Australia | Oct 17 2023
This story features PERPETUAL LIMITED. For more info SHARE ANALYSIS: PPT
Perpetual's first quarter flows were an improvement on the prior quarter though analysts expect ongoing near-term volatility.
-Better flows for Perpetual, volatility still expected
-Positive and negatives of the Pendal acquisition
-Three-year benchmark outperformance by 77% of strategies
-Compelling value on offer, suggests Jarden
By Mark Woodruff
While minor first quarter inflows in Perpetual’s ((PPT)) Asset Management division proved a significant improvement on large outflows in the prior quarter, analysts expect near-term flows will remain volatile, reflecting the recent Pendal integration and uncertain global markets.
In the face of overall market weakness, first quarter results for the globally diversified financial services firm showed steady assets under management and ongoing inflows to the Corporate Trust and Wealth Management divisions.
Since a peak of above $42 back in September of 2021, Perpetual shares have consistently fallen and have now more than halved, though four of the seven brokers below see value and have retained Buy (or equivalent) recommendations.
The company’s Asset Management division provides services across seven brands, namely Perpetual, Pendal, Trillium, Barrow Hanley, TSW, JO Hambro and Regnum.
Net inflows for the division of $0.1bn in the first quarter (September) were slightly worse than the consensus forecast for $0.6bn, according to Bell Potter, but compared favourably to the around -$5bn outflow in the final quarter of FY23.
Underlining the size of operations, funds under management (FUM) came in at around $212bn.
The recently acquired Pendal had the largest inflows of $1bn driven by $1.4bn of cash mandates, partly offset by outflows in other classes, notes Morgan Stanley.
While management notes strong interest in both the Barrow Handley and JO Hambro strategies, and expects positive momentum will continue into the second quarter, Citi believes it will be hard to achieve flow consistency and remains sceptical a full turnaround is imminent.
This broker feels recent problem areas largely remain, including US equities for Barrow Handley and global equities for TSW.
Perpetual provides services to a global client base and earns the majority of its revenue from fees charged on assets either under management, advice or administration.
Revenue is influenced by movement in the underlying asset values, margin on assets and net client flows, and the business model provides Perpetual with recurring revenue streams and leverage to movement in asset values.
Market movements were negative to the tune of -$3.8bn over the quarter, offset by positive currency movements of $3.3bn.
The first quarter outflow of -0.8bn away from equities and into cash ($1.3bn) will have implications for revenue as cash has lower management fees, observes Bell Potter.
Elsewhere, the key Corporate Trust division surprised UBS with robust funds under administration (FUA) growth of 1.7% in the quarter, with UBS analysts noting the return of lenders to the securitisation market.
Within Wealth Management, FUA fell by -1% for the quarter to $18.4bn, with inflows of $0.1bn offset by negative market moves of -$0.2bn.
Employee costs comprise the largest component of expenses, which Bell Potter attributes to maintaining Perpetual’s status as a provider of high-quality financial services.
While management anticipates FY24 expenses will weigh by -27-31%, which includes the impact of Pendal for a full year, this outcome is unchanged from prior guidance, although a weak Australian dollar is expected to put upward pressure on US and UK expenses.
During the first quarter, 77% of the group’s strategies outperformed their benchmarks over a three-year horizon.
Citi considers this investment performance, while a deterioration on the previous two quarters of 79% and 85%, respectively, should prove to be very saleable.
Neutral-rated UBS continues to question the Pendal acquisition, observing the bright spots in the first quarter for the Asset Management division were in Perpetual’s own boutiques with inflows in Barrow Hanley and Trillium.
Net outflows from Pendal have continued. While the September quarter marked a moderation versus June, the broker highlights outflows remain broad-based across the boutiques as Pendal Australia, JO Hambro and TSW experienced outflows of -$0.4bn, -$0.5bn and -$0.5bn, respectively.
Since acquisition, there have been outflows of more than -$5bn in the last eight months, placing further pressure on management to deliver on cost-related synergies, suggests UBS.
On the other hand, Macquarie (Outperform) considers Perpetual’s synergy realisation profile provides an attractive FY25 valuation.
Bell Potter agrees on the scope for synergies and believes having Pendal on board will enable Perpetual to more easily attract and retain clients.
It’s felt the acquisition adds to both the company’s scale and its suite of strategies, as well as providing a greater distribution capability.
Perpetual is Jarden’s pick from the ASX-listed asset managers, with Jarden analysts highlighting a compelling two-year forward EPS compound annual growth rate (CAGR) of around 14%, well ahead of the circa 3% peer average.
Bell Potter also continues to favour Perpetual in the asset manager space for its ongoing growth in Corporate Trust and Wealth Management, while Asset Management now has additional strategies and enhanced distribution via the acquisition of Pendal.
Overall, this broker feels management has proactively positioned Perpetual to face the challenges within its markets.
Jarden points out downside risks to its Overweight recommendation include bearish markets, net flow deterioration, integration/synergy delays for Pendal, and poor cost control.
There are six broker covered daily by FNArena that conduct research on Perpetual, with half Buy-rated (or equivalent) and the balance with Hold recommendations.
It’s should be noted, Hold-rated Ord Minnett is yet to update post Perpetual's first quarter market update.
The average target price of the six brokers is $26.45, down from $26.90 prior to the results, which suggests around 27% upside to the last share price.
Jarden (Overweight, one notch below Buy in the broker’s system) is not monitored daily and has a $27.10 target price for Perpetual.
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