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

Good morning, and welcome to the first half FY '26 Results for MA Financial Group. My name is Julian Biggins, and I am the joint CEO of MA Financial sitting alongside Chris White, who is here in the room with me. We also have Giles Boddy, CFO; and Michael Leonard, the Head of Investor Relations. We are very pleased to deliver record results and strong outlook in what many would consider challenging conditions. I'll start with Slide 7 with the key highlights. Today, we report underlying earnings growth of 45%, with strong performance across the diversified business. This excludes the large notable item, which is attributable to the combined outcome of divesting of both Infinite Aged Care and Brunswick heads hotel in the period. If these were added back to the results, the EPS growth would have been higher at 96%. As earnings grow, we expect to increase our fully franked dividend and today have announced a 33% increase in our interim dividend to $0.08 per share fully franked, up from $0.06 per share in the prior period. We're very comfortable with the performance and strength of the business. One of our key measures is recurring revenue. and that has increased to represent 72% of total revenue and underpins the predictability of MA's future performance. At $154 million is almost 4x what it was 5 years ago and continuing to grow. This is a key metric for the executive team. Assets under management were $15.5 billion at the end of the period, up 44% on the prior period supported by both organic growth across the business and the acquisition of IP Generation, which has rebalanced the portfolio of investment strategies at what we believe to be the right point in the cycle. Our unique lending ecosystem continues to deliver strong growth, although more importantly, the combination of the businesses provide a unique distribution and product manufacturing platform that is without peer in the country. The growth of MA money within the ecosystem is evidence of it working with the loan book sitting at just over $8 billion, say, and that compares to $3.7 billion just a year ago. Corporate Advisories had a very good start to the year delivering around $50 million in fees thus far when we include the $25 million that is expected to be delivered by transactions that have been announced post balance date. Bringing all of this together, we see a continuation of strong earnings growth in FY '26, driven by executing a strong, consistent strategy underpinned by a diversified scale business model. Now turning forward to Slide 8 and some key numbers. The business has continued to deliver despite the market and macroeconomic uncertainty in the half. From an operating perspective, the acquisition of IP generation has added considerable bench strength to our core real estate strategy, demonstrated in the fourth quarter last year when we acquired $1.2 billion of retail shopping centers, which carried revenue growth into FY '26. The launch of the listed private credit funds, MA1 and MA2, late last year has also underpinned revenue growth in FY '26. It's important to note that whilst AUM is a key operating metric, there are many ways to succeed in our asset management business with Redcape Hospitality being a highlight in FY '26 as asset performance transactional activity and potential performance fees will see it deliver very strong outcomes in the year. Gross flows were down slightly on the prior year, which reflects a relatively tougher environment for private credit and the listed markets being substantially closed for issuance. Excluding lumpier listed market and institutional raisings, growth inflows were actually up slightly on the prior period. Finsure continues its growth journey, increasing its loans on platform by 25% and MA Money powered through $7.5 billion at June. The MA residential ecosystem is important to its knowledge as it's a very unique collection of businesses and capabilities, and we are demonstrating how to create material shareholder value through the ecosystem. Corporate Advisory was down slightly on the prior period, while this was largely due to timing with a flurry of transactions announced post balance date, highlighting the strong activity levels experienced during the half. The result is positive. We are very happy with the way the business is navigating the current market environment. While some parts will face headwinds such as real estate credit, other parts of flourishing and delivering growth is the strength of our scaled, diversified business. Turning forward to Slide 9 and our growth journey. We have often talked about how we build long-term shareholder value and the importance of recurring income and building multiple growth strategies. As you can see on this slide, we have been executing this strategy for a long time now with strong growth across all key operating statistics over the last 5 years. When you look at recurring revenue in the first half of FY '21, it was only $44 million and then compare that to today only 5 years later, and it's $154 million. You can see what has driven this when you look at each of the business units and the significant growth achieved over the period. Whilst growth rates may slow given the expanding base, we still see considerable growth in the business and are always thinking about new opportunities. The objective of building a growing recurring revenue base is to build a strong foundation of revenue that endures variable market conditions. And we continue to execute on that consistent strategy today. Again, the 5-year ago comparison of the business start as we had half the no Finsure, no MA Money and 1/3 of the recurring revenue. The business is quite simply a larger, more stable business today. Turning forward to Slide 10 and our updated 3-year targets. On this slide, we have set out our new 3-year targets for the group. We first provided 3-year targets in August of 2023 for December 2026. And with that period now upon us and those targets largely met, we've decided to refresh the targets with a December 2029 version. We've always talked about our strategy in the context of medium-term vision and decision-making, and these 3-year targets are our preferred approach of how to provide the market with strategic targets for MA Financial. We are obviously confident in our targets and have demonstrated our track record of how we go about executing the strategy. We hope that provides credibility for the market in thinking about how we have approached landing on these targets. As you'll no doubt focus on, the implied CAGR for our targets is generally less than what we've achieved. And this obviously comes with scale and that we are starting at a much bigger basis. With that, our network is bigger, and we have more ways to guide out landing the targets, and that provides us with real confidence in our ability to deliver. We encourage you to look at these targets and back solve what financial outcomes are delivered if these targets are met as that is what excites us. If we cast our mind forward 3 years and look at the financial outcomes attached to these targets, it would be a great outcome for all stakeholders. We're a growth company and proactive in our approach of how we execute our strategy. Now turning forward to Slide 11 and the strong financial results. As I've mentioned, the financial result is a particularly strong one. The decision made last year around strategic growth opportunities, including the acquisition of IP generation, the listing of the private credit funds and the investment in MA Money have all paid dividends, and this demonstrates the strength of the diversified model. Whilst we are excluding the large notable item, which predominantly relates to the profit on sale of our aged care business, we are very proud of that result, which delivered investors 2.8x their initial capital and was obviously a material transaction for MA Financial returning approximately $40 million in capital but the balance sheet. Excluding the large notable item, return on equity jumped over 400 basis points to exceed 15% in the first half, and we expect this to continue to get stronger as our capital-light model support earnings growth. increasing our dividend by 33% to $0.08 per share demonstrates our confidence in the business and the strength of the balance sheet. We expect dividends to continue to increase as earnings grow. So in summary, this financial result is validation of the diversified business model working, delivering 45% earnings growth alongside a material increase in our return on equity. Turning forward to Slide 12. You can see from the chart that this period has generated another record result. And when you read this page in conjunction with Slide 9, you get a real picture of the breadth of the growth and the strong underlying recurring revenue base of MA Financial. You need to remember in FY '22, we generated about half of the recurring revenue we generate today, and our profitability was heavily reliant on performance fees from Redcape hospitality. Today, that picture is materially different with over 70% of our total underlying revenue from recurring revenue streams and a significantly reduced reliance on performance and transaction fees, although these are starting to build as well. Moving forward to Slide 13 and divisional highlights. In Asset Management, the December quarter of last year really set us up for the first half results. The acquisition of IP generation delivering $1.8 billion of the subsequent acquisition of hyper dome and top right shopping center for a combined $1.2 billion and the listing of MA2, all underpinning strong revenue growth. As previously flagged, we sold Marine Shopping Center in the period, and this reduced AUM by approximately $600 million. Gross flows for our domestic unlisted channels continue to be strong and not materially different from last year. Net flows have been impacted by the intense focus on product credit both globally and domestically and more directly the softness in the residential market post the federal budget. The asset-backed products such as the priority Income Fund continued to attract considerable capital over the half and are well suited to this environment with downside protection and conservative asset backing. Redcape Hospitality has had a very strong period, both from a trading performance and also transactionally. This will drive a material earnings growth for the hospitality platform, and we anticipate performance fees to feature in second half '26. The New Zealand AIP program has kicked off with in excess of $100 million of capital now deployed in predominantly private credit or hospitality assets. The pipeline for this product is strong. Over the last 12 months, the product mix has moved again, reflecting the increased growth being driven by real estate, both cord alternatives and the acquisition of IP generation. This, alongside to reduce the range of fees in real estate credit have seen the recurring margin come down over the period, whilst the transaction performance fees have increased. This resulted in a 9 basis point reduction in our total fee margin over the period to 159 basis points. Whilst core real estate AUM growth lowers recurring revenue margin, it benefits AUM growth through the use of leverage alongside equity and total margin through increased performance and transaction fees, hence, our increasing focus on the total fee-based margin. Recurring revenue should benefit as residential real estate market stabilized and increased activity levels support a rebound in the range of fees within real estate credit. Turning forward to the other divisions. Finsure's loan book continued to grow and hit $193 billion in June. As a reminder, the loan book was slightly less than $60 billion when we agreed to acquire Finsure 4 years ago. The revenue per broker increased materially over the half as we rationalize brokers to focus on the most productive brokers. We would expect to see this revenue per broker continue to grow as these numbers annualize. MA Money's loan book reached $7.5 billion at the end of June, which is well ahead of our targets. Strong volume growth has persisted as the business continues to increase its market share and broaden its mortgage broker relationships. The growth in MA Money's market share is underpinned by quick turnaround times on apps, broker relationships and market-leading tech. Net interest margin was in line with our targeted range at 1.33% and the arrears remain at a very low rate. In Corporate Advisory and equities, the business had a good first half with strong activity impacted by extended execution periods which pushed a number of transactions into the second half. The activity mix was skewed again to M&A and private capital with the IPO of SEC being the exception. MA [ Mollis ] helped FCC list on the ASX at a $1 billion valuation being the largest IPO of the year. Equities also had a stronger period with commissions up 38% as market volumes improved and a stronger leadership team executed well. The period since 30 June has been a very busy one. Gross flows accelerated post result with the group raising in excess of $400 million over the first 6 weeks with a strong focus on our asset-backed prior income fund. Net flows for the first 6 weeks of the half were $166 million which represents a strong run rate from both our domestic and international teams. These flows were largely into our open-ended funds. Our real estate business has been highly active with over $1 billion of well-progressed deal flow across both core real estate and hospitality. Whilst the first half '26 was relatively quiet for core real estate, we currently have over $500 million of retail shopping center transactions that we are starting to raise capital for which we expect to contribute significantly to the second half net flows. As I've previously mentioned, Hospitality has been active, and we expect this to be a standard year for the platform. MA Redcape Hotel Fund returned over [ 17% ] to its unitholders over the year to 30 June, and the fund has exchanged on over $500 million of pubs that will settle in the second half with a continued focus on enhancing portfolio mix. MA Money continued its growth momentum with its loan book surpassing $8 billion to deliver records with around $1 billion of settlements since 30 June. Net interest margin is being retained around the same level as first half '26, and we have placed a $1 billion RMBS into the securitization market. Finsure also carried the momentum into July, settling $8 billion in the month with only minimal impact being witnessed from the proposed changes outlined in the federal budget with July settlements approximately up 10% year-on-year. In any case, Finsure is predominantly a fee-for-service model and therefore less exposed to flows and more to revenue per broker and number of brokers. Corporate Advisory has announced several transactions post balance date with approximately $25 million of additional revenue attributable to them. Overall, a very strong start to the second half, which takes us to the next page and the outlook. In regard to the outlook, we expect the continuation of the momentum in the business to deliver material earnings growth in FY '26 with an earnings skew to the second half. In asset management, whilst the gross flows have been very strong the net flows have been more subdued. In the second half, we see a stronger net flow contribution compared to the first, supported by a more active period for core real estate. We also expect our asset-backed private credit funds to continue to perform well. Reflecting a more active core real estate offering and subdued a range of fees from real estate credit, we expect the second half recurring revenue margin to be consistent with that achieved in the first half. In regard to transaction and performance fees in the second half, we see a similar strong result to the first half with a material amount already underwritten by announced or very advanced transactions. We would expect to see AUM increase from June, predominantly underpinned by growth in core real estate, hospitality and asset-backed private credit. We'll see the Aged Care Fund and Beach Hotel settle in the second half although do not expect any other material divestments. We've increased the guidance for MA Money to deliver $25 million to $30 million NPAT in FY '26 with the loan book of $8 billion and growing. We anticipate strong growth into FY '27 as well. Corporate Advisory is well placed for the year with around $50 million of Corporate Advisory revenue already booked or derisked, which bodes well for a meeting the target range per executive this year. Finally, strategic spend is running to plan with the majority of the expense relating to the U.S. private credit platform, where we continue to make steady progress raising capital in addition to adding a number of new products being considered. In closing, we are very happy with the business and how it is performing. To think that over the next 12 or [ 18 ] months, the business will hopefully exceed $500 million of annualized revenue is a real milestone for the group and validates the scale of MA Financials reapproach our 18th anniversary and tenth year of being listed. We're a growth company focused on generating a strong foundation of recurring revenue with a diversified ecosystem designed to help balance out cycles as they come and go. Sustainable growth is something we strive for. We look forward to executing our consistent strategy and hopefully, delivering strong growth in the future. With that, I'll hand over to the moderator for Q&A.

[Operator Instructions]. Today's first question comes from Cameron Halkett with Canaccord Genuity.

Thanks for taking my questionsI have 3. The first is just around the performance that we've been seeing in the last year or so, I suppose, in Redcape in particular. Obviously, the underlying assets are performing well. I think there was some revaluation upward in the last quarter. But I suppose just at the asset level, Julian, do you have any view on what's driving, I suppose, the strong performance there in pubs in particular, the consumer descoping from mid-market [ hospital ]? Just a mix of things, any color would be helpful.

Thanks, Cam. I think from Redcade, performance was exceptionally strong over the last couple of years. And when I say exceptionally strong, it was sort of double-digit EBITDA growth. That slowed a little bit into the last [ first ] quarter, but still running sort of run rates to the market. I think from a Redcape perspective, having a well-capitalized business with high-quality values that you can joke you put CapEx into it and take market share from the competitors has been a very important feature of the rent cake business. And the F&B offering that sort of comes with building out a better more sort of diversified offering or the form within the venues of food and beverage, large sort of family sort of restaurants -- has really boded well for that business as well. So [ Chris Monaghan ] is running Redcape done a great job. We're expecting to have another strong year in FY '27. And the capital side of the busier by the capital markets in terms of transactional stay very liquid on firm pricing. And we view our valuations in recaps being conservative.

Yes, great. And I think our 2-year forward return target 15% there as well that got reiterated. So absolutely other looks good. If I can turn to MA money, the last guidance you had in market was north of $20 million of NPAT today, it's upgraded to $25 million to $30 million. I think it's fair to say people assumed and obviously wait and see impacts of federal budget and resi housing weakness. But obviously done a bit better or expecting to do a bit better. What's the key lift here, if anything? Are you flexing reinvestment in the business? Are the NIMs holding better than first thought?

Is the question, what are the key I didn't quite hear that, Chris, what are the key drivers did you say?

Yes. Just key drivers of the upgrade in MA Money, please?

Yes. I think, we are continuing to do what we've done, which is stick to the basics of the fast turnaround times, the investment in the tech, the productivity person all-time employee has really risen over the last 12 months. And we have taken on more BDM staff over the last year as well. But it's really keeping efficient tax clear underwriting standards and fast turnaround times to service the market promptly. We built our entire stack from scratch when we started that business. So we haven't been encumbered by legacy systems, which really has enabled us to be very forward-looking to cope with this level of growth and maintain our turnaround times. And so it's just about really continuing to give good service to the market and get a prompt yes or no. to brokers and just keep doing the same.

Yes. And just the last 1 then would be around the new 3-year targets. I want to relate this just by saying this is definitely not a criticism. But last time around the targets, you ended up missing on the EBITDA margin side of things for '26 as you've obviously doubled down on investment I suppose like as people look at these new FY '29 targets, do you think you hold yourselves to that EBITDA margin guidance range you provided. Just I suppose that people can get conviction, I suppose, on that trajectory? .

Yes, we've absolutely put a lot of border at these targets and accept the '26 target wasn't Matt. We have obviously invested heavily in the business. But we do see -- and you see it in this result, we've seen some margin expansion in the first half of FY '26, and we continue to see opportunities to expand the margin over the following 3.5 years. a steady rate in terms of expanding that margin. So we look at that pretty steadily over the outlook prior period.

The next question comes from Anthony Hoo with Ord Minute.

My first question is just on asset management. Just looking at the net flows that you talked about, you're talking about the first 6 weeks at $166 million, that's already gone above the past 2 quarters. Just wondering if you can give us some insight into that. Is that -- do you think that's part of your time issue where those be a lag or holding back? Or do you think there's something that indicates that it's more to...

I think when you look at the size, so you think about it through both lenses, you've had an excess of $400 million of gross flows, I think, in that first sort of 6-week period to along side $166 million of net flows. The top of the funnel is working exceptionally well. Obviously, there's an elevated sort of redemptions at the moment through some of our liquid -- more liquid funds at the top of the funnel was putting a lot of new capital into the system. So that's okay. The $166 million was a strong number and probably caught us a bit by surprise, to be honest, in the first 6 weeks given what we've seen in the second half, but a lot of that money is flowing into the priority income fund and investors are very attracted to the defensive nature of the asset-backed security class and also the buffer that's provided in that fund. So it's very hard to predict in this market where that goes through to tenant, but we're seeing very strong interest in those opportunities. The other thing I'd say is we're only just launching our core real estate opportunities, the single asset funds. And that will see another opportunity from the inflows through the more traditional channels that we just didn't have in the first half, and that gives us a bit of excitement as well.

And then in terms of -- I wonder if you can talk about the distribution channels in that business and the credit how that's going? Or are you expanding distribution network in your...

Selectively, like we've seen both international and domestic flows strong in the second half into the private credit funds. We've been -- we've got a pretty mature distribution channel, both in Australia and through Asia. And where we have made some investments through that Singapore Hong Kong family office institutional market that we haven't seen materially contribute to the numbers yet that timing that we are focused on in terms of the growing up the distribution channel and the U.S. is a separate league as well. So we have seen those. Obviously, the residential markets weighing on people's mind around real estate credit but that's not a surprise given the sort of nature of the market at the moment. And that's really the trends we're seeing.

Great. Maybe I can ask one more question. Just if you look at your FY '29 target, for example, if you look at the MA mining target. Can you talk about sort of going forward over the next 3 years, is there any sort around the client base than going after timing changes there in terms of how the business is positioned or essential to [indiscernible].

Yes, it's Chris here. It is very much more of the same. We are constantly looking at our products in market though and how to refine and optimize them. But we just continue to do the same fundamental good service and fast turnaround times. So we are not on the loan product side, forecasting any form of substantial innovation at this stage. It is continuing the business as usual.

The next question comes from Richard Coles with Morgans.

Just a question on MA Money. Can you maybe talk to you think the return metrics for that business will get to over time as it matures, like what's a reasonable level to think the ROE can get to or some of the more the profitability ratios we should think for of that business to understand the sort of the value it's creating as it's growing?

Yes, I think we've been quite consistent around the way you look at the business headlines really in relation to the NIM, we are at the 1.2% to 1.4% range. And EBITDA margins come up [indiscernible] or 45% to 50% yes, probably on the EBITDA margins. We may look to respond to the market and flex pricing, look at volume. One thing that we are also evaluating is whether or not -- in the future, we look at different funding models or the growth in the loan book. We've spoken about in the past as we come through this 2026 year because obviously, we put out our NPAT targets. As we come through this 2026 here, whether we look at a more asset management style model associated with those home loans whether we look at managing whole loans with third parties and whole loan sales. That's something that strategically we're contemplating, and that will probably play out over the next 3 years. But otherwise, yes, that hopefully gives you enough of a feel for the metrics of the volume and the margins.

Sorry, just to repeat that margin and sorry, you are targeting was at 45% to 50%. Is that the way to think it, sorry?

Yes, we've definitely seen an improvement in sort of this half. It's lifted to 44 from where it was in the previous compare period of 24%. We see that continued approval that's the expectation for sort of the year ahead. .

Yes. What I will say is we are constantly looking at our check and optimizing our check, and I sort of flagged it for a bit of tech spend that may be coming through this year as well. So that might be something to watch out for the full year. But looking beyond that and thinking on a more normalized basis, that 45 to 50 -- code on the EBITDA margin.

And just a second one on Asset Management, we see the tax changes. Are you thinking of any new products in that space given I guess, the greater focus on income, franked dividend and those sort of things going forward? Are you thinking of anything new in the space to sort of try and capture what's a fair change in the market?

I think, always practically looking at different investment products that meet the market. The legislation is clearly directional. Clearly, income is going to win over high sort of capital sort of gains in terms of tax rate. There's also some interesting sort of, I guess, alternative structures that can minimize tax in an effective way. So we are definitely looking very closely at it. In terms of behavior from our investor base, we're really seeing strong demand for income. So I think that's probably going to play to our forehand as the legislation rolls through. And there's some other nuance products that we're sort of looking at around sort of more tax-efficient structures. But it's really watching say a bit in terms of where the legislation lands as well. Appreciate it.

The next question comes from Mark Tomlins with Turn Capital.

I was going to ask about your 3-year targets as well. your revenue per executive target for corporate advisory has been flat the past equate despite the past inflation curve time. Do you anticipate that you to lift that target after this set of 3 sales?

I think the corporate advisory target is really around the revenue per executive, which we've provided a bit of detail in the deck for the last 10 years since we've leased it's been a very consistent measure for us around how productive and executive can be in the corporate advisory market in Australia and that's actually quite a strong metric. So what's more important is getting the number of bankers and having the right structure in the corporate advisory business, really pleasing about that business and the growth of the driver verticals and how it's growing. That's been a really strong sort of growth engine in the last couple of years. And just looking at the numbers over the last 12 months, we've added 9 bankers to the division in the last 12 months alone. So we've always been very steady in our growth around sort of making sure we get the right banks that work within our business and not trying to go ahead and be everything for everybody. So we'd see that team steadily grow over time, but that range is really quite fixed for us in terms of what we're aiming for each bank and to achieve in Australia in this market.

Very good. Then with Asset Management, obviously, you're getting some great growth coming through in New Zealand from the active investor data. how much of New Zealand is contributing to that asset management growth target? Could New Zealand at $1 billion over the 3 years?