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
 

Robust Balance Sheet Position With Zero Debt Amidst Macroeconomics Challenges:  Pendal Group Limited (ASX: PDL) is primarily engaged in the provision of investment management services. As on September 23, 2019, the market capitalisation of the company stood at A$2.35 billion. The company’s robust balance sheet along with no debt and good cash flow reflects that PDL is in the firm position in order to take advantage of the opportunities to expand its capabilities and global presence, which happens to be in line with its focused strategy around growth as well as diversification. The company released its results for the half-year ended March 2019 in which the Board of Directors declared an interim dividend of 20 cents per share (franked at 10%). Amidst challenging conditions, the company declared an interim dividend, indicating that the management is focused on strengthening its shareholders’ returns. On the financial front, the company’s net sales have witnessed a CAGR growth of 7.57% in the span of FY14- FY18 and, thus, it can be said that PDL is possessing decent capabilities to garner sales which could help it over the long-term. During the same period, the company’s net income has witnessed a CAGR growth of 11.97%. In 1HFY19, average FUM recorded at $97.4 Bn while statutory NPAT came in at $69.6 Mn with cash and cash equivalent of $75.04 Mn. The company’s cash operating expenses amounted to $140.0 million in 1HFY19, reflecting a fall of 13% on pcp basis, mainly because of lower variable staff costs given lower fee revenue. Additionally, it was stated that the operating profit margin for 1H FY19 stood at 42% as compared to 45% in the pcp. PDL’s FUM stood at $100.9 billion, which reflects a fall of $0.7 billion for the half which was because of lower market levels and partially offset by lower AUD while the net flows were flat for the period. While the company witnessed outflows throughout the European and Asian equity strategies, it also experienced good institutional inflows into its Australian equities, cash and fixed income strategies.
 

Moving forward, decent capabilities to generate net sales, robust balance sheet position and the commitment towards expanding investment and distribution capabilities might act as tailwinds for the long-term growth. The capital retained in business in order to grow PDL is mainly used towards providing the seed capital for new funds and investment strategies. It looks like the company’s focus towards deployment in the US for the growth purposes and development and enhancement of the distribution channels in order to drive sales might support PDL moving forward.
 

Long-term Growth (Source: Company Reports)

Top 10 Shareholders: The following table provides a broader overview of the top 10 shareholders in Pendal Group Limited:

Top 10 Shareholders (Source: Thomson Reuters)

Key Margins Are at Decent Position: The company’s key margins are higher than the margins of a broader industry, which reflects that PDL is possessing decent financial footing. PDL’s net margin stood at 28.6% in 1H FY19, which is higher than the industry median of 26.9% and, thus, it can be said that the company has better capabilities to convert its top-line into the bottom-line as compared to the broader industry. The company’s RoE stood at 7.9% in 1H FY19, which is higher than the industry median of 3.9% and, thus, it looks like that PDL has delivered better returns to its shareholders when compared to the broader industry. The company’s current ratio stood at 1.53x in 1H FY19, which is marginally above than the industry median figure of 1.47x and, thus, it can be said that PDL would be able to meet its short-term obligations. Additionally, decent liquidity levels might help the company in making deployments towards the key strategic business activities that could act as tailwinds for long-term growth. Since PDL has zero debt position, the company could be able to focus towards its long-term growth prospects.
 

Key Metrics (Source: Thomson Reuters)

Appointment of JOHCM CEO – USA: Pendal Group Limited has recently made an announcement about the appointment of Nick Good as the Chief Executive Officer (or CEO) of J O Hambro Capital Management (or JOHCM) operations in the USA. The appointment follows a decision to appoint the dedicated CEOs for JOHCM business in the UK, Europe and Asia as well as a CEO for the US business in order to support the growth in offshore markets. It was added that Alexandra Altinger was appointed as the CEO of JOHCM’s UK, Europe and Asia business in the month of July.

The group CEO of Pendal Group Mr Emilio Gonzalez stated that the US region is the key growth engine for Pendal Group. There are expectations that there are significant opportunities in order to continue to materially grow the funds under management in that region.

Key Takeaways from PDL’s 1H FY19 Results: The first half of 2019 was characterised by lower performance fees for the company, volatile market environment particularly in the quarter ended December 2018, and the subdued investor confidence which has weighed over the industry flows. Despite this backdrop, the company’s FUM held up well and was closed at $100.9 billion, and there was a shift in the investor preferences during the period away from the equities and into the cash as well as fixed income strategies. The company’s cash net profit after tax (or Cash NPAT) stood at $84.5 million, which reflects a fall of 26% as compared to the previous corresponding period and its statutory net profit after tax (or NPAT) amounted to $69.6 million, reflecting a fall of 37%.

The strategic highlights during 1H FY19 consisted of an expansion of the US distribution footprint by establishing a presence on West Coast, launching concentrated global share strategy through the UCITS vehicle in Europe, and moving to full ownership of Regnan. Even though there were difficult trading conditions, the company is committed towards expanding its investment and distribution capabilities, maintaining the disciplined approach towards managing the capacity and providing ongoing support to investment talent via investment-led culture and business model.

FUM Figure as at June 2019: As at June 30, 2019, total Pendal Group FUM amounted to AUD101.3 billion which reflects a marginal rise from March 31, 2019 figure of A$100.9 billion. During the quarter ended June 2019, Pendal Australia witnessed net outflows amounting to -$2.0 billion primarily because of previously announced Westpac redemption amounting to $1.5 billion which consisted $2.1 billion redeemed from legacy book partially offset by $0.6 billion coming into Westpac Other book, all part of one transaction. It was also stated that $0.2 billion was won through the institutional channel, which was led by the lower margin cash inflows of +$0.3 billion. The following picture provides an overview of the total Pendal Group FUM:


Funds Under Management (Source: Company Reports)

What to Expect from PDL Moving Forward: With respect to the outlook, Pendal Group Limited’s key personnel stated that any resolution with respect to the US and China trade talks might lead to improvement of the investor confidence. Even though there were difficult trading conditions, PDL’s robust balance sheet along with zero debt levels and good cash flow reflects that the company is in the firm position in order to take advantage of the opportunities to expand its capabilities and global presence which might help it in gaining traction among the market players.

Moreover, the company has a track record of consistently paying dividend with a dividend per share (DPS) of CAGR of 10.4% and dividend yield of between 3.56% and 5.92% over the last five years. In 1HFY19, the Board of Directors declared an interim dividend of 20 cents per share (franked at 10%), which equates payout ratio of 75% and expects full year dividend payout ratio in the range of 80-90% of Cash NPAT. This might attract the dividend-seeking investors moving forward. The company’s objectives with respect to managing capital are to maintain a robust capital base in excess of the regulatory requirements across the business cycles which supports execution of strategic goals, in order to optimise the returns to shareholders and, at the same time, ensuring compliance with Pendal Group’s Risk Appetite Statement.


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 Cash Flow based Valuation

Price to Cash Flow based Valuation (Source: Thomson Reuters), *NTM: Next Twelve Months

Note: All forecasted figures and peers have been taken from Thomson Reuters.

Stock Recommendation: The company’s stock has witnessed a fall of 18.04% in the span of the previous six months while, on a YTD basis, the stock has fallen 5.34%. As per ASX, the company’s stock is trading lower than the 52-week low high average range of $6.43-$9.59, indicating a decent opportunity for accumulation. The company has no debt on its balance sheet, and it also stated that the seed capital meets the current requirements. PDL’s strategy revolves around continued focus towards deploying for the growth and diversification. The company primarily focuses on attracting and retaining the investment talent, which creates the portfolio of complementary strategies as well as disciplined capacity management for preservation of the investment performance. On the backdrop of decent fundamentals and long-term potential in the business, we have valued the stock using two relative valuation methods, i.e., Price to Earnings multiple and Price to Cash flow multiple and arrived at a target price upside of lower double-digit growth (in percentage term). Hence, we give a “Buy” recommendation on the stock at the current market price of A$7.350 per share (up 1.1% on 23 September 2019).

 
PDL Daily Technical Chart (Source: Thomson Reuters)

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