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Three ways to value a beaten down fund manager
The Magellan Financial Group Ltd (ASX: MFG) share price has sunk 24% in 2022.
But in just the last two weeks the share price is up 17%.
With the Magellan share price moving sharply in both directions, it’s clear the market is struggling to land on a valuation.
Here are three methods you can use to value the Magellan share price.
1. Book value
Book value represents what a business is worth once all the assets are sold and liabilities are paid.
Put another way, it’s the net assets of the company.
Why is this used in valuation?
It gives you an idea of the minimum value a company is worth. It effectively puts a floor on the Magellan share price.
The method was made famous by Benjamin Graham and his then protege Warren Buffett.
When a company’s share price trades at less than its book value, this implies you are buying assets for cents on the dollar.
Magellan has net assets of $1.1 billion, with a large part held in liquid assets (assets easily converted into cash like shares and term deposits).
As a function of the Magellan share price, the net assets are worth about $5.92.
There is likely further upside to this valuation given Magellan accounts for external investments such as Guzman y Gomez at cost.
2. Magellan share price dividend yield
The Magellan share price is currently trading on a dividend yield of 15.2%. And that doesn’t even include the 75% franking.
Without further context, this sounds like a great return.
But the fund manager has lost more than 50% of its funds under management (FUM) in the flagship Global Equities fund.
Subsequently, the fees it receives from FUM will fall impacting revenue in future periods.
Dividends are function profit. And profit is typically a function of revenue.
Therefore, its unlikely Magellan’s share price will be paying a 15% return going forward is unlikely.
Dividend yield valuations are great when the business is relatively stable like Woolworths Group Ltd (ASX: WOW) or Coles Group Ltd (ASX: COL).
But investors always need to take note of changes in the underlying business as this is the key driver of future dividends.
3. Earnings multiple
Another way to value Magellan is to take its current earnings and then multiply by what its peers typically trade on.
But due to the aforementioned outflows, using historic earnings is not a great proxy for future earnings.
Instead, we’ve estimated profit based on the most recent FUM announcements and historical margins.
Magellan is expected to achieve around $324 million in profit over the next 12 months.
Funds management businesses typically trade on a profit multiple of around 8 to 12.
That would imply Magellan is worth anywhere from $2.6 billion to $3.9 billion.
Magellan currently has a market capitalisation of $3.0 billion, towards the lower end of the earnings multiple valuation.
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