Investment Thesis:
- Principal Investments could grow to become a meaningful contributor to group performance over the medium-to-long term
- MFG no longer trades at a significant premium to its peer-group post the recent derating
- Acquisitions could pave growth runways, helping to ease the Company’s fund capacity constraints
- Average base management fee (bps) per annum (excluding performance fee) continues to be stable but there are risks to the downside from pressures on fees (which is an industry trend not specific to MFG alone)
- Continued strong investment performances, especially in the global and infrastructure funds
- Growing levels of funds under management
- New strategies could significantly increase addressable market and help sustain earnings growth
Key Risks:
- Decline in fund performance
- Risk of potential funds outflow – both retail and institutional (loss of a large mandate)
- Execution risk with the acquisitions
- Significant key man risk around Hamish Douglass and key management or investment management personnel
- New strategies fail to add meaningful earnings to the group
Key highlights:
- MFG’s FY21 adjusted net profit of A$412.7m, declined -5.8% over pcp, which came in below consensus estimate of A$434m, as a year of trailing the market for MFG’s most important global equities strategy, the Magellan Global Fund, reduced the performance fee take for FY21 by -63% to $30.1m
- The core business of funds management still managed to grow despite a lesser outperformance overall, and the Company reported management and service fees increasing +7% over pcp to $635.4m and average FUM increase of +9% to $103.7bn
- The Board declared a final dividend of $1.141 a share taking FY21 dividend to $1.22 a share and announced a dividend reinvestment plan discounted at 1.5%
- Management saw total Funds Management expenses declined -8.5% over pcp to $106.9m
- Management has restructured three Global Equities retail funds into a single trust (Magellan Global Fund) with total FUN of $18bn
Company Description:
Magellan Financial Group Ltd (MFG) is a specialist funds management business. MFG’s core subsidiary, Magellan Asset Management Ltd, manages ~$53.6bn of funds under management across its global equities and global listed infrastructure strategies for retail, high net worth and institutional investors.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Investment Thesis:
- Trading on fair value relative to our valuation
- Exposure to both developed and emerging markets’ growth
- Near-term headwinds should be in the price
- Revised strategy following recent strategic review
- Bolt-on acquisitions (and associated synergies) provide opportunity to supplement organic growth
- Leveraged to a falling AUD/USD
- Potential corporate activity
- Capital management (current on-market share buyback plus potential for additional initiatives)
Key Risks:
- Competitive pressures leading to margin erosion
- Input cost pressures which the company is unable to pass on to customers
- Deterioration in economic conditions in US, EM and Australia
- Emerging markets risk
- Adverse movements in AUD/USD
- Declining OCC prices
Key highlights:
- ORA delivered a solid FY21 result, which came in ahead of consensus expectations – revenue of $3,538m was up +7.8% YoY
- Operating earnings (EBITDA) of $369.3m was up +11.5% YoY
- NPAT of $156.7m was up +34.1% YoY
- EPS up +29% to 16.9cps (also driven by the on-market share buyback) and full year dividend of 14cps up +16.7% on pcp (representing a payout ratio of ~80% vs target range 60-80%)
- Strong performance in the North America business, which delivered revenue growth of +8.2% and EBIT growth of +43.0% year-on-year (YoY) in constant currency
- Leverage increased from 0.9x to 1.5x, driven by the impact of the on-market share buyback
- With a strong balance sheet, the Company is looking to invest to drive growth
- Australasia segment revenue was up +6.1% to $834
- North America segment revenue was up +8.2% to US$2,019.8m and EBIT was up +43.0% to US$73.8m
Company Description:
Orora Limited (ORA) provides packaging products and services. The Company offers fiber, glass and beverage can packaging materials in Australia and Asia and packaging distribution services in North America and Australia.
(Source: Banyantree)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
About The Benchmark
A sector sub-index of the S&P/ASX 200, this index tracks the performance of Australian real estate investment trusts (A-REITs) and mortgage REITs.
Fund Objective
The SPDR S&P/ASX 200 Listed Property Fund seeks to closely track, before fees and expenses, the returns of the S&P/ASX 200 A-REIT Index.
Process
SLF aims to fully replicate the S&P/ASX 200 A-REIT Index. REITs are listed vehicles that own and operate property. REITs are required to pass on the majority of their income to investors to enjoy favourable taxation arrangements, and distributions are not franked. High payout ratios and an absence of franking mean that REITs typically offer a high headline yield relative to other stock market sectors. SLF is by far the longest running, with an FUM of AUD 650 million as at September 2021, which helps it to maintain trading levels far above most rivals. SPDR doesn’t participate in securities lending for Australian ETFs.
Portfolio
With the relatively short list of A-REIT names in the S&P/ASX 200, the portfolio is understandably concentrated. As at September 2021, the index consists of 24 holdings, with the top 10 accounting for over 85% of the total portfolio. The exposure to the largest current holding, Goodman Group, has ballooned significantly over the past five years to 27% from around 11%. Seeing that the index is relatively untouched by any reconstitutions, portfolio turnover is quite low at 5%. However, in case of an eventual entry or exit of the constituents, the concentrated index is susceptible to reconstitution, which may lead to a meaningfully altered portfolio.
| Top 10 Holdings | Weight (%) |
| GOODMAN GROUP | 27.07 |
| SCENTRE GROUP | 11.52 |
| DEXUS/AU | 8.59 |
| MIRVAC GROUP | 8.17 |
| STOCKLAND | 7.98 |
| GPT GROUP | 7.27 |
| CHARTER HALL GROUP | 5.93 |
| VICINITY CENTRES | 4.91 |
| SHOPPING CENTRES AUSTRALASIA | 2.20 |
| CHARTER HALL LONG WALE REIT | 2.06 |
Sector Allocation
| Sub-Industry Breakdown | Weight (%) |
| Diversified REITs | 34.79 |
| Industrial REITs | 28.49 |
| Retail REITs | 23.96 |
| Office REITs | 9.46 |
| Specialized REITs | 1.90 |
| Residential REITs | 1.41 |
People
The Global Equity Beta Solution team that is responsible for managing this ETF has undergone a leadership transition recently. Effective September 2021, John Tucker has been appointed as the new chief investment officer, replacing Lynn Blake, who has taken retirement. Tucker is a State Street veteran who has been in multiple senior leadership roles within GEBS for the past 20 years. The ecosystem and structure of the investment team is well-defined, where research and trading functions are centralised and spread out globally; however, portfolio managers are based locally. Australia-domiciled passive products are managed by a core team of Tucker and four portfolio managers: Alexander King, Lillian Poon, Andrew Howson, and Elda Dong.
Performance
The fund has managed its tracking difference well, matching up to the benchmark after accounting for management fees. SLF has recorded a return of 6.54% since its inception in 2002. As at the close of 2019, the annualised five-year returns for the fund stood at an attractive 10.55%, outperforming the category returns of 9.87%. The rally was mainly driven by the strong returns of Goodman Group in the latter half of the five-year period.
| Total Return | 1 Month | 3 Month | 6 Month | 1 Year | 3 Year p.a | 5 Year p.a | Since Inception p.a |
| Fund (%) | 0.38 | 4.27 | 12.07 | 30.25 | 9.57 | 8.63 | 6.54 |
| Index (%) | 0.42 | 4.38 | 12.34 | 30.87 | 9.87 | 8.96 | 6.78 |
(Source: MorningStar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Business Strategy and Outlook
Rio Tinto is one of the world’s biggest miners, along with BHP Billiton, Brazil’s Vale, and U.K.-based Anglo American. Most revenue comes from operations located in the relatively safe havens of Australia, North America, and Europe, though the company has operations spanning six continents.
Rio Tinto has a large portfolio of long-lived assets with low operating costs.The invested capital base was inflated by substantial procyclical investment during the height of the China boom, the rot setting in by overpaying for Alcan, and subsequent iron ore expansion; the combination of these factors means midcycle returns are likely to remain below the cost of capital.
The recent focus has been to run a strong balance sheet, tightly control investments, and return cash to shareholders. The company’s major expansion projects are Amrun bauxite, the Oyu Tolgoi underground mine, and the expansion of the Pilbara iron ore system’s capacity from 330 million tonnes in 2019 to 360 million tonnes. Those projects are expected to complete in the next few years. Otherwise, the focus is on incremental expansions through productivity and debottlenecking initiatives. These will be small but capital-efficient and should modestly improve unit costs.
As a commodity producer, Rio Tinto is a price-taker. The lack of pricing power reflects in cyclical commodity prices. Rio Tinto lacks a moat, given that the bloated invested capital base doesn’t permit returns in excess of the cost of capital. The firm’s assets are large, however, and despite being overcapitalised, generally have low operating costs.
Morningstar analyst have lowered the fair value estimate for Rio Tinto to USD 66.00 per ADR from USD 69.00 per ADR previously. The cut mainly reflects lower near-term iron ore price forecasts, with higher copper and aluminium prices prices a partial offset.
Financial Strength
Rio Tinto’s balance sheet is strong with net debt standing of less than USD 2 billion at end 2020. Net debt/adjusted EBITDA for 2021 is very comfortable at 0.1. The strong balance sheet may allow the company to make targeted investments or acquisitions through the downturn, important flexibility. But it appears management is favouring distributions to shareholders. The progressive dividend policy was canned in 2016, providing important flexibility to increase or reduce dividends as free cash flow allows.
Bulls Say
- Rio Tinto is one of the direct beneficiaries of China’s strong appetite for natural resources.
- The company’s operations are generally well run, large-scale, low-operating-cost assets. Mine life is generally long, and some assets, such as iron ore, have incremental expansion options.
- Capital allocation is has improved following the missteps of the China boom with management generally preferring to return cash to shareholders than to make material expansions or acquisitions.
Company Profile
Rio Tinto searches for and extracts a variety of minerals worldwide, with the heaviest concentrations in North America and Australia. Iron ore is the dominant commodity, with significantly lesser contributions from aluminium, copper, diamonds, gold, and industrial minerals. The 1995 merger of RTZ and CRA, via a dual-listed structure, created the present-day company. The two operate as a single business entity. Shareholders in each company have equivalent economic and voting rights.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
