MA Financial Group Limited (MAF) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the MA Financial Group 1H '21 Results Announcement. [Operator Instructions] I would now like to hand the conference over to Mr. Julian Biggins, Joint Chief Executive Officer. Please go ahead.

Thank you, Bernadett, and thank you for joining the call today. I guess presenting the first half FY '21 results for MA Financial Group. This half has been a continuation of the strong momentum we delivered in the second half of last financial year. Today, we report a record result, and Chris and I agree that we have never felt more comfortable with the direction of our strategy and strength of the company in 12-year history. The investment strategies continue to gain scale and positive investment performance supports greater inflow for a diversity -- from a broader diversity of investors. There are exciting new businesses within the group, such as Lending, that we look forward to scaling over the coming years and continuing to demonstrate to investors that we have significant new growth opportunities within the diversified business of MA Financial Group. As previously mentioned, operational expertise in those areas of specialization is key to delivering results. And we are pleased that our conscious investment in capability is delivering. Being direct managers of our assets makes the difference. The company's new name and logo has been received very well, both internally and externally. And we're excited about MA Financial being the name of the company for the future. With that background, let's turn to Slide 5 and run through the record results. Our FY '21 underlying earnings of $0.163 per share is up 92% compared to the prior period. All business divisions contributed to the result with Corporate Advisory up 16% and Asset Management up 94% on a revenue basis. In Asset Management, AUM is up 21% over the last 12 months or $1.2 billion to be in excess of $6.1 billion at 30 June. This excludes $275 million of assets that we have contracted to acquire late in the half, which was settled in the second half of FY '21, and add to second half AUM growth. The growth was underpinned by the $500 million of net inflows over the last 6 months across both foreign and domestic channels as momentum continues to build following a strong second half of FY '20. As indicated at the Investor Day in May, we've split the Lending division out for the first time as it has become a more meaningful contributor to the results and is a significant opportunity for future growth. The strong balance sheet remains an important asset for the group, and we moved to utilize it over the period to help launch new funds and make strategic acquisitions such as RetPro. Today, the Board has declared a maiden interim fully franked dividend of $0.05 per share, which reflects the confidence in the business and the increase in proportion of revenue that is predictable and recurring in nature. This also puts a high level of confidence in MA Financial Group. And we've increased our underlying earnings guidance to a range of 20% to 30% growth over FY '20 versus our prior guidance of 10% to 20% growth. The business is in great shape, and we're executing on our strategy and delivering results across the whole platform. If we turn to the next slide and the financial highlights of the year. Underlying revenue growth of 52% underpinned a 92% increase in underlying earnings. This evidences the operating leverage in the business. EBITDA margin and return on equity bounced back as more normalized condition prevails, and performance and transaction fees [indiscernible]. Deflation in cash represents first half '20, that is June 30 last year being a high point given our cautious position relating to COVID and the subsequent deployment of capital to grow our business, whether underwriting new funds or to make strategic acquisitions such as RetPro or our initial interest in MKM. The balance sheet remains in a strong position to support new funds as we have several assets worth in excess of $60 million that are expected to convert back into cash in the second half of this year. The tables on Slide 7 highlight a continuation of the momentum from the second half FY '20 results versus the first half this year. The comparative period, FY -- first half FY '20 was impacted by COVID, and clearly, that impacted the results in that period. We aim to remain a growth company through scaling our existing investment strategy and continuing to invest in new initiatives as well. And given the shape of these charts, it's working well. On the following slide, Slide 8, we talk the divisional performance. As previously mentioned, the numbers here are slightly different from last year with Lending being broken out for the first time. And that has the impact of reducing the Asset Management contribution to 71% from 79% previously. Asset Management had a very strong period with both AUM and net inflow growth underpinning a 28% increase in base management fees over the period. Transaction and performance fees also returned with the launch of new funds and strong underlying performance of the investment strategy. Today, Lending represents around 14% of the group's EBITDA and is experiencing strong growth with the size of the loan book and EBITDA increasing 160% and 33%, respectively, over the period. In building our Lending division, we do so with a focus on building long-term distribution channels through technology and aligned relationships, coupled with sticky capital sources. Consistent with our broader approach, we still seek to build predictable and growing cash flows. Corporate Advisory also had a very good period with a record result, which benefited from some M&A activity that rolled over from last year and a broad contribution from the various teams in advisory. If we turn to Slide 9, comparing the performance against our strategic priorities, we believe that we continue to deliver on our stated objective of scaling our investment strategies and diversifying our capital sources. In regards to growing recurring income, if you annualize our June month base management fees, we're generating $77 million of base management fees per annum, which is up 28% from the prior period. During the period, we also opened 2 existing credit strategies to retail investors, which has had a positive start in terms of both investor -- sorry, both adviser and platform interest. The strength of the domestic inflows is really positive. Given the investment we made over the last couple of years, we demonstrated that we are delivering on the stated strategy of diversifying our capital sources. Operational expertise is at the heart of what we do, and we continue to invest in operational expertise, which is consistent with our objective of delivering better returns for investors and having direct drive into the management of our assets. We consider both new hires and strategic acquisitions as ways to enhance our operational expertise. MA Financial has a very robust balance sheet. And we've utilized it over the period to seed and underwrite funds in addition to strategic acquisitions like RetPro. We continue to strengthen the bench with senior hires and focus on executive talent with programs centered around the MA Academy. Developing and retaining our talent is a very high priority for the business. And in this regard, we are working to further enhance the equity alignment of executives through long-term incentive plans and look forward to providing more details at the annual results. On Slide 11, we turn to key activity post the results. In Asset Management, the inflows have remained consistently strong with $185 million of inflows over the last 6 weeks alone, and this has been from a combination of both domestic and foreign investors. In VC, we contracted to sell one of our investments, which will deliver a $4 million performance fees to the group in the second half. And this highlights the diversity in our business and the ability to earn performance-based fees from a number of -- sorry, a number of different strategies. In Corporate Advisory, there has been a lot of activity since 30 June with a number of larger deals completing in addition to a number of transactions being substantially completed. At this point, we have around $18 million of fees that are highly probable or already earned, which is a great way to start the half. So despite the recent COVID lockdown disruption, the business continues to experience similar momentum that was experienced over the last 12 months. Turning to the delisting proposal for Redcape Hotel Group. As we have said before, we've been disappointed with the share price performance of RDC since listing in 2018. It has predominantly traded at a discount to NAV, and sometimes that discount is immaterial. We are strong believers in the underlying fundamentals of our hospitality assets, including those in the Redcape Hotel Group portfolio. Since acquiring Redcape, the MA hospitality management team have delivered outstanding results at the asset performance level, and this is even more impressive given the significant headwinds of COVID. MA, its funds and executives own in excess of 40% -- or sorry, 44% of Redcape and are long-term owners of the asset class. Over the last few months, we have worked with the independent directors of RDC and their advisers on strategic options for the group with the objective of finding a way to materially close the gap to NAV. And today, the RDC announced that they'll put forward and recommend a delisting proposal to RDC security holders. The delisting proposal will essentially take RDC back to be an open-ended, unlisted fund and provide investments with a quarterly liquidity mechanism more closely aligned with directors' NAV. We believe that the structure of the proposal provides choice for RDC security holders. Those that want to retain their exposure to the high-quality Redcape assets can stay invested. Those who would like to increase their interest in the unlisted fund can do so either on market or through the rights issue at $1.15. And those who want to exit at the time of delisting can at $1.15, representing a 22% premium to the last close. The proposal is subject to a security holder vote, and we will not be voting our interest in this space. This means that all nonassociated security holders will decide the future of Redcape, and we're confident that the vote will be approved. Many investors in Redcape were invested in the unlisted structure prior to the IPO, and we believe that they will support the unlisted structure going forward. In many cases, they'll prefer the unlisted structured. On Slide 13, we move to our guidance. We're upgrading our guidance for the outlook for FY '21 from 20% to -- or to 20% to 30% growth from 10% to 20% growth at the May AGM. The strength of the first half and the momentum in the business provides us with the confidence to upgrade at this point, and we look forward to delivering a strong FY '21 result for all MA shareholders. The guidance is based on a number of assumptions that are outlined on this slide. We turn to Asset Management now on Slide 15. And as a reminder, this division was established in 2013 with one retail shopping center asset in Hillsvile, Victoria as a stand-alone syndicate. Over 8 years, we've grown AUM from $30 million to be $6.1 billion today diversified across a number of specialized investment strategies, all driven by the constant pursuit of strong risk-adjusted returns for investors. The divisional results today demonstrate that focused strategy is working. And we believe that the business is in great shape to continue its growth trajectory and also incubate more businesses like the Lending division over time. So focusing on the divisional results. Over the half, Asset Management revenue was up 94% versus PCP. And underlying EBITDA was up 190% -- 119%, sorry, on the same basis. The result was underpinned by strong inflows and a return of transactional and performance fee revenue across a number of investment strategies with the performance fees primarily being attributable to hospitality and equity. This is the first period that RetPro has been included in the numbers as we settled in early April 2021, and it contributed $2.5 million to the base management fee account. The Redcape mark-to-market of $7.6 million is a significant item in terms of both FY -- first half '21 contribution and also in the comparative year as FY -- as the first half of FY '20 included a negative movement due to the initial onset and uncertainties surrounding the global pandemic. As a part of the delisting proposal, the Redcape independent directors have had the entire RDC portfolio independently valued. This resulted in the directors' NAV increasing from $1.22 to $1.31, which was the main driver of the mark-to-market results in Asset Management. If we turn forward to Slide 16, this chart demonstrates both consistent growth in AUM and increased diversity in AUM over time. It's great that the credit is growing quickly as it was a conscious decision to build this business 3 to 4 years ago with the objective of diversifying into what we consider could be a very large, multi-decade opportunity for growth. It is also great to see Equities starting to be a meaningful contributor to the business with $695 million of AUM compared to 30 June last year when it was $310 million of AUM. The opportunity in both strategies is very significant. Slide 17 is a new slide, which looks to provide greater transparency in our fund flows. Gross inflows over the last 12 months were $1.1 billion, with a broad support for all our investment strategies, which is reflective of our strategies having longer-term track records of performance and our distribution teams building deeper relationships with more investors. The foreign distribution channel continued to grow strongly, raising 1.5x the money in this half compared to the last. Clearly, both SIV and non-SIV flows are growing strongly. As mentioned earlier, our significant investment in our distribution -- domestic distribution team is paying dividends with a very material step up in net flows in this market across a number of our investment strategy. Diversifying our capital sources continues to be a top priority for the group, which takes us to the following slide, which reinforces the diversification of our investor base across retail, high net worth and institutional capital. In regards to the SIV program, it was pleasing to see the Federal Government confirmed its support to the program this half, including the introduction of new rules, which will be implemented from 1st July 2021. We are confident that the new rules will -- the new rules support our professional approach and future growth in inflows. Slide 19 talks to the various investment strategies and some of the drivers for the half. I won't dwell on this slide. I'd only call out a few highlights. The credit strategies we've opened up to retail investors are gaining positive momentum on the larger platforms, which bodes well for future inflows. The real estate credit AUM grew [ about ] 50% over the period to $480 million of AUM with strong interest also continuing into the next -- into the last 6 weeks. The fund has an impeccable track record and is gaining very broad acceptance amongst investors. During the half, we contracted to acquire the Bundaberg shopping center for $140 million. This asset will settle in the second half and represents our first stand-alone retail offering for some time. And we are encouraged by investor interest in the high-yield offering. We have high conviction for strong subregional shopping centers that dominate their local markets, especially in the large regional cities. Our equity fund continues to perform well. AUM under that strategy reached $695 million in the half, up 124%, underpinned by strong performance at the fund level. The PE/VC strategy commenced in 2015, and we are now into our third vintage fund. Overall, we've invested in around 20 growth companies across the 3 funds with 8 made during this half. 17 of these investments remain in the funds today. And given the maturity of some of the earlier funds, we expect to see additional realizations in coming years, which should deliver more consistent performance fees for the group from this investment strategy. All in all, the 4 investment strategies on this page have been performing exceptionally well, and we expect that to continue in the future. If we turn forward now to Slide 21. This is where we stood at Lending for the first time, and this really reflects 2 aspects of that division. The nature of the Lending business being [ a NIM-based ] model is quite different to Asset Management and Corporate Advisory & Equities. And the Lending business is also gaining scale today where it is becoming more meaningful to the group. And the massive opportunity that we see ahead for the division means that we think this will continue to grow. On results, strong growth across the key indicators with revenue [indiscernible] 32% and underlying EBITDA are up in the 30% range. In relation to NIM, it was 5.8% in the half. And whilst this was down from the prior period, it also reflects our conscious decision to grow our loan book in the largest addressable market being home loan, which will benefit volume, although reduce NIM over time. The loan book grew 160% over the period with $70 million being attributable to the acquisition of MKM and the remainder being organic growth. One of our key measures is return on invested capital, and that came in at 16.5% for the period, which is above our targeted return. On Slide 22, we walk through some of the highlights in Lending, which include the disbursement business continues to be a great business for MA Financial. And we further strengthened our dominant position in that market with the addition of new channel partners. We have made some early progress with MKM across people and technology, which should also support much stronger growth in net loan book. And finally, the flagship MA Priority Income Fund continues to grow in line with our expectations and was opened up for retail investors in the half. We continue to implement our strategy of scaling the Lending division in a prudent and measured way with a focus on very large addressable markets. On Slide 24, we touch on Corporate Advisory, which had a record half with a significant skew to M&A engagement, including a couple of large transactions that rolled over from the second half FY '21. We've seen ECM pick up in the second half with 3 capital raises already undertaken in the last 6 to 7 weeks. Since the end of June, we've derisked around $18 million of revenue, which when added to $24.8 million reported in the first half takes us to around $43 million of revenue year-to-date. This represents around 70% of our targeted $1.1 million to $1.3 million per executive and bodes well for the year. The pipeline remains very deep, and that also gives us confidence around being able to achieve our targeted revenue per executive of $1.1 million to $1.3 million. On Slide 25, it's matched out the revenue seasonality in Corporate Advisory & Equities and has been consistent over the years on that sort of 40-60 split first half, second half. And we really see no difference in this period. Commissions have been a bit stronger this year versus last year, although that is largely reflective of the significant increase in volume in the June quarter as -- in the June quarter last year when COVID uncertainty peaked and volumes peaked as well. I'd now like to pass over to Graham Lello, our CFO, to run through some of the financial numbers.

Great. Thanks, Julian, and good afternoon, everyone. If we start on Slide 27, we've talked a fair bit about revenue today. So I thought we'd touch on the expense side of the equation and in particular, our continuing investment in platform and talent. As we mentioned at the full year results, we expected a higher-than-average increase in compensation in the first half of '21. And this is exactly how it turned out with the increased split evenly between fixed and variable comp. Some factors impact both components of comp with headcount being the most material driver. Excluding the impact of RetPro, headcount grew 20% in the first 6 months. And on a year-on-year basis, that increased to 36%. A significant driver of our variable comp is also increased revenue performance, which has obviously been strong in the first half. But most importantly though is that we have maintained our comp ratio at around our target of 50%. The combination of increased earnings and our strong cash conversion has resulted in us in declaring our maiden interim dividend. And while we expect to be at the upper end of our dividend policy power range of 25% to 30% for the full year, this will still mean that we will continue to retain good levels of operating cash for future investing. And on the topic of cash and investing, if we move to Slide 28, we'll quickly run through our operating balance sheet. As a quick reminder, we present an operating balance sheet because we think it gives a simpler view of both our economic exposures and the capital available to us to allocate. It's worth pointing out that typically in the first half, we have a cyclical low point in our working capital when in March, we pay our annual dividend and our annual bonuses. And this, coupled with a continued focus on growth investing in the half, has reduced our cash balance, which despite this remains pleasingly strong. As part of our consistent approach to capital, cash will always be an important component of our net assets. And with the 5% NPA increase, that adds further strength to our asset backing per share. Borrowings remain unchanged in the period, and we're comfortable with the current levels of debt and the balanced maturity profile. Looking forward, I don't see us changing our approach of maintaining a dynamic but prudently capitalized balance sheet. It certainly stood us in good stead and allows us to not only invest in existing platform growth, but also explore new opportunities. And over the page on Slide 29, I'll touch on some of the investment highlights. We were particularly active in the period, which was a continuation of the momentum coming out of the second half of 2020. On the slide, you can see that we continue to support the ongoing growth of the Lending business in the period. And whilst it may -- it may seem we did not do much with our co-investments, this actually belies how we approach the growth and see funding of our funds. As a demonstration of this, we sold down close to $30 million of seed investments that were on our balance sheet at 31 December. These proceeds were then rotated into both short-term seed capital initiatives in the first half and over $20 million in longer-term strategic assets, including the acquisition of RetPro and the closure of our major bank funding partnership. And this dynamism talks to how we think about and position our balance sheet for growth. The recycling of capital to me is a clear focus, and in this regard, I believe, a real strength of ours. And to highlight this point, we have over $60 million of capital we expect to realize in the second half with some $20 million already banked as of today's date. Importantly, an emerging feature of our capital recycling is the maturity profile of our longer-term investments, with the return of this longer-dated capital making up a large part of the $60 million of realization as expected. And this only comes about with time in the game, and it gives us additional confidence and firepower to continue to look at new opportunities. So with some great earnings momentum and a strong balance sheet behind us, I'll now hand back to Julian to talk you through our strategic outlook.

Thank you, Graham. And I think you mentioned time in the game. So Slide 31 talks to this. I guess, the slide looks back at some of our track record in building businesses within the group and looks to show the benefit of delivery -- of developing deep financial and operational expertise in the businesses we choose the scale. The value of time and investment and capability delivers strong investment performance over time, which in turn provides investors with confidence to keep investing in our products and gaining access to our operating capability. It's a virtuous cycle, although the core of it is investment performance over an extended period of time. We firmly believe you need deep operational expertise to deliver on this front. The growth rates and our success of building business in the past speak for themselves. We'll now turn forward to the final slide on Slide 32. This really provides a bit of a view on how we think about the business and delivering medium-term growth. We are a builder of valuable businesses in large addressable markets. We have access to unique distribution channels to support scaling. We have access to diversified sources of capital, and we have a strong balance sheet to support growth. We have specialized advisory capability aligned with the leading global firm. And we are an aligned and experienced executive management team. So in closing, we are very pleased that executing our clear and consistent strategy is delivering strong results for all MA shareholders, and we look forward to continuing to execute this strategy in the future. I'd now like to pass back to Bernadett to moderate the Q&A.

[Operator Instructions] Your first question comes from Glen Wellham of MST Financial.

Well done on another great result. Just a question around -- I suppose one area that hasn't grown so much over time in Asset Management is the PE/VC fund. Is there a reason for that? And do you expect that to grow over time?

Yes, it's a good question, Glen. I guess VC/PE has really been an allocation that's come out of a significant investor visa program over the journey. So that's been a mandated approach. And I guess we've been very careful around VC/PE because a lot of our investors have a, I guess, a wealth preservation frame of mind as opposed to multiples of money frame of mind, and that's the way we've really managed the account. I think there's a massive opportunity in VC/PE. The government increased the allocation through the recent review of the SIV program. So I think we see that being more prominent in the future. And the other thing I'd say is this comment around the sort of vintages of our funds and that we'll see more investment portfolios realized over the coming years is not an unimportant one in terms of how we think about performance fees in the future as well. So it's is a massive opportunity for us. It probably hasn't grown as quick as the other areas, but that doesn't mean that we're not focused on it.

Is that because some of the investments were taking a longer to realize? Or is there...

That's a fair comment when you think about PE/VC, you sort of you buy a company and then 4, 5 years down the track, you might realize it, right? So the vintage of the first fund in VC was 2015, and we're just starting to cycle through some of those realizations. I think you'll see the number of investment companies or the number of companies we invest in increase as the mandates have increased the allocation from 10% of the SIV investment mandates to 20%. And so you'll see us buy more -- we'll have to invest more money in more companies and you also see the velocity of realizations pick up. So it's a very a very strong focus for us in terms of how we think about VC/PE in the next couple of years and using that money to -- invest that money well.

Right. I was just wondering if you could help me out forecast performance fees also within Asset Management. We had a $6 million in Hospitality and $6.4 million in Equities. I mean you have to say that obviously, Hospitality is going to be affected by the current lockdown, which looks much worse than last year. And also is there any color or disclosure around your performance fee for Equities and the performance in detail?

Yes. We've disclosed that. So the rough break is about $6 million in Hospitality and $6.3 million, I think, in Equities this period. I think your comments around the lockdown, I think we're still seeing very strong appetite for the real estate in terms of Hospitality. Obviously, the lockdown impacts cash flow and just cash burn at this point. And we do believe that this half is materially impacted. In terms of, I guess, looking forward, I think -- and this goes to the PE comment as well. We see a lot more diversity in the maturity of our funds. And so you're going to see performance fees being contributed in some periods out of Hospitality, in some periods out of real estate, some out of PE/VC and some out of Equities, right? And I think Equities is a more consistent strategy. So we see the level -- I think this period was slightly above sort of our 3-year run rate in terms of its percentage of AUM, but it's not that size. So it's probably around -- it's not too far from a normalized period.