Navigator Global Investments (ASX:NGI) kicked off reporting season for the Small Caps sub-portfolio with a positive 1H19 update. Shares closed up 10% to $3.28 on the day.
NGI’s wholly owned subsidiary Lighthouse Partners weathered a challenging December quarter, resulting in reduced Assets Under Management (AUM). In January NGI lowered earnings guidance for FY19 to US$36m EBITDA (from US$38m previously).
A scan of the share price chart shows the market did not take the news well. Shares fell 35% over the following days to $2.71, a 52-week low.
As we’ve articulated, we were surprised with the reaction. Without delving too much into the details, over the first half Lighthouse’s AUM reduced from US$16.7bn to US$14.7bn. At a glance this might look worrying, however most of the reduction was due to client attrition within the Mesirow (MAS) business, which at the time of acquisition by NGI on 1 July had US$5.4bn in AUM.
As is typical with such acquisitions, initially some mandates choose not to remain with the merged entity. NGI had flagged that they were expecting to retain approximately 75% of the initial US$5.4bn transitioned. As at 30 December, MAS AUM totalled US$3.9bn, which was slightly below expectations.
The other contributor to lower AUM, and the main reason for the sell-off in January, was negative performance over the December quarter. Given the December quarter market turmoil was unusual in its severity, and because Lighthouse still performed ahead of benchmarks, we didn’t see Lighthouse losing mandates, but rather a delay in new mandate wins. The market reaction led to shares being priced at around 9 times free cash flow, implying negative growth in the underlying business.
However, as highlighted in Thursday’s (14 Feb) 1H19 presentation, January performance rebounded strongly and well ahead of benchmarks. In addition, NGI announced a new $300m Customised Solutions client mandate funded on 1 February. The share price jumped 10% on the announcement, (arguably) reflecting restored confidence in the company’s growth trajectory.

With a $63m net cash balance sheet, and strong cash generation supporting a 7.5% yield, we think NGI is attractive for both income and growth.
FY19 guidance of US$36m was retiterated, however on the back of January performance and the $300m new mandate, this could prove to be rather light.
Looking out over the next two years, NGI has additional growth drivers from cost efficiencies to be realised after MAS is fully integrated (by June), as well as initial customer wins within its burgeoning Managed Accounts platform business. We leave our FY19 valuation unchanged at $4.65.
Clime Group owns shares in NGI.