Perpetual Slowing?

This story features PERPETUAL LIMITED, and other companies. For more info SHARE ANALYSIS: PPT

-Mix still with lower margin product
-Robust earnings, reasonable yield
-But may be overvalued
 

By Eva Brocklehurst

Financial services provider Perpetual ((PPT)) remains dependent on positive equity markets for growth in its funds under management (FUM). In the March quarter net flows were positive in a seasonally quiet period and brokers expect that favourable markets and operational improvements will support ongoing profitability.

The achievement of seven consecutive quarters of positive net fund flows was reasonably encouraging for Citi, although the mix of flows continues to stem from institutional and/or cash and fixed income, which tend to be lower margin. Perpetual has made the necessary investment to reinvigorate sales and distribution, yet Citi notes the benefits have been modest so far. Still, supportive equity markets and a solid investment performance should underpin the stock near term. The broker expects another large annual fund distribution in FY15.

Perpetual recognised less than $60m in net inflows into its global fund in the quarter which suggests to Citi the fund is only slowing gaining traction. To meet its targets, the company will need to achieve $100m in net flows per quarter over the next three years. The broker believes the company offers strong earnings growth and a reasonable yield but could become overvalued in the short term as, in the current environment, these attributes are especially in demand. This is likely, particularly if interest rates continue to fall and the equity market remains buoyant. Citi remains hopeful of refining an entry point on the stock and maintains a Neutral rating.

Deutsche Bank downgrades to Hold from Buy as the value upside is now more limited. The broker believes flow trends are starting to moderate while remaining dominated by lower-margin institutional sources. While large year-end distributions are likely to feature in the fourth quarter the broker expects revenue momentum in the investment division will slow. Deutsche Banks' FY15 FUM forecasts are unchanged, resulting in static earnings expectations for FY16-17. Higher average second half assets under management (AUM) provide a stronger uplift from markets which means the broker's FY15 earnings forecasts are ratcheted up 1.4%.

Morgan Stanley on the other hand considers the valuation undemanding and remains Overweight. The appointment of two senior managers to the diversified strategies/multi asset team supports future flows and, in the broker's view, these asset classes are among the best placed to benefit from a reallocation of funds in a lower-for-longer interest rate and inflation environment. Morgan Stanley envisages earnings benefits from improving net flows, the global share fund and the Trust Co acquisition will offset an overweight Australian equities footprint.

The skew to cash and fixed income in the institutional channel is a slight negative, in JP Morgan's view. The stock has underperformed its listed peers over the last 12 months but the broker still prefers Magellan Financial ((MFG)) and retains a Neutral rating. That said, JP Morgan views the investment in the new global equities fund a positive step which provides the potential for meaningful medium-term growth.

FNArena's database shows two Buy and six Hold ratings. The consensus target is $57.30, signalling 2.1% upside to the last share price. This compares with $55.56 ahead of the quarterly update. The dividend yield on FY15 and FY16 forecasts is 4.3% and 5.2% respectively.
 

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