MSCI: Investor Day Reaffirms The Double-Digit Growth Path
Summary
- MSCI delivers an upbeat investor day event, with its industry-leading growth and margin expansion potential intact.
- The core index business should continue to benefit from AUM growth, while growth opportunities in wealth management and ESG offer additional tailwinds.
- Shares continue to trade at a well-deserved premium, but considering the YTD underperformance, they may be worth a look.
As a leading provider of investment decision support tools such as indices and portfolio analytics, MSCI (NYSE:MSCI) remains on track for sustainable double-digit growth and margin expansion, as reaffirmed at its recent Investor Day event. With MSCI's diversified revenue stream continuing to drive an industry-leading profitability profile that allows for both earnings growth and attractive capital return to shareholders, I see plenty of upside ahead. While shares continue to trade at a well-deserved relative premium, they have underperformed YTD, making MSCI a compelling value proposition at current levels.
AUM Tailwinds to Support Continued Index Growth
The Index segment remains the core cash generator for MSCI, contributing c. 60% of the top-line in fiscal 2020. Encouragingly, there remains plenty of tailwinds here, with several trends likely to expand the addressable market for the Index segment significantly, from global diversification initiatives and increased flows toward passive investing, as well as demand for sustainable investments. Validating MSCI's runway is the fact that the amount of global investable assets in the hands of owners stand at a staggering $113 trillion, implying a cumulative growth of c. $17 trillion over the last two years, with managed assets also up c. $12 trillion to $82 trillion in the same period.
Source: MSCI Investor Day Presentation Slides
On the flip side, pricing remains a concern, having declined at c. 4% annually in recent years. Yet, AUM has grown at a 20+% rate, helping offset much of the pricing pressure on driving overall Index revenue growth to c. 13% in the corresponding period. I expect this trend to continue – while pricing pressures will likely remain a factor, the company should continue to manage any modest fee pressure via increased AUM levels.
Plenty of Opportunities to Sustain Growth
In addition to solid growth across MSCI's core index business, the company also stands to benefit from a range of secular tailwinds such as ESG & Climate and Wealth Management, along with growth in Fixed Income, and Private Assets, among others. Of these, much of the buzz seems to be around the Wealth Management opportunity, which remains relatively small at the current c. $50 million run-rate. Yet, with growth likely to sustain at over 20% and coming off a strong start in fiscal 2021, the Wealth Management outlook appears to be promising. ESG & Climate is another key driver, with the addressable market sized at $3.2 billion at present, although this expands to $3.9 billion including new cases across corporates, bank stress testing, climate, and private assets. The ESG trend looks to be here to stay, and hence, I think MSCI's ESG solutions as a service, which also improves on the transparency the underlying data around ESG ratings, should be well-received by investors.
Source: MSCI Investor Day Presentation Slides
Robust Longer-Term Growth Targets
Looking ahead, MSCI's longer-term growth outlook remains encouraging, with the company continuing to target low-double-digit % top-line growth. While the outlooks across Index and Real Estate were unchanged from pre-investor day levels, the Analytics outlook was reduced to the high-single digits % (from high-single to low-double-digit % prior). More importantly, however, the ESG & Climate growth target improved to the mid-to-high 20% (up from mid-20% previously). As a result, adj EBITDA growth is targeted to hit a low-to-mid teens % CAGR (up from mid-teens %), implying a clear path toward reaching the high-50% range over the longer-term.
Source: MSCI Investor Day Presentation Slides
Notably, MSCI also guided for a high single to low double-digit % expense growth, signaling its intention to continue investing in the business. Of these, much of the expense growth will be for ESG (mid-to-high 20s % growth) and the core Index business (low double-digit % growth). Admittedly, the elevated investment levels could weigh on the pace of margin expansion ahead, but relative to the longer-term growth potential, I think MSCI is striking the right balance here.
Shareholder-Friendly Capital Allocation Policies
A core advantage of MSCI's business model is its capital efficiency, with limited reinvestment required in the form of capex and working capital to sustain its strong cash flow profile (FCF conversion has averaged over 100% in recent years). This has allowed the company to maintain a relatively clean balance sheet and consistent shareholder returns – in addition to a quarterly dividend, the company has repurchased over $3.9 billion shares since fiscal 2012 with an average IRR of over 40%.
Source: MSCI Investor Day Presentation Slides
As MSCI should sufficiently fund organic investment through its cash generation, much of the targeted c. $160 million excess cash flow will be dedicated to efficiencies, enhancements, and new growth opportunities. New growth investments include its Index 2.0 platform and infrastructure, climate, and corporate client segments, along with fixed income indices and ESG. Outside of organic investment, MSCI will continue to return capital to shareholders through a 40-50% quarterly dividend payout and share repurchases against a 3.0-3.5x target leverage ratio.
Final Take
Overall, the investor day provided many positives, with a sustainable double-digit % growth and margin expansion path intact. MSCI shares currently trade at c. 33x EV/EBITDA – a premium to peers like CoStar (CSGP), Dun & Bradstreet (DNB), Moody's (MCO), and S&P (SPGI) which I view as warranted due to its industry-leading margins and growth potential. Going forward, I see room for the premium to sustain or even expand further as MSCI continues to deliver on its growth targets amid secular tailwinds in index investing, ESG, and wealth management.
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