Praemium Needs Higher Flows For Re-Rating

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Fund administration platform provider, Praemium, delivered a mixed first half, as the Australian business performed strongly while UK revenues were much softer than brokers expected.

-Despite a highly competitive industry, growth in funds under administration is robust
-UK operation adversely affected by outflows in the last 6-12 months, still to break even
-Impact of reduced industry pricing still unclear
 

By Eva Brocklehurst

Praemium ((PPS)) has suffered from the correction in global equities that occurred late in 2018, delivering a mixed result in the first half. The company provides exposure to the growth in funds under administration on its platforms in Australia and the UK.

The Australian business performed strongly, with operating revenue up 13% and steady margins at 42%. Funds under management (FUM) increased to $5.9bn, up 20%. In contrast, UK revenues were much softer as the company was affected by a steep fall in UK stocks, unfavourable exchange rate moves and the loss of a managed funds business from a major client in the Middle East.

Yet, the magnitude of the fall in the share price, around -16%, surprised Shaw and Partners, although admittedly this is a high-multiple stock and thus needs to maintain a commensurate rate of revenue growth to sustain the current share price. Bailieu considers the drop in the share price an over-reaction and maintains a Buy rating and $0.90 target.

The broader client network in Australia has been enhanced by the launch of a major upgrade to the platform in February. This should expand the addressable market in Australia to a broader platform valued at $860bn.

Of note, Asgard has been retained as a key client for a minimum of a further three years and up to six years. All up, Shaw and Partners considers the business an attractive Australian outfit, with a large addressable market and impressive five-year compound earnings growth forecasts of 16%.

The company has no debt and, despite a fragmented and highly competitive industry, growth in FUM remains robust. This is also prior to international operations achieving break even. Shaw and Partners has a Buy rating and $0.90 target.

However, the result signals to Bell Potter that the company needs to deliver better conversion of operating earnings to reported earnings as well as translate new clients to increased flows. Praemium has won several new clients in both Australia and the UK but a higher level of gross flows needs to feature in order for the stock's rating to recover. Bell Potter has a Hold rating and $0.67 target.

The broker points out Praemium is the only listed investment platform provider that does not provide net flow figures on a quarterly basis, and suspects the conversion of gross to net flows is lighter than what it should be.

Wilsons assesses the opportunities and pressures are now better reflected in the stock, despite ongoing weakness in the UK and the increasingly competitive domestic platform market. The broker upgrades to Hold, with a target of $0.59, noting the shares have fallen around -30% since August.

Unified Managed Account

Bailieu expects the new adviser portal and the unified managed account (UMA) will add significant business over the long-term. Morgans agrees, noting the company's confidence in the second half outlook following the recent launch of UMA, but warns regulatory changes in the wind could reduce the appeal of such solutions. Morgans has an Add rating and $0.87 target.

Wilsons accepts the new platform broadens the service and allows a company to more effectively tender for platform contracts, although early traction is required to offset near-term UK headwinds. The launch also coincides, brokers conclude, with a lift in competitive intensity and, as Wilsons points out, market penetration is therefore not a certainty.

UK

The UK segment made an operating earnings (EBITDA) loss of -$600,000 and, as the result of the departure of advisers within a major client, Guardian, the operation has been adversely affected by outflows of over -$300m in the last 6-12 months.

Wilsons asserts, for many observers, the UK was supposed to be the providing the next leg of growth for the company but it remains sub-scale and management commentary has suggested outflows will continue in the second half. Canaccord Genuity remains positive about the outlook for Praemium as well as the opportunity to accelerate growth rates above its industry market share, retaining a Buy rating with an $0.85 target.

What is still unclear is whether Praemium will experience some collateral damage from a scaling down of prices in the financial platform industry, although the company believes it is equipped to handle a higher level of competition. There may have been a number of one-off items that clouded the quality of the result and the persistent losses in international also detracted from the performance, but the business is solid, Bailieu concludes.

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