ANALYST’S NOTE

PPS reported a strong FY18 result which again highlighted the ongoing momentum in the business which is benefiting from the strong growth in SMAs.

Relative to previous corresponding period (pcp), group revenue was up +27%, underlying operating EBITDA was up +40% and underlying operating EBIT was up +44%, highlighting the significant operating leverage and scalability in the business.

This performance was driven by +41% growth in SMA revenue and SMA FUA increased by +36% to a record $8.3bn. Whilst rest of the world (UK and Asia) is still a drag on earnings, the losses are moderating and should turn to positive contributors in the near-term. We downgrade our recommendation to Neutral.

Since our last note on the stock on 14 Feb-18, the share price is up +36% versus ASX200 +8%. We have revised our DCF estimates and forecast revenue CAGR of +16% and earnings CAGR of +32% over the next 5 years.

Our revised DCF valuation and price target is $1.00. Trading on a PE-multiple of 44x for FY19E and 31x for FY20E, on our numbers, we believe the near-term growth trajectory is adequately priced in.

• FY18 numbers compared to prior year. 1. Solid top line growth of +27% driven by SMA (up +41%) with positive contributions from Portfolio Services (up +5%) and Planning software (up +3%). 2. In terms of revenue by geography, Australia (up +19%) and the UK (up +44%) were the main drivers. Asia, whilst had strong growth, is still immaterial at the group level. 3. Underlying group EBITDA was up +39% to $8.8m, driven by moderating losses in the UK and Asia, whilst Australia saw EBITDA grow by +17% (with margin down slightly to 45%). 4. FUA growth over the year was again solid, with Australia platform up +45% to $5.6bn and International platform & Smartfunds up +20% to $2.7bn. Total FUA grew +36% to $8.3bn. 5. Operating cash flows was strong in line with higher operating earnings (EBITDA). 6. Balance sheet in a solid position with $12.1m in cash.
• Investment is a positive. Management continues to invest in the business to drive top line growth, with the Company increasing its expenditure on sales & marketing and information technology as a percentage of revenue. Further the Company also accelerated its R&D investment in proprietary technology, with $2.1m to expand PPS platform. This expense will be capitalized. In our view, expanding its cost base is not a negative if it supports group FUA growth and revenue base. The Company can still afford to forgo margin at this stage, in order to increase its share of the pie.
•  Competition will pick up. PPS’ growth trajectory is not without risk, as we do expect competitors to also increase investment into their respective platforms and compete on pricing. This is likely to bring into question the long-term growth trajectory in margins.
• SMAs growth a structural story, in our view. Through its platform, PPS offers separately managed accounts (SMAs). We see this as a major positive for PPS for two reasons: 1. investors can easily buy international investments (something that is not readily available to investors through some other platforms from our understanding) and more importantly 2. we believe investors will increasingly gravitate towards SMAs given the flexibility it offers versus clients’ money being locked with one asset managers and/or investor style.