Upgrades Follow Perpetual Strategy Day

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

By Chris Shaw

Perpetual Limited ((PPT)) held a strategy day yesterday and it has revived overall market interest for the financial service provider and wealthmanager as the FNArena database shows four of the ten brokers to cover the company have upgraded their ratings post the meeting with management.

Both Citi and RBS Australia have moved their recommendations to Buy from Hold previously, while Bank of America Merrill Lynch and Credit Suisse have shifted to Neutral ratings from Underperform previously. The upgrades from the latter two brokers are essentially valuation based, BA-Merrill Lynch pointing out Perpetual has underperformed the broader market by 43% so far in 2009, meaning the stock is now trading on around 15 times FY11 earnings estimates.

BA-ML suggests some of this underperformance may have reflected some selling of the stock following its recent removal from the MSCI Index.

As Credit Suisse notes, such a multiple means Perpetual is now trading broadly in line with the average multiple of its peers, which implies some value given the high degree of leverage on offer in terms of earnings-to-market movements. BA-Merrill Lynch’s view is there is now little downside risk to earnings, so justifying the upgrade in rating.

A more positive view is not justified however, suggests BA-Merrill Lynch, as while there is potential upside from expansion in mortgage service volumes and from growing the Private Wealth funds management business, these are both longer-term factors, with any earnings boost likely to be a gradual process.

What could deliver big time in its view is if Perpetual can create a mortgage settlement clearing house or mortgage hub, as this would allow the company to largely corner the market and so grow this business exponentially. One more bank is required to join to make this possible, reports BA-ML  – but again this is a long-term proposition.

Citi is more bullish however, pointing out the underperformance of late leaves the stock trading at the lower end of its historical trading range relative to the market. At the same time, the improved market conditions should support earnings growth in the core perpetual Investments business in its view, while it too sees longer-term upside from expanding the Private Wealth and Corporate Trust divisions.

RBS Australia has made minor increases to its divisional forecasts to reflect the information provided at the strategy day, the end result being relatively significant increases to its EPS estimates overall. For FY10 RBS has lifted its forecast by 8% to 182.7c, while in FY11 and FY12 its numbers have risen 15% and 18% respectively to 222c and 242.5c.

UBS also lifted its estimates by 5-6% through to FY12 and is now forecasting EPS of 176c, 223c and 259c, while Citi’s numbers stand at 180c this year and 203c in FY11 and BA-ML is forecasting 185c for FY10, 216c in FY11 and 241c in FY12. Consensus forecasts according to the FNArena database stand at 187.1c for FY10 and 219.3c for FY11.

JP Morgan’s normalised EPS forecasts of 183.9c and 208.8c are broadly in line with the market, but the broker continues to rate the stock as Underweight, believing there is still some regulatory risk attached to the shares given the ongoing Cooper Review and as it wants to see signs the company can maintain a relatively stable cost base in the event the current improved market conditions continue for some time.

While JP Morgan values the company at $35.00 per share, down from $36.60 previously, RBS Australia is more bullish and sets its valuation based price target at $40.00, up from 35.84 previously. Bank of America Merrill Lynch has also lifted its target to $36.00 from $32.50, while the average price target according to the database is $36.43, up from $35.92.

The database shows the company is now rated as Buy twice, Accumulate once, Hold six times and Sell once, with Deutsche Bank supporting its Buy rating with the view current regulatory issues have been overstated and the share price impact has created a value situation.

The market appears to agree as Perpetual shares as at 11.20am were up $1.58 or 4.9% at $34.08. Over the past 12 months the stock has traded between $21.60 and $41.39.

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