Is the Magellan (ASX:MFG) share price a beaten-up buy?

The Magellan Financial Group Ltd (ASX: MFG) share price has fallen around 36% over the last month and 60% in the past year.

Not only has Magellan gone through a downwards re-rating of what earnings multiple investors were willing to pay for the shares, but it has also lost its largest client.

Magellan share price dives after St James’ Place loss

Earlier in December, the funds management business was notified that St James’ Place – a major wealth management business – had terminated its mandate with Magellan.

The mandate, which was a separate account and not an investment in any of Magellan’s retail global funds, represented approximately 12% of the current annual revenue and is anticipated to have an approximate 6% impact on the revenue for the year ended 30 June 2022.

Due to the timing of the mandate termination, the impact is immaterial for the first half of FY22.

What does this mean?

Not only will it mean a sizeable chunk of revenue is lost from its annualised total, but profit will also be significantly impacted. Magellan benefits from operating leverage when funds under management (FUM) grows, but the opposite can happen if FUM is lost.

Brokers think that the business may be facing more difficulties in the shorter-term. Magellan’s funds continue to show underperformance against benchmarks in recent times, which could mean that the net flows may be impacted.

Management fees could also come under further pressure as investors question whether the fund manager is worth the fees that are being paid for its performance.

Morgans recently cut its price target for Magellan to $24.15, so it’s expecting a bit of a recovery over the next 12 months.

Is the Magellan share price a potential opportunity?

A few brokers actually still think there is further downside for Magellan shares.

For example, UBS rates Magellan as a sell with a price target of just $17 – that’s around 20% lower. The broker is concerned about outflows in the coming years and potential fee reductions.

Morgan Stanley has similar thoughts to UBS, with a sell/underweight rating and a price target of $17.50.

Looking at those pessimistic ratings, let’s see what the valuation is for the projected earnings in FY23. UBS reckons the Magellan share price is valued at 12x FY23’s estimated earnings. Morgan Stanley thinks that Magellan is valued at 11x FY23’s estimated earnings.

Whilst analysts are focused on the potential profit decline from the global equity strategy, there are other areas that Magellan is bullish on over the longer-term such as infrastructure, Australian shares and ESG investing. It also thinks that its investments of FinClear, Guzman y Gomez and Barrenjoey have attractive futures.

The post Is the Magellan (ASX:MFG) share price a beaten-up buy? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison owns Magellan Financial Group. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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