Perpetual Ltd (PPT) – BUY
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report|
|Sector : Financials||52-Week Range: A$38.04 – 56.85|
|Industry: Asset Management & Custody Banks||Market Cap: A$2,144.8m|
We rate PPT as a Buy for the following reasons:
- PPT trades below our DCF valuation and attractive mulitples relative to its peer-group.
- Post-acquisition of Trust Company, PPT is a diversified business with earnings derived from trustee services, financial advice and funds management.
- PPT has an opportunity to increase FUM via its Global Share Fund, which has a strong performance track record over 1, 3 and 5-years and significant capacity, whilst PPT continues to maintain FUM in Australia equities which is near maximum capacity. This equates to flattish earnings growth unless PPT can attract FUM into international equities, credit and multl-asset strategies (and other incubated funds).
- Retail and institutional inflow of funds is expected to be solid especially from positive compulsory superannuation trend and flow from Perpetual Private.
- Potential for Perpetual Private to drive growth in funds under management and funds under advice.
- Cost improvements in Perpetual Private and Corporate Trust.
We see the following key risks to our investment thesis:
- Any significant underperformance across funds.
- Significant key man risk around key management or investment management personnel.
- Potential change in regulation (superannuation) with more focus on retirement income (annuities) than wealth creation.
- Average base management fee (bps) per annum (excluding performance fee) continues to be stable at ~70bps but there are risks to the downside from pressures on fees.
- More regulation and compliance costs associated with the provision of financial advice and Perpetual Private.
- Exposure to industry funds which are building in-house capabilities (~15-20% of total PPT funds under management).
Figure 1: Profit Before Tax Split by Segments
Perpetual Ltd (PPT) delivered solid results in FY18, with NPAT of $140.2m (up +2%) which was in line with consensus estimates, lifting the stock price marginally by +3.6%.
Growth in Perpetual Private was underpinned by 5% growth in FUA and growth in Perpetual Corporate Trust was driven by growth in securitization markets in Australia and continued market activity within commercial property and managed investment funds, together with higher asset prices.
Management has declared a final fully franked dividend of 140cps, taking the total dividend payout for FY18 to 275cps (up +4%) representing a payout ratio of 91%.
Whilst we are concerned about changes to strategy and personnel as Rob Adams, the new CEO joins from 24 September, we believe that PPT trades on attractive valuations and trading multiples (~14.7x PE20, 6.2% yield) – upgrade to Buy
- FY18 results summary. Key points include:
1. PPT reported revenue of 533.7m, up +3.6% over the pcp, driven by higher levels of FUM and FUA.
2. Expense growth was +3% on pcp, due to higher remuneration charges and an increase in depreciation & amortisation expenses from investments made in prior year.
3. NPAT was $140.2m, representing growth of +2.1%.
4. Board declared a final fully franked dividend of 140cps, taking the total dividend payout for FY18 to 275cps (up +4%) representing a payout ratio of 91%, which is within the Board’s stated dividend policy range of 80% to 100%.
5. Gearing ratio declined to 11.6% from 12.1% in FY17 and remained well within PPT’s limit of 30%.
6. Net cash from operations declined by $14.1m and cash used in investing activities increased by $29.7m (due to decrease in net proceeds from sale of investments).
- Perpetual Investments. The segment reported FY18 revenue of $232.3m (up +2%) and profit before tax of $112.5m, which was -3% lower compared to pcp, primarily driven by an increase in operating expenses partially offset by higher performance fees earned. Average FUM remained unchanged at $31.5bn with the benefit due to higher All Ords (up +6% on pcp) offset by prior period distributions and net outflows largely from Institutional clients and cost to income ratio increased to 52% from 49% in FY17. Average FUM revenue margins increased 1bps to 73bps but excluding performance fees earned, underlying average margins remained constant at 70bps. Total expenses were up +7% to $119.7m driven by new staff additions, increased variable remuneration expenses and higher equity performance fee expenses.
- Perpetual Private. FY18 revenue increased +5% to $186.4m and profit before tax was up +14% to $46.1m, driven by growth in market related revenue (FUA increased +5% to $14.1bn) due to higher equity markets, continued positive net flows and greater non-market related revenues, partially offset by an increase in staff and variable remuneration expenses (total expenses were up +2% to $140.3m). Perpetual Private experienced continued new client growth within the high net worth segment with the cost to income ratio declining to 75% from 77% in FY17.
- Perpetual Corporate Trust. FY18 total revenue of $103.3m, was up +11% and profit before tax of $42.6m (an increase of +16% compared to pcp), primarily driven by sustained growth in securitisation markets in Australia and continued market activity within commercial property and managed investment funds, together with higher asset prices, partially offset by continued investment in strategic initiatives. Cost to income ratio declined -1% to 59%, despite total expenses increasing by +8% to $60.7m due to continued investment in strategic initiatives. In FY18, Debt Markets Services revenue increased +11% to $57.5m and Managed Fund Services revenue was +13% higher at $45.8m.
PPT FY18 RESULTS SUMMARY
Figure 2: PPT FY18 results summary
Figure 3: Perpetual Investments
Figure 4: PPT Fund Rankings as per Mercer Wholesale and Institutional Surveys
Figure 5: Perpetual Private
Figure 6: Perpetual Corporate Trust
Figure 7: PPT Financial Summary
Source: BTIG estimates, Company, Bloomberg
Perpetual Ltd (PPT) is an ASX-listed independent wealth manager with three core segments in (1) Perpetual Investments which is one of Australia’s largest investment managers; (2) Perpetual Private which is one of Australia’s premier high net worth advice business; and (3) Perpetual Corporate Trust which provides trustee services. PPT manages ~$32.8 billion in funds under management, ~$13.7 billion in funds under advice and ~$662 billion in funds under administration (as at 30 June 2017).
Recommendation Rating Guide
|Recommendation Rating Guide||Total Return Expectations on a 12-mth view|
|Speculative Buy||Greater than +30%|
|Buy||Greater than +10%|
|Neutral||Greater than 0%|
|Sell||Less than -10%|
Reach Markets Disclaimer
Reach Markets Pty Ltd (ABN 36 145 312 232) is a Corporate Authorised Representative of Reach Financial Group Pty Ltd (ABN 17 090 611 680) who holds Australian Financial Services Licence (AFSL) 333297. Please refer to our Financial Services Guide or you can request for a copy to be sent to you, by emailing firstname.lastname@example.org.
Read our full disclaimer here >
This publication contains general securities advice. In preparing the advice, Reach Markets Australia has not taken into account the investment objectives, financial situation and particular needs of any particular person. Before making an investment decision on the basis of this advice, you need to consider, with or without the assistance of a securities adviser, whether the advice in this publication is appropriate in light of your particular investment needs, objectives and financial situation. Reach Markets Australia and its associates within the meaning of the Corporations Act may hold securities in the companies referred to in this publication. Reach Markets Australia does, and seeks to do, business with companies that are the subject of its research reports. Reach Markets Australia believes that the advice and information herein is accurate and reliable, but no warranties of accuracy, reliability or completeness are given (except insofar as liability under any statute cannot be excluded). No responsibility for any errors or omissions or any negligence is accepted by Reach Markets Australia or any of its directors, employees or agents. This publication must not be distributed to retail investors outside of Australia.
It is recommended that you seek independent advice and read the relevant Product Disclosure Statement before making a decision in relation to any investment. Any advice contained in this communication is general and has not taken into account the investment objectives, financial situation and particular needs of any particular person.
Banyan Tree Disclaimer
This document is provided by Banyan Tree Investment Group (ACN 611 390 615; AFSL 486279) (“Banyan Tree”).
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy, or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and Banyan Tree is not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Banyan Tree does, and seeks to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Banyan Tree, its associates, officers, directors, employees and agents. Except for any liability which cannot be excluded, Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Banyan Tree is not liable to recipients in any matters whatsoever otherwise recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Banyan Tree does not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Banyan Tree.
This document has been commissioned by Reach Markets Australia Pty Ltd and provided by Banyan Tree Investment Group (ACN 611 390 615; AFSL 486279) (“Banyan Tree”).