Joint Statement by Baillieu Limited Chairperson David Trude and Managing Director Gavin Powell

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Mainstream Group (MAI) | Fund facts

Overall: We reassess the outlook for MAI given its recent 3Q20 update. The company showed a very strong and stable performance on funds under administration (FUA), with some downside from interest rate-related custody revenue. Meanwhile, the company’s earnings guidance for FY20 remains withdrawn. We maintain a BUY with a High risk rating.

Funds under administration (FUA): MAI reported group FUA of $187.1bn at 31 Mar-20, largely flat on the previous quarter ($187.5bn) and up 15% over the year ($162.8bn). This is despite Australian equity markets being down 25%. The company stated investment markets impacted FUA by $8.3bn (or 4.4%) which was largely offset by inflows of $7.9bn (or 4.2%). The US Private Equity division was the largest contributor, with net flows of $3.4bn. Growth was also recorded in the Singapore and Hong Kong regions.

Earnings guidance: MAI did not provide an earnings update, except to say the 3Q20 performance was in line with expectations and guidance remains withdrawn despite the strong FUA performance. There has been a reduction in custody revenues, driven by lower interest rates, but the company noted this had been partially offset by increased transaction volumes in the short term. Meanwhile, various executives and board members have taken 15-30% pay cuts as a means of saving operating expenditure.

Balance sheet: The company stated it had cash of $10.5m on its balance sheet at 31 Mar-20, of which $8.1m is required for regulatory capital. Debt has reduced by $1.0m over the quarter to now sit at $6.0m. The banking facility matures in Jan-21 and will need to be extended or renegotiated.

Changes to EPS: We downgrade our EBITDA forecasts by 9-11% and underlying EPS forecasts by 12-16% over the forecast period. This takes account of reduced revenue from custody and potentially lower new business volumes, partially offset by lower interest charges and some cost flexibility. Our valuation and price target decrease from $0.70 to $0.50 given the changes to earnings.

Investment view: We maintain a BUY rating. Whilst progress on FUA has been impressive, persistent market volatility is likely to create revenue headwinds, and reduced growth expenditure is likely to further constrain the outlook. MAI should be leveraged to a recovery by global markets in the long term but in the short term, volatility may persistent. We emphasise our High risk rating.

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