Perpetual’s Underperformance Coming To An End?

This story features PERPETUAL LIMITED.
For more info SHARE ANALYSIS: PPT
The company is included in ASX200, ASX300 and ALL-ORDS

By Chris Shaw

It has been a tough past month or so for fund manager Perpetual ((PPT)), as on the estimates of UBS and RBS Australia the stock has underperformed the broader market in that period by between 14-16% and by a similar amount over the past quarter.

This underperformance has meant the relative value on offer in the stock has improved, so both UBS and RBS have this morning upgraded to Neutral ratings from Sell or Underperform previously.  This implies a slight improvement in the overall rating of Perpetual on the market, as the FNArena database now shows seven Holds and just three Sells, up from a 5-5 split previously.

There have been no accompanying changes to earnings forecasts as UBS suggests the company will lack much in the way of earnings leverage until at least FY11. The stockbroker suggests it will take until then for the average level of funds under management to catch up with the rebound in the share market seen over the past six months or so, so delaying any improvement in revenues.

Overall, UBS views Perpetual as a strong business but this delay in earnings leverage means some headwinds remain, margins being one example. On its numbers Perpetual should generate EBIT (earnings before interest and tax) margins of around 26% in FY10, which compares to a peak of 45% in FY05. Improvement should come, with forecast EBIT margins of 29.3% in FY11 and 31.5% in FY12.

But this won’t come fast enough to justify a more positive rating, argues UBS, as on a cash earnings basis it estimates Perpetual shares are trading on around 14.4 times FY10 earnings and 12.1 times FY11 earnings, which is in line with the market multiple. This is based on earnings per share (EPS) forecasts of 166c for FY10 and 210c for FY11.

RBS Australia’s EPS estimates stand at 169.1c and 192.7c respectively and it too suggests the company will find it tough to deliver any real earnings growth until cost cutting measures begin to impact and there is a flow through effect from stronger investment markets. Average EPS forecasts according to the FNArena database are 183.9c for FY10 and 215.4c for FY11.

One possible reason for the recent underperformance in RBS Australia’s view is the announcement Perpetual would be removed from the MSCI Australia Index as part of the index’s semi-annual re-balancing. Apart from this, RBS sees no obvious reason for the stock to have performed so poorly of late apart from the shares previously being over-priced (which may well represent all the obvious reasons one needs to pinpoint one).

As with UBS, the RBS Australia rating upgrade has seen no change to its price target, which remains $35.84. UBS has a target price of $33.20, while the average price target according to the FNArena database stands at $35.92. Shares in Perpetual today are stronger and as at 10.40am the stock was up 92c or 2.8% at $34.15, which compares to a range over the past year of $21.60 to $41.39.

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