GQG Partners Inc. : UBS downgrades GQG to neutral, slashes price target by 30%

UBS downgraded GQG partners (ASX: GQG) from a “Buy” to a “Neutral” rating on December 2, 2024, and lowered its target price from AUD3.30 to AUD2.30. This downgrade was triggered by an anticipated AUD600mn loss in funds under management (FUM), following the indictment of the Adani Group by US authorities. GQG is a significant investor in Adani Group companies, whose founder Gautam Adani and seven other company associates have been charged with bribery. The analyst pointed out that GQG had already been experiencing weaker fund inflows during November, prior to the Adani news, and predicted that the company would likely see slow growth in funds in the near term. Though the analyst is 'largely comfortable' with the investment performance implications for GQG due to its exposure to Adani.

Gautam Adani and group executives of the Adani Group were charged by the US prosecutors and SEC on 21^st Nov-24, with allegations that Gautam Adani participated in a USD250mn bribery scheme to secure solar energy contracts in India and obstruction of justice. With GQG, being a major investor in the Adani group stocks, this news has already caused the share price to drop by c.20% in Australia. Following this, the company has announced a repurchase of their own stock, with a share buy-back of up to AUD100mn in their Sydney listed depository receipts.

GQG, with headquarters in Florida, operates as a boutique investment management organization, managing worldwide and emerging market equity portfolios for institutions, advisors and individuals. The revenue segments comprise management fees, which contributes 96.2% of sales and performance fees contribute the rest 3.8%.

Diversification into private markets enhance company prospects

The asset management industry market size is expected to grow at 36.4% CAGR from 2024 to 2030, triggered by rapid digital change and technological advancements. The Private markets segment has gained prominence over the years, with AUM totaling USD13.1tn as of June 30, 2023, representing around 20% growth per annum since 2018. Subsequently, GQG has entered this industry to benefit from this growth and has created an experienced team to support this new venture.

As per the 1H24 results, management fees accounted for USD343.7mn. With the diversification into private markets, GQG would be able to obtain predictable, contractual management fees, which would be beneficial for the company. With over 90% of its clients’ assets invested in issuers unrelated to the Adani Group, this diversified portfolio is expected to withstand some of the anticipated impact from the US SEC implications on Gautam Adani.

Strong financial record across the business

GQG has delivered consistent performance over the last three years, registering consolidated revenue CAGR of 31.5% to reach USD517.6mn in 2023. During the same period, EBIT reached USD384mn, growing at 31.4% CAGR while margins remained stable at 71%. However, profits declined by USD22mn to reach USD283mn in 2023, driven by higher taxes which increased by around USD85mn to reach USD104mn in 2023. Recently in 1H24, GQG reported strong numbers, with revenue of USD363.1mn, up 53.1% YoY, due to growth in average FUM and strong relative investment returns. Closing FUM reached USD155.6bn for 1H24, up from USD104.1bn in 1H23, owing to strong investment performance. The FUM allocation for 1H24 was USD58.3bn in the institutional, USD39.3bn in wholesale and Sub-Advisory accounting for USD58.0bn.

GQG expects the positive net flows to continue for the rest of 2024, due to favourable client demand across multiple geographies and channels. Additionally, they expect the existing revenue mix to remain stable, thus contributing to a high-quality earnings profile and facilitating the organic improvements of the business.

Organic and inorganic growth to support the growth of the business

With FUM growth being a major element of the business performance, the company seeks to use vital organic strategies to achieve the same. The company demonstrated growth in retail channels, with FUM in the US mutual fund business rising more than 60% in 2023 to reach approximately USD21bn. Furthermore, the company aims to re-open capacity for the Emerging Markets strategy for institutional investment vehicles and plans to launch new strategies to drive future growth.

Going forward, geographic footprint expansion is also expected to be a major strategy for the company. The company managed USD26.8bn pertaining to non-US clients, with the major growth in regions like Australia, the UK, Canada and Middle East. GQG plans to further invest in Australia, both on an institutional and wholesale basis, where total FUM was around USD7.6bn. Additionally, the company decided to open an office in Abu Dhabi, with approval received from the Financial Services Regulatory Authority to conduct business activities on March 8, 2024. This new venture will give GQG access to new regional markets and investors.

In conclusion, GQG has a strong capability to cater to different markets with their current and new geographic scope and has consistently managed to deliver a favorable performance, as evidenced by the robust financial results. Valuation also looks attractive, with an estimate of 9 financial analysts, the current P/E ratio was trading at 9.7x as compared to 2-year historical average of 12.0x and peer average of 18.7x. FY25 and FY26 sales and EBITDA have been significantly revised upward by consensus over the last few quarters. Most analysts have provided a ‘Buy’ recommendation, with the average price target of USD1.96, indicating upside potential of approximately 43%. However, with the concentrated investments made by GQG in the Adani Group, there are some risks involved, with the firm’s FUM in danger owing to large client withdrawals. Additionally, any correction in global markets can trigger client’s withdrawals and can impact the revenues.