Company Overview: Pendal Group Limited, formerly BT Investment Management Limited, is engaged in the provision of investment management services. The Company operates through two segments: investment management business in Australia (BTIM Australia) and investment management business outside of Australia (BTIM UK). The Company operates in the funds management markets in the world, including the United States, the United Kingdom, Asia, Europe and Australia. The Company offers investment services in Australian equities, global equities, property, ethical, income and fixed interest and diversified strategies. Its Australian equities include a range of funds, such as BT Core Australian Share Fund, BT Focus Australian Share Fund, BT MicroCap Opportunities Fund, BT Smaller Companies Fund and BT MidCaps Fund. J O Hambro Capital Management (JOHCM), which operates as a boutique investment management business with offices in London, Singapore, New York and Boston specializing in the active management of equities.


PDL Details

Decent Fundamentals: Pendal Group Limited (ASX: PDL) is a small-to-mid cap investment management company with the market capitalisation of ~$2.11 Bn as of 19 August 2019. The group operates under two segments, i.e., investment management business in Australia (Pendal Australia) and outside of Australia (Pendal International), which contributed revenue around 29.9% and 70.1%, respectively in 1HFY19. The company earlier released its results for half-year ended March 31, 2019 wherein it stated that the business attracted robust institutional flows into the Australian equities, cash and fixed interest strategies. Additionally, the group expanded its US distribution footprint by establishing the presence on West Coast and launched a concentrated global share strategy through an Undertakings for Collective Investment in Transferable Securities (UCITS) vehicle in Europe.  With respect to the funds under management, it was stated that Pendal Group FUM witnessed robust net inflows when it comes to the Australian business during 1H FY19, and the Brexit uncertainty impacted flows in UK/European OEICs (open-ended investment companies). The company stated that the closing FUM as at March 31, 2019 amounted to $100.9 billion, which represents a decline of 1% on $101.6 billion as at September 30, 2018, affected by the negative market movements in the December quarter. It was also stated that the robust balance sheet with no debt and good cashflow represents that the company happens to be in the firm position to take advantage of the opportunities to expand the capabilities and global presence. Generally, lower debt places the company in a better position to focus on its long-term growth prospects. With respect to the investment performance, it was added that the period witnessed significant market volatility primarily in the quarter ended December, where the US rate policy, tightening financial conditions and the deepening concern with regards to the economic growth placed pressure on the equity markets. Fundamentally, the company looks in a decent position with a net margin of 28.6% and ROE of 7.9% in 1HFY19, which are higher than the industry median of 20.4% and 2.4%, respectively.

Considering the decent fundamentals position of the company coupled with  strong balance sheet, good cash flows, and continued footprint expansion on its US distribution, we are positive on the company’s future performance and expect that the group is well-positioned to tap the growth opportunities in years to come.
 

Overview of 1H FY 2019 Results (Source: Company Reports)
 
Top 10 Shareholders: The following table provides an idea of the top 10 shareholders in Pendal Group Limited:

Top 10 Shareholders (Source: Thomson Reuters)

Decent Position in Key Margins: The company has a decent position with respect to its key margins as its net margin stood at 28.6% in 1H FY19, which is higher than the industry median of 20.4% and, thus, it can be said that the company has better capabilities to convert its top-line into the bottom-line when compared to the broader industry. The company is having RoE (or Return on equity) of 7.9% in 1H FY19 as compared to the industry median of 2.4% and, therefore, it looks like that the company has been delivering decent returns to its shareholders. It can be said that capabilities to convert the top-line into the bottom-line along with the higher RoE as compared to the industry median might help it in gaining traction among the market players. 


Key Metrics (Source: Thomson Reuters)

The company has a current ratio of 1.53x in 1H FY19, and the industry median stands at 1.50x and it can be seen that PDL’s current ratio is marginally higher than the industry median. Therefore, it can be said that the company is in a decent position to meet its short-term obligations. Also, the company can make deployments towards its strategic business activities, which can act as a long-term growth catalyst.

Appointment of JOHCM CEO - UK, Europe & Asia: Pendal Group Limited has recently announced the appointment of Alexandra Altinger as the CEO (or Chief Executive Officer) of J O Hambro Capital Management (or JOHCM) operations in UK, Europe, and Asia. It was added that the appointment follows decision which was announced at PDL’s 1H FY19 results, to support the growth in the offshore markets via appointing a dedicated CEO for JOHCM business in UK, Europe and Asia and a CEO for JOHCM US business.

In the release, it was added that Alexandra’s passion for investment management and broad experience throughout multiple markets would be invaluable in contributing to the growth of the business. She is a strong and proven leader and the right person to continue the successful execution of the company’s strategy of identifying the new investment strategies and building upon the success of the existing investment teams.

FUM Figure as At June 30, 2019: Pendal Group Limited has recently released its FUM figure as at June 30, 2019 in which it was stated that its funds under management (or FUM) witnessed a rise of $0.4 billion for June 2019 quarter. As at June 2019, total Pendal Group FUM amounted to $101.3 billion while, at the end of March 2019, the figure stood at $100.9 billion. The following picture has been extracted from the company’s release:


Funds under Management (Source: Company Reports)

In the release, it was stated that, over the quarter, Australian Dollar strengthened +2.0% relative to British Pound and weakened -1.1% against the US Dollar. As a result of this, the FUM decreased by -$0.4 billion.

Despite Challenging Conditions, PDL Declares Interim Dividend: In 1H FY19, Pendal Group Limited posted cash net profit after tax of $84.5 million which reflects a fall of 26% as compared to previous corresponding period (or pcp) while the company’s statutory net profit after tax amounted to $69.6 million, a fall of 37%. In the release, it was added that the result was mainly impacted by the significantly lower performance fees, which was down by 91% and stood at $4.4 million as compared to $47.6 million in pcp. Despite certain challenges during the period, the group managed to declare an interim dividend amounting to 20 cents per share for 2019 financial year, which is 10% franked. This represents a payout ratio of 75% for the first half of 2019. The Board has a dividend payout ratio policy of around 80% to 90% of the full year cash NPAT. At CMP of $6.650, annual dividend yield stands at 7.63%, which can be considered at decent levels and might attract the attention of the dividend seeking investors.


Dividend Trend (Source: Company Reports)

What To Expect From PDL Moving Forward: The company stated that its balance sheet happens to be robust and it has no debt and there are good cash flows in the business, and we expect that this might support the company’s long-term prospects.  The company’s key personnel have stated that the 1H FY19 was a challenging period for the markets and investors. The market returns in the quarter ended December were worst since September 2011 quarter, and despite there was a rebound in the market returns in the quarter ended March, volatility over the half resulted in the significant increase in risk aversion from the clients. Additionally, it was mentioned that any resolution to the US/China trade talks and clarity over the Brexit will improve the investors’ confidence. The following table provides a list of important dates:


Updated 2019 Financial Calendar (Source: Company Reports)

The company is focused on expanding investment and distribution capabilities, maintaining the disciplined approach towards managing capacity and providing support to the investment talent via investment-led culture and business model. It can be said that the broader performance of the stock markets is sensitive to the health of the global economy and a rise in economic uncertainties might weigh over the sentiments of investors.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodologies:
Method 1: PE- based Valuation

PE- based Valuation (Source: Thomson Reuters), NTM: Next Twelve Months

Method 2: Price to Book Value based Valuation

Price to Book Value based Valuation (Source: Thomson Reuters), NTM: Next Twelve Months

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Stock Recommendation: The company’s stock has fallen 11.96% in the time frame of the past one month while, in the time span of the previous three months, the stock has fallen by 14.82%. As per ASX, the company’s stock is trading closer to its 52-week lower levels and, thus, it can be said that that the stock is offering a decent opportunity for accumulation. Additionally, the company’s annual dividend stood at 7.63%, which can be considered at decent levels. The company managed to declare an interim dividend despite the challenging conditions, which imply that the management focuses on shareholders’ returns. The group continued to focus on investing for growth and diversification which might support to achieve its long-term business objectives. During 1HFY19, the company had done several business activities such as (1) expansion of the US distribution footprint by establishing a presence on the West Coast, (2) launching concentrated global share strategy through UCITS vehicle in Europe, and (3) moving to the full ownership of Regnan- Governance Research and Engagement Pty Limited (Regnan). Additionally, it was added that Regnan’s recognised expertise along with PDL’s heritage in environmental, social and corporate governance ESG space, positions PDL well to expand in this growing segment of the market as leading stewards of capital and offers opportunity to leverage the capability globally.
 

Considering the fundamentally strong position of the company, lower trading levels, zero debt on the balance sheet and good cash flows, we are affirmative on the stock and expect that the company is well-positioned to tap the growth opportunities which might occur moving forward. Based on the foregoing, we have valued the stock using the relative valuation methods, P/E and P/BV multiple, and have arrived at a target price upside in the ambit of $7.06-$7.69 (single-digit to low double-digit growth (in percentage term)). Hence, we give a “Buy” recommendation on the stock at the current market price of A$6.650 per share (up 1.527% on 19 August 2019), ahead of its full year results, which are expected to be released on November 6, 2019.

 
PDL Daily Technical Chart (Source: Thomson Reuters)

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