18 Aug Magellan pledges special dividend, floats M&A potential

Source: Financial Review

By: Tom Richardson and Lucy Dean

Magellan shares surged the most in five years after the fund manager promised to tackle costs and declared a special dividend of 30¢ a share, in a show of balance sheet strength aimed at winning back the confidence of the market.

The stock rallied 17.9 per cent to $10.85 on Friday.

New Magellan chairman Andrew Formica is prepared to look at merger and acquisition targets, both in Australia and overseas, as part of a strategy to restore the fallen asset manager’s fortunes, he said a day after being named Hamish McLennan’s successor.

Net profit slumped 52 per cent to $182.6 million in financial 2023 on revenue 22 per cent lower to $431.7 million. It follows a torrid year of client redemptions that saw total funds under management shrink from $61.3 billion to $39.7 billion.

“[Acquisitions] are absolutely part of the tools available to the board,” Mr Formica said. “I’m not saying it’s the only tool available – there are examples where M&A has been successful, and examples where it hasn’t.

“To me, what makes successful M&A is very much around the culture of two firms coming together and also the strategic alignment, let’s be clear – Magellan has got client relationships, distribution reach, brand strength and support that’s really the envy of all.”

The international equities manager will pay a final dividend of 39.8¢ a share. Earnings per share tumbled to $1 over the year to June 30, versus $2.07 in financial 2022. As of June 30, total institutional FUM stood at $21.4 billion, with retail at $17.8 billion.

The group guided for expenses in financial 2024 to total between $95 million and $100 million, down from $121.3 million in financial 2023 as it adjusts to its falling FUM.

Investment returns

Its flagship Magellan Global Fund returned 20.6 per cent over the year after fees, versus 22.4 per cent for its benchmark, the MSCI All World Index.

Its Australian equities strategy – the Airlie Australian Share Fund – returned 18.1 per cent over the year, versus 14.8 per cent for its benchmark, the S&P/ASX 200 Accumulation Index.

It had no debt and cash on hand of $373.4 million at balance date. Chief executive David George said the special dividend reflects the group’s strong balance sheet as he counts on market-beating investment performance to revive the equities manager.

“Our primary focus has been on delivering the investment performance we are known for, and we are encouraged that the changes we have made during the year have resulted in improved collaboration, information flow and efficiency. Investment ideas are being brought forward and prioritised more efficiently,” he said.

On Thursday, the group revealed the appointment of industry veteran Mr Formica as its new non-executive chairman. Mr McLennan will transition to the role of deputy chairman.

Activist investor Gabriel Radzyminski of Sandon Capital said he was pleased with the board reshuffle, but warned Magellan against making acquisitions, arguing excess capital should be returned to shareholders via dividends or an extension of its share buyback.

“Historically, if you look globally most acquisitions don’t work,” Mr Radzyminski said. “The result reinforces the strength of the business despite perceptions, we believe it’s a phenomenal business.

“We’re happy about the new cost guidance [for financial 2024], we’d like to see more, but it’s in the right direction and reflects the diminution in the group’s size. Our major concern remains the capital management, there’s a huge amount of capital we consider excess to the needs of the business on the balance sheet.”

UBS analyst Shreyas Patel described the result as offering “significant positives”, including Mr Formica’s appointment and lower funds management costs, while the net profit was in line with consensus.

“This result sees Magellan start to address low-hanging fruit,” Mr Patel said, pointing to the company’s 30¢ special dividend, and the rightsizing of the cost base, which could drive 14 per cent consensus earnings upgrades anticipated for financial 2024.

Mr Patel added that addressing outstanding loans to employees by bringing forward staff bonus payments from 2025 to 2024 and the removal of a target for $100 billion in funds under management were strategic positives for the market.