HMC Capital (HMC) $6.01

The bearish thesis on HMC had been around valuation relative to their funds under management. As a broad rule of thumb,  a funds management business will typically trade on 5-10% of their Assets Under Management (AUM), adjusted up or down for expected inflows/outflows. HMC has $18.5bn of AUM with a market capitalisation of $2.5bn, placing it above the upper end of that metric at ~13%.   As a rough comparison, Magellan Financial Group (MFG) manages $38.6bn with a market cap of $1.35bn, placing it at 3.5% of AUM.

At its peak, HMC had a market cap of ~$5bn, which was clearly aggressive. However, there is a strong expectation that their AUM will grow strongly, to be ~$21bn by the end of FY25, growing to $28bn in FY26. They also have a different model to a traditional fund manager, with high fee and transactional income opportunities across their book.

HMC is down ~40% over the past quarter, reflecting challenges in two of its listed funds (HCW and DGT), with the poor performance of their listed vehicles (along with heightened macro uncertainty) prompting a sharp re-rate lower. This is a function of a tougher market = less increase in AUM, and given it was priced for big inflows, the deteriorating outlook is amplified in the stock price.

• We still expect HMC to be able to grow AUM by at least $5bn annually for the next two years; however, we do note the risks around this ‘bull market’ investment, insofar as whilst volatility in fund performance is not unusual for Fund Managers, delivering strong returns in the medium term is the key catalyst for future growth, particularly important for a company with ~72% of AUM in listed funds.

HMC’s headline P/E valuation has moved from above 30x to now 13.4x, a huge re-rate.  MM bought HMC at $9.68, just before they reported in February and initially bounced ~15% on good earnings. The backdrop has deteriorated since, with DigiCo Infrastructure REIT (DGT) indicative of their woes, having IPO’d at $5 in December 24 to be now trading at ~$2.90. These sorts of outcomes for investors can cause ongoing issues for a manager who was looking to list other funds. Investors understandably are likely to shy away from new issues sponsored by HMC, given the poor outcome in previous deals.

The same is true for the Healthco Healthcare and Wellness REIT (HCW), which was trading around $2.30 in 2021 and is now sub $1, dealing with a tenant (Healthscope) that is under significant financial stress.

Yesterday, HMC said that based on year-to-date performance, annualised FY25 operating EPS (pre-tax) is currently tracking at 70c, which looks around 7-10% below consensus; however., we’d argue this is more than captured in the price around $6.

• Ultimately, we believe the share price weakness looks overdone, as we expect improved momentum in existing funds with the launch of new funds in the coming months. That said, this is not a conservative investment, and macroeconomic conditions will have a significant impact on their ability to grow in the short term.