##{"id":88836,"date":"2020-09-22T13:30:25","date_gmt":"2020-09-22T03:30:25","guid":{"rendered":"https:\/\/www.fnarena.com\/?p=88836"},"modified":"2020-09-22T13:30:25","modified_gmt":"2020-09-22T03:30:25","slug":"barrenjoey-capital-lures-magellan-financial","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2020\/09\/22\/barrenjoey-capital-lures-magellan-financial\/","title":{"rendered":"Barrenjoey Capital Lures Magellan Financial"},"content":{"rendered":"

Magellan Financial intends to diversify its options with an investment in Barrenjoey Capital Partners, although the near-term returns are expected to be minimal.<\/p>\n

-Attractive returns expected but no details on path to profitability
-Should provide upside if Barrenjoey Capital becomes profitable
-Unlikely to diversify earnings materially in the short term<\/strong>
<\/p>\n

By Eva Brocklehurst<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

Potential Expansion<\/u><\/p>\n

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<\/strong>.<\/p>\n

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.<\/p>\n

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.<\/p>\n

The broker believes it will be difficult for the company to return to ROE in excess of 55%<\/strong>, 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.<\/p>\n

Barrenjoey Capital<\/u><\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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