Magellan Financial Group (MFG) is out and AUB Group (AUB) has moved into Morningstar’s best stock ideas list, which identifies high-quality and undervalued Australian and New Zealand companies.

Morningstar equity analyst Nathan Zaia says narrow-moat AUB Group is a highly cash-generative business, with a maintainable competitive advantage due to switching costs.

“There are two aspects to AUB’s switching cost advantage. First, the switching cost between the customer and broker, and secondly the broker remaining within the AUB network,” Zaia says.

AUB Group overview:

  • 4-star rating
  • Economic moat: Narrow
  • Fair value: $28.00 per share
  • Uncertainty rating: Medium

A narrow moat rating is given to companies whose competitive advantage is strong enough to fend off competition and earn high returns on capital for 10 years.

Zaia says that competitive advantage will help underpin AUB’s low-double-digit return on equity over the long term.

As of 1 February 2023, the company was trading at a 17% discount to Morningstar’s fair value estimate of $28 per share.

AUB Group operates the second-largest general insurance broker network in Australia and New Zealand, and earns revenue from commissions paid by insurers, based on gross written premiums.

Zaia says the company is set to benefit as insurers lift their premiums to combat rising claims costs. But he says AUB will also benefit on the other side as customers seek out insurance brokers to find a better deal.

AUB Group is one of 13 Australian and New Zealand companies on Morningstar’s global equity best ideas list in February. The full list is available to investor subscribers

Magellan falls off best ideas list


Morningstar cut Magellan’s fair value estimate by 43% in January, with equity analyst Shaun Ler noting optimism for a sustained earnings recovery has faded.

“Prolonged underperformance and unforeseen key personnel departures have eroded Magellan’s competitive position in the global equities investment management space,” Ler says.

“Recent, successive fund ratings downgrades to a subpar level signal a lack of conviction in Magellan’s investment personnel and process,” he says.

Collectively, Ler says these factors significantly disrupt Magellan’s ability to attract and retain funds under management and generate earnings growth.

“It’s unlikely Magellan can regain its prior competitive position, given the abundance of alternatives, the firm’s maturity in the Australian market and its above-average fees.”

As of 1 February, Magellan was trading at a 23% discount to Morningstar’s intrinsic valuation, however Ler notes the margin of safety has narrowed considerably with better opportunities elsewhere.

Magellan has an uncertainty rating of very high.