Is MA Financial Group a potential mini Macquarie Bank?

MA FINANCIAL GROUP – A MINI MACQUARIE BANK?

The Surrey Australian Equities Fund (SAEF) has had a holding in MA Financial Group (MAF.ASX) for some time. While the macroeconomic environment is challenging, particularly for its corporate advisory/equities business and performance fee revenue, the company has a number of earnings drivers we see as attractive over the medium and longer term. We also expect its earnings profile to “smooth” as it diversifies its business mix.

MAF is a financial services firm which listed in 2017 and is often referred to as a “mini Macquarie Bank (ASX: MQG)” given it is a growing, diversified financial services group. The company specializes in the management of alternative assets, lending & technology, and corporate advisory/equities work. MAF is ~45% owned by its staff and strategic partner Moelis International, providing an alignment of interests between stakeholders.

DIVISIONAL OPERATIONS

The business operates along three broad divisions grouped as: Asset Management, Corporate Advisory & Equities, and Lending & Technology.

Asset Management

The Asset Management business invests across multiple asset classes including real estate, hotels, credit, equities, and Private Equity/Venture Capital as highlighted in the chart below.

Source: MA Financial Group

Since the end of FY22 (December Year End) Asset Management has expanded into other classes such as Marinas while generating net fund inflows of $650m to mid-June 2023. Growth of this size is impressive in the current market environment.

While we are pleased with the fund growth to date and the subsequent benefit to base management fees, our forecasts assume a normalisation of performance fees this financial year.

Corporate Advisory & Equities

This division has suffered from lower Equity Capital Markets and Merger & Acquisition activity. It can be lumpy and cyclical but we believe it offers a strategic benefit to the group while contributing to positive returns.

We are also encouraged by the company’s ability to maintain its corporate advisory revenue per executive at ~$1m per annum despite the weaker recent market conditions.

Source: MA Financial Group

Lending & Technology

A key focus in this division is the Finsure business.  As at FY22 MAF had $91 billion in managed loans (representing 14.2% broker market share) across 2,640 brokers on its platform.

Source: MA Financial Group

In addition, the company consolidated MA Money into its business in March 2022. Our view is that as fixed-rate mortgages continue rolling across Australia there will be an opportunity for both Finsure's activity levels and growing its own loan book. This could also benefit from Australia's major banks beginning to ease to some degree, on recent intense mortgage price competition.

We are seeing early signs of growth with MA Money settling $185 million of new loans in FY23 to date, with a current application pipeline in excess of $200 million.

However, while we are positive on this division, we forecast it to be of benefit more so to medium-term earnings growth as opposed to the short term which will likely require investment into MA Money.

WHERE TO FROM HERE?

Surrey Asset Management has forecast moderate/flat group earnings growth for MAF in FY23 as the company cycles the high-performance fees achieved in FY22 and as it invests in its Lending and Technology business. Following this period we have forecast solid double-digit growth in FY24 and FY25 based on growth in the asset management business and benefits from FY23 investment in Lending & Technology.

Source: Surrey Asset Management internal forecasts

Overall while a portion of the company’s valuation and earnings are exposed to macroeconomic forces and the share price often reacts to stock market sentiment, trading on ~14x our FY23f Earnings Per Share (EPS) dropping to ~12x our FY24f EPS we see value at current levels as we look for medium and long-term earnings growth across a diversifying asset base.