Pinnacle Investment: And The Beat Goes On

This story features PINNACLE INVESTMENT MANAGEMENT GROUP LIMITED. For more info SHARE ANALYSIS: PNI

Analysts raise 12-month targets for Pinnacle Investment Management after rising equity markets boosted funds under management and performance fees.

-Pinnacle Investment Management FY24 beats forecasts
-Record affiliate FUM, performance fees up strongly
-Margins bouncing back after period of investment
-Current momentum potentially a structural, long-term trend

By Mark Woodruff

While shares in Pinnacle Investment Management ((PNI)) have already climbed by 60% in 2024, one broker forecasts annual returns to shareholders will compound at around 20% over the next few years, and another suggests current momentum may be structural in nature.

Analysts are generally bullish following FY24 results, with the average target price of four covering brokers in the FNArena database rising by 20% to $18.30, suggesting around 12% upside to the latest share price.

Rising equity markets contributed to higher levels for both funds under management (FUM) and performance fees in the second half of FY24. As the exit FUM for the period was 11% above the FY24 average, prospects are also bright for FY25.

Increasing by 35% on the previous corresponding period, FY24 profit of $90.4m beat the consensus forecast by 12%, though UBS highlights this reduces to 3% on an underlying basis when adjusting for large one-offs including principal investment gains.

In a sign of accelerating momentum, second half profit came in 18% ahead of the consensus estimate.

Affiliate profit, performance fees, and a mark-to-market on financial assets all came in higher than forecasts by Ord Minnett.

Business model and Affiliate performance

Investors may gain access to 15 different asset managers through Pinnacle’s global network of affiliated investment partners, providing a variety of investment options across asset classes. 

Among other revenue streams, Pinnacle holds equity in these affiliate investment management funds, providing seed funding, distribution, office and infrastructure services, and general support to deliver investment services to clients.

The company’s largest investment partners by FUM are Hyperion, Plato, Solaris, Resolution, Antipodes, Firetrail, Metrics, and Coolabah. In total, there are 25 strategies that have potential to deliver meaningful performance fees to Pinnacle.

The new global equity affiliate -Life Cycle Investment Partners- brings material optionality, suggests UBS, with every $10bn of FUM equivalent to around $8m net profit for Pinnacle.

According to this broker, Pinnacle has the potential to more than double its share of affiliate profits (pre performance fees). To achieve this, the company would need to convert around 50% of remaining capacity over the next five years in order to double FUM (ex market appreciation).

Affiliate FUM reached a record of $110bn in FY24, increasing by 20% year-on-year aided by $9.9bn of net inflows and $8.3bn of market movements/investment performance, explains Macquarie.

FY24 flows of $9.9bn included contributions from Retail, International and Domestic Institutional of $3.9bn, $7bn and -$1bn, respectively.

Macquarie highlights International distribution and Private market strategies now represent 17% and 21% of FUM, respectively.

Performance fees

In addition to management fees, Pinnacle also earns performance fees based on the investment performance of affiliated funds.

FY24 performance fees increased by 89% year-on-year to $109.8m in FY23 driven primarily by Coolabah, Hyperion, and Palisade, while FUM subject to performance fees continues to increase and now sits at around $38.6bn, a 14% rise on FY23.

In funds management, the term ‘above high watermark’ refers to a performance benchmark that must be exceeded before a fund manager can earn performance fees.

Setting the stage for a strong FY25, according to Wilsons, 58% of performance fee FUM is now at or above high watermark.

Affiliate base fee margins increased to 57bps from 55bps in FY24 due to an improved mix of higher-margin retail flows and low-margin institutional flows, higher margin private markets mix in the second half, and realisation of lumpy origination fees, explains UBS.

The board declared a final dividend of 26.4cps (72% franked), well ahead of Ord Minnett’s 20.9cps forecast.

Margins and the Horizon 2 investment program

Operating leverage across Pinnacle’s platform could see margins exceed the average historical levels of 50%, suggests Macquarie.

A step-up in Horizon 2 investments in the second half of FY22 caused margins to contract in recent periods to as low as 35%.

Horizon 2 affiliates include Hyperion, Plato, Solaris, Palisade, Antipodes, Spheria and Firetrail. Pinnacle also recently brought in a new affiliate called Life-cycle Investment Partners from the UK. 

Wilsons believes this new entrant has the potential to be a material earnings driver due to the management team’s strong reputation globally and significant FUM capacity.

As these Horizon 2 investments increasingly turn profitable, Macquarie expects margins will track back toward 50%.

Following the drag from the Horizon 2 investment program, (which UBS expects to reduce in the medium-term), there were emerging signs of operating leverage in the second half.

Management flagged key Horizon 2 affiliates such as Firetrail, Riparian, Langdon, and Longwave were approaching profitability after making steps toward run-rate profitability during FY24.

Outlook

The FY25 outlook is strong, UBS declares. This broker forecasts 26% reported profit growth.

As investment has peaked, Ord Minnett anticipates a significant improvement in underlying Affiliate profitability, and forecasts annual returns to shareholders will compound at around 20% over the next number of years.

Momentum for Pinnacle now appears a structural, long-term trend, in Wilsons view, given the shift to Private Capital and consistent Retail and International distribution success.

Four brokers covering Pinnacle Investment Management are updated daily in the FNArena database. Morgans, Macquarie and Ord Minnett have Buy ratings (or equivalent) while UBS is Neutral-rated.

Outside of daily coverage, Wilsons has an Overweight rating and target price of $19.70, up from $14.10 post the FY24 result.

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