Analysts wary about Magellan

Analysts have raised concerns about Magellan’s valuation and growth potential despite it posting strong first-half results.

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Fund powerhouse Magellan surprised many with its stronger-than-expected first-half result, but analysts have raised concerns about its valuation and growth potential, with momentum in net fund flows looking challenging, while questions linger over its future product launches, including its new retirement income fund.

Although analysts were mostly positive on the result, 11 of the 12 investment houses listed by Bloomberg as covering the stock have a “sell” rating on it. Morgans was the odd one out, retaining its “hold” call even as the shares scale all-time highs.

“With Magellan on a 26.9 times price earnings ratio, sustaining the pace of flows is becoming increasingly difficult, in our view, from an elevated funds under management base, which is up 47 per cent since December 2018. We see downside risks if flow momentum slips from here,” UBS analysts led by Kieren Chidgey said.

UBS also noted the lack of detail on the retirement income “solution” despite the product being tipped to launch before the end of the financial year.

Valuation concerns were echoed in the market, with Macquarie analysts also questioning the fund manager’s momentum.

“Magellan delivered another strong result and is a high-quality fund manager, however current valuation is too stretched. In our view a moderation in the positive business momentum would result in a material de-rating,” they said.

The Hamish Douglass-led Magellan last week posted a 13 per cent rise in net profit after tax for the six months to December 31, to $195.7m, while adjusted net profit rose 23 per cent to $216.8m.

Magellan also reported a 26 per cent increase in its interim dividend to 92.9c a share.

It came as average funds under management rose 29 per cent to $92.8bn in the period.

Citi analysts also retained their sell rating, despite the “solid” and better-than-expected result.

“Until there is more clarity on Magellan’s medium growth opportunities, then its rich valuation of 30 times fiscal 2020 estimates remains a hurdle for us,” they said.

Ord Minnett head of institutional research Nicholas McGarrigle said Magellan was a beneficiary of its success, but he also struggled to see the valuation support at its current share price. Magellan was now managing more than $100bn and producing earning margins of greater than 80 per cent, he noted.

“This success means that Magellan’s earnings are driven (more) by investment returns than by flows,” he said.

Magellan shares hit an all-time high of $74.88 on Friday before falling back slightly to close the session up 2.99 per cent at $73.67.