This morning international equities manager Magellan Financial Group Ltd (ASX: MFG) reported that its funds under management landed at $70.78 billion as at December 31 2018, compared to $72.1 billion as at November 30 2018.
The group posted net inflows of $41 million over December, but weak global equity markets and currency movements combined to drag overall FUM down.
More importantly Magellan reported that average FUM for the six-month period ending December 31 2018 was $72.07 billion, compared to $53.55 billion for the prior corresponding six-month period.
Magellan earns the lion's share of its revenues by charging base management fees on FUM and given FUM averaged around 36% higher over the period investors can expect a big leap in base fee revenues when Magellan hands in its interim results this February.
It also reported today that it has earned around $42 million in performance fees for the six-month period ending December 31 2018.
For all of fiscal 2018 Magellan paid a performance fee dividend of 14.9 cents per share on $40 million of performance fees for the fiscal year, so investors can expect a similar special dividend amount in February for just the first-half year period of FY 2019.
The rising revenues may not translate into quite so strong earnings per share growth as the group has issued equity to acquire some FUM recently, but if we take the adjusted $1.54 earned per share in FY 2018 (backing out Airlie acquisition costs among others) we can see that it's set to deliver a double-digit percentage earnings per share beat on H1 FY 2018.
Analysts are estimating $1.74 in earnings per share over FY 2019 which would place it on 14x forward earnings with double-digit growth and a 5.5% trailing yield.
Moreover, it has only forecast operating costs to rise a little between FY 2018 to FY 2019 from $101 million to $105 million, which should show the group's operating leverage as profits grow faster than revenues.
In other words the stock looks as cheap as it has been in 5 years or so after the market de-rated pretty much all fund managers' earnings multiples over 2017 due to the rise of ETFs and associated fee pressures among other things, while plunging US stock markets have also dragged Magellan's valuation down recently.
Should you buy?
If US equity markets track sideways or better from here I expect Magellan stock is going far higher from in the first quarter of 2019 and would not be surprised to see it over $30 by the end of 2019.
Of course there are risks including investment performance and the risk of wider market falls generally, but investors are compensated for now with a cheap-looking valuation at $24.10.
Either way it looks head and shoulders above other asset managers on the local market (apart from Macquarie Group (ASX: MQG) thanks to its operating performance and founder led nature that allows it to retain tight cost controls.
