Company Overview

MSCI Inc. (NYSE: MSCI) is a worldwide investing community supplier of crucial decision support tools and solutions. Index, Analytics, ESG and Climate, and All Other - Private Assets are the company's operational segments. Its indexes are utilized in indexed product design, performance benchmarking, portfolio construction and rebalancing, and asset allocation, among other aspects of the investing process. The Analytics category includes material, apps, and services for risk management, performance attribution, and portfolio management. MSCI ESG Ratings, MSCI ESG Business Involvement Screening Research, and MSCI Climate Solutions are among the company's ESG and Climate solutions. The Real Estate and Burgiss sectors make up the company's All Other sections.

MSCI Details

Key takeaways from Q1 FY22 (Ended March 31, 2022)

• Growth in Operating revenue: Operating sales increased by 17.0% to USD 559.9 million. Organic operating revenue increased by 13.7%. The USD 81.5 million increase came from greater recurring subscription revenues of USD 62.0 million, increased asset-based fees of USD 18.4 million, and higher non-recurring revenues of USD 1.1 million.
• Run rate and retention rate: Total Run Rate was USD 2,229.5 million as of March 31, 2022, up 17.4%. Asset-based fees climbed by USD 257.5 million, while recurring subscriptions increased by USD 257.5 million. The Run Rate went up to USD 73.0 million. The growth rate of organic recurring subscriptions was 13.7%. In the first quarter of 2022, the retention rate was 96.3%, up from 95.9 percent in the previous quarter.
• Increase in Expenses for the firm: Total operational expenditures increased by 20.9 percent to USD 271.0 million. Adjusted EBITDA expenditures grew 19.6% to USD 241.4 million, owing to greater salary and benefits costs associated with continuing growth initiatives, such as additional staff in technology, research, and client coverage. Total operating expenditures excluding the impact of foreign currency exchange rate variations and adjusted EBITDA expenses ex-FX grew 23.0 percent and 21.8 percent, respectively.
• Increase in profitability for the firm: As of the factors described above, net income increased by 16.1% to USD 228.4 million, and Adjusted EBITDA increased 15.2 percent to USD 318.5 million. In the first quarter of 2022, the adjusted EBITDA margin was 56.9%, compared to 57.8% in the first quarter of 2021.
  

Recent Developments

• MSCI Inc. will publish the results of the May 2022 Semi-Annual Index Review for the MSCI Equity Indexes, which includes the MSCI Global Standard, MSCI Global Small Cap, and MSCI Microcap Indexes, on May 12th, 2022. Other indexes will be released on May 12th, 2022. All adjustments will be implemented by the end of May 2022. On May 12, 2022, MSCI will publish the list of index additions and removals for the May 2022 Semi-Annual Index Review.
• On March 2, 2022, MSCI Inc. announced that the MSCI Russia Indexes will be reclassified from Emerging Markets to Standalone Markets. Because the Russian equities market is now uninvestable, the reclassification decision was executed in one step across all MSCI Indexes, for a price of effectively nothing, and as of March 9, 2022.
• MSCI announced the launch of its Real Capital Analytics (RCA) data package European Construction Starting on March 14, 2022. The new dataset made MSCI RCA one of the first companies to provide a common source of construction starts coverage throughout Europe, the United States, and Australia, and it was Real Capital Analytics' first big announcement since being bought by MSCI in September 2021.

Other Key events of Q1 FY22

• During the quarter, total share repurchases totalled USD 772.7 million, or 1,498,143 shares, at an average buyback price of USD 515.74. As of March 31, 2022, there were 81.2 million shares outstanding. As of April 25, 2022, there was USD 794.4 million left on the remaining share buyback authorization.
• In addition, in the first quarter of 2022, stockholders received USD 84.7 million in dividends. The MSCI Board of Directors announced a cash dividend of USD a1.04 per share for the second quarter of 2022 on April 25, 2022, payable on May 31, 2022, to shareholders of record as of May 13, 2022.

Balance Sheet & Liquidity Position

• Decrease in cash and cash outstanding: As of March 31, 2022, cash and cash equivalents totalled USD 679.3 million, down from USD 1.421 billion as of December 31, 2022. MSCI aims to keep a minimum cash level of USD 200.0 million to USD 250.0 million for general operational purposes across the world.
• Debt outstanding for MSCI: The total principal amount of outstanding debt as of March 31, 2022, was USD 4.2 billion, roughly identical to the amount as of December 31, 2022. The overall debt to net income ratio was 5.5x as of March 31, 2022 (based on trailing twelve months’ net income), while the total debt to adjusted EBITDA ratio was 3.4x (based on trailing twelve months adjusted EBITDA). MSCI aims to keep total debt to adjusted EBITDA in the 3.0x to 3.5x range.
• Capex and cash flow: Due to continuing solid client cash collections, cash supplied by operating operations climbed by 13.3 percent to USD 244.2 million, while free cash flow increased by 11.6 percent to USD 228.9 million. Capex for the quarter was USD 15.3 million.

Key Metrics

Exceptional Track Record of Financial Execution

Source: Company Presentation

Top 10 Shareholders: The top 10 shareholders together form around 42.02% of the total shareholding, while the top 2 constitute the maximum holding. The Vanguard Group, Inc., and BlackRock Institutional Company hold the maximum stake in the company at 10.54% and 5.08%.

Top 10 Shareholders; Source: REFINITIV, Analysis by Kalkine Group 

Risk Analysis

• Operational Risks: Dependence on third parties for data, apps, and services for products and services, as well as on certain suppliers to distribute the company's products. Any loss of key outside data suppliers, or a refusal or failure by a key vendor to distribute the products, could impair the company's ability to provide products and services to its clients, which could have a material adverse effect on the company's business, financial condition, or results of operations.
• Client’s risk: Clients who pay a fee based on assets under management or the total expense ratio of an indexed investment product may try to negotiate a lower asset-based fee percentage or the total expense ratio of such products, or they may stop using the company's indexes, limiting the growth of, or decreasing revenue from asset-based fees.
• Technology risk: Any failures, disruptions, instability, or vulnerabilities in the company's information technology architecture, platforms, vendors and service providers, production and delivery systems, software, code, internal network, the Internet, or other systems or applications may disrupt operations, cause company's products to become unavailable or fail, impose delays or additional costs in deploying the products, or impose conditions or restrictions on the company's ability to trade.

Outlook

MSCI Inc expects operating expenses for the current year 2022 to be in the range of USD 1.075 billion to USD 1.115 billion while adjusted EBITDA expense is expected in the range of USD 0.95 billion to USD 1.005 billion. Interest expense for the year is expected to be USD 162 million. Free cash flow for the year is expected to be in the range of USD 1050 million to USD 1100 million with an effective tax rate in the range of 15.5% to 18.5% for the year.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation

Over the past six months, MSCI's share price has corrected by 39.62%. The stock is currently leaning towards the lower end of its 52-week range of USD 376.41 to USD 679.85. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of USD 455.17.

We believe that the company should trade at a premium to its peer's average as per the historical averages, given its strong competitive advantage against the peer.

Considering the strong fundamentals, robust margins, robust risk profile, positive outlook, associated risks, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 387.40, as of May 11, 2022.

MSCI Technical Chart, Data Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary

* Closing price as of May 11, 2022.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above. 

Note 3: The report publishing date is as per the Pacific Time Zone.