regarding the path to profitability.
The broker notes there have been a number of entrants over recent years to the domestic investment banking sphere, with mixed success. While Barrenjoey Capital may provide a source of diversification for Magellan, Goldman Sachs finds few obvious areas for collaboration.
This is particularly the case as the company had, throughout August, indicated it was not particularly interested in adding unlisted/alternative investment products. Morgan Stanley forecasts $441m in adjusted earnings in FY21, so agrees the joint venture is unlikely to materially diversify earnings in the near term.
Citi also finds the near-term financial impact modest, given an upfront investment of $160m as well as a working capital facility of $50m. Barrenjoey Capital will not be fully live until mid 2021 and a minimal earnings contribution is anticipated.
Potential Expansion
Credit Suisse assesses potential expansion through Barrenjoey Capital into listed asset management that could complement existing operations and expose Magellan to an attractive segment of the asset management industry.
If Magellan Financial could build a $10bn unlisted asset management business over the next five years this could add 10-15% to earnings, in the broker’s calculations. Moreover, Credit Suisse believes concerns over a PE (price/earnings) de-rating because of the business mix are overdone and remains confident flows over the next 2-3 years should allow the company to maintain its current above-peer multiple.
Morgan Stanley calculates Magellan is now generating more than 40% return on equity (ROE) but it was more than 55% before capital was raised for growth options.
The broker believes it will be difficult for the company to return to ROE in excess of 55%, and considers Magellan one of the most expensive asset managers in the world on a 23x PE compared with pure advisory firms on 10-12x PE.
Barrenjoey Capital
Barrenjoey Capital will be majority staff-owned, with Barclays also taking a stake (9.99%). The CEO will join the board but Magellan will have limited strategic involvement with only a 4.99% voting interest. UBS suspects the issue of scrip by Magellan to Barrenjoey could be a source of currency to attract and retain talent as it expands.
The inferred value of the firm, in Citi’s assessment, is $450m. The broker also highlights key partners are industry veterans and the ability to offer equity ownership to staff may be a positive differentiator, in terms of attracting and retaining talent.
Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, has a Neutral rating and target of $53.77. Magellan Financial Group has one Buy rating (Credit Suisse) on the database, with four Hold and two Sell. The consensus target is $59.75, signalling 9.1% upside to the last share price. The dividend yield on FY21 and FY22 forecasts is 4.0% and 4.5%, respectively.
See also, Magellan Financial Targets Low-Cost Demand on August 13, 2020.
