Equity Research - MSCI Initiation report
Posted: 1 November 2010
MSCI is a financial technology company offering a range of products and services that facilitate informed investment decisions. Probably best known for its equity indices, the company also provides a wide range of other investment decision support tools, such as portfolio performance analytics, risk management and corporate governance.
Most recently the company acquired RiskMetrics - a successful provider of advanced risk management tools and corporate governance solutions. As a result, MSCI has broadened its diversification across market segments, significantly boosting its risk management offering and gaining the corporate governance portfolio.
There was virtually no customer or product overlap between MSCI and RiskMetrics, so the customer base nearly doubled, providing cross-selling opportunities and exposing RiskMetrics' products to fast growing Asian markets. As a result of the merger, MSCI hopes to realise around $50 million in cost savings, many of which have already been identified. At the same time, the acquisition has significantly increased the company's debt, generated significant goodwill and decreased the company's liquidity - though not beyond acceptable levels.
MSCI is a good cash generator and should benefit as the financial markets recover. This is evidenced by the increase in global assets under management, to which it is exposed. Recent regulatory and shareholder attention to tighter risk management and responsible corporate governance policies should also ensure that MSCI's revenues continue to grow. However, there is significant competition in the market, both from large industry heavyweights (such as Thomson Reuters) and small niche providers. Competition will only intensify as the market eventually reaches saturation.
Our valuation suggests that MSCI is currently fairly valued.