Perpetual Taking Time To Ramp Up Growth

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

-Synergies yet to be realised
-Upside from new equities fund
-Stock now inexpensive
 

By Eva Brocklehurst

Financial services firm Perpetual ((PPT)) is considered by most brokers to be a bastion of stability. On the surface, fund flows were strong in the September quarter but opinions diverge is on just how much of the improved flow will translate to the earnings bottom line, and when.

September quarter inflows totalled $1.1bn, ahead of expectations, but several brokers observe the majority of this inflow was in lower margin cash and fixed interest products. The quarter was characterised by increased volatility towards the end, with strong gains in the fist two months reversing in September. Deutsche Bank also notes funds were sourced mainly from institutional clients, while the $300m net flow into Australian equities partly included reinvestment of the "abnormally" large distributions that were paid in the fourth quarter of FY14. Deutsche Bank retains a Buy rating but downgrades earnings forecasts by 1.6% in FY15 and 2.3% in FY16 because of weaker equity markets.

While the first quarter fund flows were the strongest for several years and the company's new equity investment company and global share fund should contribute to net flows in coming quarters, Citi lower earnings forecasts as well, by 3% and 6% for FY15 and FY16 respectively. The broker concludes that the company's strategy should eventually produce improved fund flows. The question for Citi is how long this may take.

Macquarie believes the company is well placed, benefitting from cost cutting and synergies from the Trust Co acquisition. To this broker Perpetual is a stable operation in the face of more challenging conditions and deserves an Outperform rating. JP Morgan acknowledges the positives and the clear path to near-term earnings growth via improved investor sentiment and acquisition synergies, but believes these are yet to drive meaningful results for the company. The broker prefers Magellan Financial ((MFG)) in the listed fund manager segment. JP Morgan also views Perpetual's establishment of the new global equities fund as a positive step.

To Morgan Stanley the company's valuation has been undemanding for some time. Prior to the September quarter report, the stock was trading at just a 5% premium to the ASX200. The broker observes the growth hurdle is being cleared and this should support a price/earnings recovery. Morgan Stanley believes there is the opportunity for the stock to re-rate further by demonstrating traction with its new global share fund. There was no update on the flows into this fund but it won approval from a large wealth management group in the quarter and Morgan Stanley believes this will support flows via financial advisers going forward. The broker also maintains earnings benefit will come from the Trust Co acquisition, offsetting an overweight footprint in Australian equities.

For Credit Suisse there is potential upside to earnings estimates if Perpetual completes a successful capital raising for its investment company. Inflows were strong but the broker noted a slowdown later in the quarter. Credit Suisse also remarks that equity flows benefitted substantially from the reinvestment of the June distributions. Still, the broker maintains the stock is inexpensive as it offers the highest earnings growth outlook among its peers. The broker forecasts earnings growth of 8% in FY15 and 14% in FY16, underpinned by funds growth, costs and synergies.

On FNArena's database there are five Buy ratings and three Hold. The consensus target is $48.50, suggesting 9.5% upside tot the last share price, and compares with $49.48 ahead of the quarterly report. Dividend yield on FY15 forecasts is 5.1% and 6.3% on FY16 forecasts.
 

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