Perpetual Disappointments

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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

Since equity markets globally started heading south it has been tough going for fund managers, with the likes of Perpetual ((PPT)) and BT Investments ((BTT)) having been forced to revise down earnings guidance for this year.

Sadly for Perpetual shareholders management is at it again, yesterday advising the market normalised earnings for FY08 would be in the range of $130-$140 million, guidance that was well below most estimates in the market place and so becoming an obvious prompt for earnings downgrades by brokers.

These downgrades have begun to flow through as analysts adjust for not only falling levels of funds under management, which are not a great surprise in the current market, but a more concerning increase in costs. It is the cost side of the equation that has most displeased Citi and Merrill Lynch, the former pointing out the latest update is evidence the company has been slow to address the cost issue and the latter at a loss as to why costs are continuing to rise as funds under management come down.

ABN Amro analysts went further with their analysis of costs, suggesting the update has implications for FY09 earnings as well given there is unlikely to be any sharp turnaround in terms of funds under management next year. Credit Suisse took a similar approach and also sliced into FY09 numbers, with the broker now forecasting a further fall in earnings next year.

In earnings per share (EPS) terms the broker now expects an outcome of 330c in FY09 compared to its revised forecast of 331c this year, both numbers having been cut by 11% following the update. UBS is even more bearish and after cutting its estimates by 12% and 11% respectively the broker sits at forecasts of 321c and 300c, while Citi is at 319c this year and 330c for FY09.

Consensus forecasts according to the FNArena database now stand at 325c and 321c, which compares to previous consensus estimates according to UBS of 360c and 351c. In other words: market consensus is now assuming it’ll get worse still before things can improve again at Perpetual.

The issue for the stock going forward is, as UBS points out, revenues and earnings are largely driven by the level of funds under management and here the outlook is for few positive catalysts shorter-term given ongoing uncertainty in global financial markets. Credit Suisse also sees little in the way of any positive news on the horizon, while suggesting the stock remains somewhat expensive given it is currently trading on around 15x 12-month forward earnings, which is towards the upper end of the 12-17x range of its peers.

Despite the changes to earnings estimates there have been few rating changes, Citi moving to a Sell on the stock but ABN Amro upgrading to Hold from Sell on valuation grounds. Overall the FNArena database shows one single Buy rating compared to six Holds and three Sells.

The average price target on the stock is $51.17, which compares to an average of $55.34 prior to the update and a median price target according to Thomson One Analytics of $55.00 (this merely suggests Thomson has some updating to do). Shares in Perpetual today are stronger despite the weaker overall market on the back of some bargain hunting after yesterday’s fall and as at 12.05pm the stock was up 46c at $49.72.

This compares to a trading range over the past 12 months of $47.25 to $83.58, leaving the shares a long way short of last year when they were being considered one of the stocks most likely to crack the $100 barrier.

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