The Magellan Financial Group Ltd (ASX: MFG) share price is currently exchanging hands at $32.72, some 50% above its 52-week low at 4 July 2018. Impressive, and further still, should be seen in the context of almost a compounding annual share price growth rate of around 24% over the past 5 years.
Following its 1H FY19 results release on 14 February 2019, Magellan Financial Group's share price turned frothy. Building on a recovery from the late 2018 turmoil of the post-October market downturn, Magellan has added 13% to the share price since 14 February.
Magellan's financial results for 1H FY18 were overwhelmingly positive. Net profit after tax adjusted for significant items (primarily the $56M IPO costs for Magellan Global Trust (ASX: MGG)) grew by 62% from 1H FY18 to $175.3M in 1H FY19. That result was driven by dramatic Funds under Management growth, and accompanying growth in fee revenue amidst a decline in operating costs of 7% in comparison to the previous corresponding period.
The scalability of the business model was also on full show with management anticipation of expenses growing from $101M in FY18 to just $105M for full year FY19. A relatively fixed cost base opens the possibility of further margin growth.
Revenue growth depends on Funds under Management
Funds under Management (FuM) climbed to $72.9B by 31 January 2019, a 35% increase on the prior corresponding period. The increase in FuM is positively impacted by the addition of Airlie Funds Management business in early 2018. Accompanying management and services fee revenue is up 28%, lagging the increase in funds due to a changing business mix from Airlie.
Monthly average retail inflows of $79M were up from $55M in 2017. Institutional inflows of $0.9B, however, down $0.5B on the previous period. This was all in the context of declining marketing spend which contributed to the lowered costs for 1H FY19.
As the aggregate balance has grown, investment returns have become the primary determinant of change in Magellan's key revenue driver, FuM. Average performance across the portfolio since inception is 10.8% p.a., exceeding the Board's hurdle target of 10% p.a. However, with market turbidity weighing on the 1- and 3-year results across the fund, further share price gains in 2019 need good old-fashioned investment performance in the underlying portfolios.
Regulation could drive new product opportunities
Magellan is not just banking on the quality of its existing portfolio. Brett Cairns, CEO, mentioned that considered product expansion was a goal and that "one area we are looking at closely is retirement income".
This focus may prove timely given the passage on 14 February 2019 of the Social Services and Other Legislation Amendment (Supporting Retirement Incomes) Bill 2018, which pushes Super funds to offer comprehensive retirement income strategies to members.
Foolish Takeaway
While the Magellan share price bounced dramatically, net profit, EPS, dividend, and revenues have grown even faster. Looking ahead, as FuM drives fee revenue, Magellan may well put down an even stronger full-year performance.
Pending no repeat of the general retreat of last October, continued revenue growth on a fixed cost base seems likely making MFG a good addition to your holdings.
