BUY | Plenty of incentive to achieve success
MA Financial Group Limited (ASX:MAF) – formerly Moelis Australia Limited- is part of a global strategic network of advisory experts servicing the Sydney, Melbourne, London, Beijing, and Shanghai markets. The group offers diversified financial service solutions in Asset Management, Corporate Advisory, and Equities.
The Asset Management division is a market leader in providing access to alternative investment opportunities (real estate, hospitality, and credit) and the division has been resilient over the past year, contributing the majority of earnings (84% of EBITDA in FY20). Assets under management have grown by double digits over the past year (to $5.8bn) as net inflows including High Net Wealth and acquisitions in hotels and credit (lending partnerships with major banks) are set to continue to drive earnings.
The Corporate Advisor and Equities division is much smaller (16% EBITDA) however, low interest rates and buoyant market activity is supportive of Equity Capital Markets and improving Merger and Acquisition (M&A) activity going forward. Given they are primarily focused on small to mid-cap industrial and real estate companies and they offer the broadest research coverage of small-cap real estate companies in Australia, growth and opportunities remain significant in that space.
MAF management and employees have plenty of skin in the game, led by Founder and MD Jason Pridham (28% shareholder) and US parent Moelis (20%). This means nearly half the company is owned by insiders who have a vested interest in the success of the business – and their own personal fortunes. Incentivising and retaining key employees is vital to the growth of the business, and a strongly aligned structure of owners/shareholders can create a positive culture that produces a competitive advantage, as seen by the success story of our largest listed investment bank, Macquarie Group Limited (MQG).
MAF has a strong track record in growing scale businesses that require ongoing investment in people and strategy, with a strong balance sheet providing flexibility to support that growth. In February, the company reported an improved FY20 result as positive business momentum and confidence in the outlook was led by expected inflows, growing lending activity, and a strong pipeline of advisory work. The company provided guidance of 10%-20% earnings per share growth in FY21 and subsequently upgraded guidance in May that growth will be towards the top end of that range given a strong start to the year. While there remains some risk that their large investments in pubs and hospitality could see some of the strong momentum and gains delayed by a quarter, the one thing we have learned globally is that activity bounces back very quickly from such lockdowns given low interest rates, high consumer savings rates and pent up demand.
Presently we are experiencing a global M&A boom, with announced deals in the Australian market totalling $148bn in the first half of the year, and we are on track to reach/exceed the $215bn high which was set in 2007. Higher asset prices and higher base fees bode well for future profits. MAF are due to report later this month and we expect a favourable outlook to be maintained. MAF currently trade some 10% below their pre-pandemic levels (20% below their all-time 2018 highs of $6.90) while many of their investment bank/ funds management peers are trading record highs. We see further upside ahead as the stock screens as relatively inexpensive trading on 19x FY21 earnings going to 16x (FY22) whilst yielding a 2.5% fully franked dividend, which is reasonable given the strong growth outlook.
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