AMG - Affiliated Managers Group: Spotlight On Recent Deals (Rating Upgrade)

2023-10-06 05:01:56 ET

Summary

• The divestment of Veritable gives Affiliated Managers Group the additional capacity to engage in other accretive capital allocation initiatives.
• AMG's investment in Forbion is an indication of the company's intention to expand its presence in the alternatives space.
• I raise my rating for AMG to a Buy, as I have a favorable view of the company's capital allocation approach.

Elevator Pitch

I rate Affiliated Managers Group, Inc. ( AMG ) shares as a Buy. With my earlier July 27, 2023 update , I evaluated AMG's Q2 2023 results and the company's outlook.

In this latest write-up, I share my thoughts on Affiliated Managers' recent transactions and the impact of these deals on AMG's future capital allocation strategy.

AMG's divestment of Veritable and investment in Forbion offer an indication of how the company can enhance shareholder value by engaging in accretive capital allocation moves funded by capital recycling. This explains why I have decided to upgrade Affiliated Manager's rating from a Hold previously to a Buy now.

AMG's Recent Deals

Previously, Affiliated Managers shared at the company's most recent quarterly results briefing in late July that its sale of investment firm Veritable LP is expected to be concluded in the third quarter of the current year. According to the press release issued by buyer, Veritable is "one of the first and largest multi-family offices in the U.S."

AMG has revealed that it will receive around $225 million of proceeds (net of tax) relating to the divestment of Veritable. This is a significant deal, as $225 million is equivalent to 5% of Affiliated Manager's current market capitalization and a third of the company's consensus FY 2023 normalized net profit (source: S&P Capital IQ ).

The company emphasized at its Q2 2023 results call that it plans to allocate "capital from the Veritable transaction across really a combination of growth investments, share repurchases and debt paydown." In other words, the recent monetization of its investment in Veritable has provided Affiliated Managers with greater financial capacity to execute on various value-accretive capital allocation initiatives.

In the next section, I highlight another deal done by Affiliated Managers, which is part of the company's M&A or capital investment plans.

Capital Investment

In the middle of August this year, Affiliated Managers issued a media release disclosing "the completion of its investment in Forbion Group Holding B.V." which it refers to as a "pan-European venture capital and growth equity firm."

AMG didn't provide quantitative details relating to the recent Forbion Group transaction such as the exact equity stake in Forbion or the amount spent on this investment. But Affiliated Managers did guide at its second quarter earnings call that the Forbion and Veritable transactions are expected to "generate incremental earnings per share of approximately 2% to 3% once the proceeds from Veritable are fully deployed."

It will be reasonable to assume that AMG has the intention to invest more capital in fast-growing asset classes such as alternatives. It is noteworthy that Forbion is the company's 7th investment in the alternatives space since 2019, and two-thirds of AMG's $1.5 billion capital investments for the last four years were allocated to alternatives.

At the company's Q2 earnings briefing, Affiliated Managers stressed that "the (deal) pipeline is strong, and we continue to see opportunities to invest for growth." This implies that AMG is likely to utilize a meaningful proportion of the proceeds derived from the Veritable divestment for future investments that boost its financial prospects.

Buybacks

AMG has guided for spending a minimum half a billion dollars on share repurchases for full-year FY 2023. The company has already executed on $269 million worth of share buybacks in the first half of this year, which is more than half of its full-year target.

This seems to be a good time for Affiliated Managers to buy back their own shares, taking into account AMG's current valuation metrics.

Affiliated Managers' Price/Earnings-to-Growth or PEG multiple is estimated to be 0.64 times, considering its consensus forward next twelve months' normalized P/E metric of 7.3 times and its consensus FY 2024-2025 normalized EPS CAGR of +11.4%. AMG's consensus forward normalized P/E ratio of 7.3 times is also way below its 10-year and 15-year mean P/E multiples of 10.2 times and 11.3 times, respectively. These numbers are sourced from S&P Capital IQ .

It is fair to say that AMG's current share buybacks will be accretive, given that the stock's PEG ratio is below 1 and its P/E multiple is at a discount to its historical averages.

Deleveraging

As per S&P Capital IQ data, Affiliated Managers' net debt-to-EBITDA ratio has gone up from 1.59 times as of December 31, 2021 and 1.87 times at the end of last year to 2.10 times as of end-Q2 2023. This suggests that AMG should be thinking about deleveraging to reduce its credit risk.

AMG noted at its Q2 2023 results call that it is "committed to paying down some of our debt, probably $200 million to $300 million." Taking into account the company's comments on deleveraging, the sell-side analysts see Affiliated Managers' net debt-to-EBITDA metric declining to 1.73 times and 1.63 times (source: S&P Capital IQ ) at the end of 2023 and 2024, respectively.

As mentioned in an earlier section of this article, "debt paydown" is one of Affiliated Managers' key capital allocation priorities that is made possible by the sale proceeds derived from the divestment of Veritable.

Concluding Thoughts

I have turned bullish on Affiliated Managers after reviewing the company's recent deals. I think that AMG is making the right capital recycling and capital allocation moves, which warrants a Buy rating for the stock.

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