Magellan shares ‘too dear’ after rally: Morgan Stanley

Shares in Hamish Douglass’s Magellan Financial Group are ‘too expensive’, says Morgan Stanley’s Andrei Stadnik.

Hamish Douglass, co-founder of Magellan Financial Group Picture: Hollie Adams

Shares in Hamish Douglass’s Magellan Financial Group are “too expensive”, says Morgan Stanley’s Andrei Stadnik.

Mr Stadnik has cut his target price by 20 per cent and reiterated his “underweight” rating after Magellan shares rose 72 per cent amid a sharp rebound in global sharemarkets over the past three weeks.

Shares of the leading international fund manager could more than halve in value if equity markets stay depressed this year, ­retail outflows accelerate, institutional mandates experience some outflows and pressure on margins increase, he warns.

But his “base case” is for Magellan to trade around $40 a share in 12 months, assuming retail fund outflows, subdued institutional inflows and lower performance fees amid market volatility.

Even after the rebound from about $30 to $50 a share in recent weeks, amid one of the fastest ever moves from bear to bull market in the S&P 500 as central banks and governments deployed unprecedented stimulus measures to offset the impact of coronavirus lockdowns, Magellan’s estimated price-to-earnings valuation of about 24 times “remains too dear” versus its peers.

“We think the March retail outflows of about $300m — a rare retail outflow for Magellan — may be a sign of retail maturation,” Mr Stadnik says. “While recent market volatility had an impact, we also think the maturing customer profile in unlisted funds leaves Magellan more exposed to elevated gross outflows than investors appreciate.”

Magellan fell 2.2 per cent to $48.40 on Wednesday after hitting a five-week high of $51.73.

The fall came as the S&P/ASX 200 share index fell 0.4 per cent to 5466.7 after hitting a four-week high of 5533 points.

“The newer active ETF (exchange traded funds) channel saw about $25m of net inflows in March as Magellan continues to successfully target self-directed investors, but this was not enough,” Mr Stadnik says.

“The lack of product diversity also means Magellan does not have a more defensive strategy for clients seeking less risk.”

He thinks Magellan will delay the launch of its retirement income product past the start date of June, and expects retail flows to remain negative for the next six months before stabilising.

Magellan’s institutional cap­acity is “unclear” since its main global equities strategy is “soft closed” (existing shareholders can still buy shares but the fund is closed to the public) and Magellan has estimated that its Global Listed Infrastructure strategy has capacity of $US16bn ($25bn) to $US17bn, versus $US12.4bn of funds under management in ­December, implying it is at two-thirds capacity.

“We think this strategy has been driving most of the institutional inflows in the past 12 months,” Mr Stadnik says.

“The ESG-style (environmental, social, governance) global equities strategy now has a three-year track record and will also add some capacity, but how much remains unclear. Despite the recent derating, Magellan remains one of the most expensive traditional asset managers in developed markets. While a premium to Australian peers is justified, we think it is currently too wide and retail outflows may test Magellan’s trading multiples.”