Company Overview: Pendal Group Limited (ASX: PDL) is a global investment management company focused on providing superior investment returns through its active management. The company operates three business segments i.e., Pendal EUKA, Pendal Australia, and Pendal US. The company operates a "multi-boutique" style business model and provides a range of investment strategies across the global marketplace. It actively manages investments in Australian equities and diversified properties, global equities, Australian fixed income, and multi-asset portfolios.

PDL Details

PDL Fundamental Overview:

• H1FY22 Result Overview: The fee revenue increased 31% to $362.6 million relative to H1FY21, owing to buyout synergies from Thompson, Siegel & Walmsley (TSW) and a positive impetus from global equity market. However, the current market conditions create challenges for the medium-term outlook. Underlying profit after tax (UPAT) improved by 59% to $131.4 million, and EPS gained 34% to 34.3 cents per share relative to H1FY21. Operating margins also improved because of TSW contribution and prudent cost management, as of H1FY21 operating margin was 37%, which increased to 42% in H1FY22. The funds under management (including cash) as of 31 March 2022 was $124.9 billion, while at the end of 30 September 2021, it was $139.2 billion. Nevertheless, in the past one year 36% and in the past three years 86% of FUM outperformed the benchmark.
• Dividend Quality and Capital Management: PDL board remains committed to dividend policy by following an annual payout ratio of 80% to 95% of UPAT. The company paid an interim dividend of 21 cps in H1FY22, up from 17 cps in H1FY21 and 15 cps in H1FY20. As of 31^st March 2022, PDL reported a total cash and seed investments of $460 million, out of which, up to $100 million will be utilised for share buyback in H2FY22.

Financial Results overview (Source: Analysis by Kalkine Group)

Key Metrics: For H1FY22, PDL reported an EBITDA margin of 42.4% and net margin of 27.4%, backed by prudent cost management that contributed to improvement in its margins. Notably, in FY22, the company revised its fixed cost growth outlook to 3-5% compared to FY21, based on stable currency in 2HFY22.

Profitability Profile (Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form around 20.22% of the total shareholding, while the top four constitute the maximum holding. The Vanguard Group, Inc. and Paradice Investment Management Pty. Ltd. are holding a maximum stake in the company at 4.90% and 4.67%, respectively, as also highlighted in the chart below:

(Analysis by Kalkine Group)

Dividend Track Record: PDL has a decent track record of rewarding shareholders through dividends. For 1HFY22, the company has issued an interim 10% franked dividend of 21 cents per share, with the payment date 01^st Jul 2022. At the current market price of $4.27, the annual dividend yield stood at 10.44%.

Dividend History (Source: Analysis by kalkine Group)

Key Risks:  The company operates in an industry where it faces key people risk because any loss of investment personnel could result in loss of investment mandates. Further, the company has to maintain a good track record of performance to attract and retain funds. The major revenue source, management fees, is linked to the market value of the asset under management, so any significant movement in asset price could result in a material impact on the company's revenue. PDL operates in multiple jurisdictions, making the company exposed to currency and regulatory risk.

Outlook: PDL remains on track to successfully deliver above benchmark long-term investment performance, thanks to its unique business strategies. It focuses on diversifying its product sets by integrating ESG into the core products and enhancing its product range via organic and inorganic activities. This, in turn, aids the company to deliver robust growth and positive shift in revenue mix with stable base management fee margins. The company maintains a flexible investment approach with respect to current market conditions and client sentiment. The company opines to benefit from multiple factors such as leveraging global distribution footprint, diversifying product range, providing a better platform to deliver exceptional client outcomes, and making it the best home for talent in the industry.

Valuation Methodology: Price/Book Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last six months, the stock has been corrected by ~22.64% and is trading near to its 52-week low price level of $4.040, offering a decent opportunity for accumulation. The stock has been valued using the P/BV multiple-based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). The company can trade at a slight discount as compared to its peers, considering economic headwinds, volatility in the market, etc. For valuation purposes, peers like Perpetual Ltd (ASX: PPT), Platinum Asset Management Ltd (ASX: PTM), Magellan Financial Group Ltd (ASX: MFG), and others have been considered. Considering the company's growth in H1FY22, increase in management fee, reduction in cost, indicative upside in the valuation, and key risks associated with the business, we give a "Speculative Buy" recommendation on the stock at the closing market price of $4.270, down by ~0.928% as on 16^th June 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

PDL Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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