Brokers Want More Evidence Of Growth At Perpetual

This story features PERPETUAL LIMITED. For more info SHARE ANALYSIS: PPT

-Is there a near-term opportunity?
-Global equities fund a positive
-More consistency in flows needed
 

By Eva Brocklehurst

Perpetual ((PPT)) reported funds under management (FUM) ended the September quarter at $28.4bn, revealing outflows of $1bn in Australian equities from the institutional channel and $400m in inflows from the intermediary channel. The company also confirmed it has obtained a new $1bn institutional client mandate to manage Australian equities which is expected to fund the second quarter.

Bell Potter believes the current share price does not reflect where the business is at and this provides a near-term opportunity. Despite the net outflows of $700m in the September quarter, the company's new mandate is a positive and the broker expects more synergies will still ensue from the Trust Co acquisition.

Perpetual is currently trading at less than 15 times FY16 price/earnings, below its long-term average, and this does not reflect the growth profile, in Bell Potter's view. The broker, not one of the eight monitored daily on the FNArena database, upgrades its price target to $49.50 from $47.30 and reiterates a Buy rating.

Credit Suisse is more cautious. While the company has obtained benefits from cost cutting and cost synergies in FY15, no such benefits are likely in FY16. The broker believes the softer fund flows and markets are becoming a headwind, although the stock does offer a leveraged play on a run in Australian equities.

The broker acknowledges a positive case exists at current valuation levels, based on the assumption that the last of the major outflows occurred in the September quarter, but its performance has softened over the past 12 months and this may affect inflows in the short term.

The quarter disappointed JP Morgan, with the stock lagging its listed competitors over the past 12 months and now trading at a discount based on consensus forward estimates.

The broker acknowledges some of the discount may be justified, given a more diverse operating business and lower leverage to markets, which is accentuated through its ownership of Trust Co. The focus is on organic growth and JP Morgan believes the establishment of Perpetual's global equities fund is a positive move.

The net outflows actually had a positive impact on revenue in the quarter, in Macquarie's observation, because of the mix of institutional outflows versus intermediary inflows. Moreover, the new institutional client mandate to manage Australian equities is of similar size to the outflow expected to be funded in the December quarter.

UBS is also upbeat. The broker upgraded to Buy at the FY15 result on the basis that the share price reflected a lack of confidence that he company could successfully execute the next phase of its strategy. The institutional outflows were modestly disappointing but the intermediary inflows were encouraging to the broker, given a tough quarter for equities.

UBS continues to believe the company can jump a relatively low hurdle on organic growth expectations in FY16-17. The update has no major revenue implications for UBS. Earnings risk is manageable and the broker is prepared to give the company the benefit of the doubt on delivery of positive flows in retail an intermediary channels as there are some early positive signs emerging.

Deutsche Bank sticks with a Hold rating and cannot go past the fact that this has been a second consecutive quarter of net outflows, which have offset all positive net flows since December 2013. Funds under management are back at a two-year low and, the new mandate aside, the broker requires a more consistent record on flows to become more positive on the valuation upside, although the current price is considered undemanding.

The new equity mandate provides some encouragement for Citi, partly alleviating concerns about further fund outflows stemming from recent changes in personnel. The broker considers the stock has growth options which are more medium term, despite being strongly leveraged to a potential rebound in the Australian equity market.

The market backdrop has been difficult, although Citi acknowledges the softness in the stock stems from the large outflow of $1bn from Australian equities. The broker notes Perpetual is still only attracting minimal net flows to its global share fund and needs to achieve an average of $100m in quarterly net flows for the next two years to meet its targets.

Morgan Stanley believes the global share fund, with its strong brand and distribution, should deliver a solid performance. The fund remains well placed to benefit from asset re-allocation in a lower-for-longer interest rate/inflation environment. Revenues are also expected to benefit from stronger flows into higher margin products.

Winning further share in the domestic market is difficult and the broker envisages better growth opportunities elsewhere in  the sector. That said, Morgan Stanley is encouraged by not only the global share fund but the diversity across private clients and the trust business.

FNArena's database shows three Buy and five Hold ratings with a consensus price target of $46.35, which signals 9.6% upside to the last share price. The dividend yield on FY16 and FY17 forecasts is 5.7% and 6.2% respectively.
 

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