Company Overview: Perpetual Limited (ASX: PPT) is an independent Australian diversified financial services company that earns the majority of its revenue from fees charged on assets under either management, advice or administration. It provides asset management, financial advice, and trustee services with operations in Australia, Singapore and the United States. The company operates four business segments - Perpetual Asset Management Australia (PAMA), Perpetual Corporate Trust (PCT), Perpetual Asset Management International (PAMI), and Perpetual Private (PP).  

PPT Details

Decent Growth Potential Backed by Well-Diversified Business Model: Perpetual Limited (ASX: PPT) is a diversified financial services company operating in asset management, financial advisory and trustee services. As on 18 March 2021, the company’s market capitalisation stood at ~$1.83 billion. PPT has a well-diversified business model that provides it with a variety of sources of revenue, by capability type and client type. Despite the challenges created by the COVID-19 pandemic during FY20, the company was able to execute on its strategic plan to grow and diversify its business. During FY20, the company completed the strategic acquisition of Trillium Asset Management (Trillium) in Boston USA, which positioned it well to take a lead in the fast-growing ESG (environmental, social and governance) market.

Looking ahead, the company is focused on new product, service and channel development. PPT is of the view that there is significant capacity across all acquired investment capabilities and its each division is well-positioned for future growth. PPT intends to capitalise on industry disruption and accelerate growth through adviser acquisition. It currently has an active merger and acquisition (M&A) pipeline of opportunities to add new adjacent products, enter new markets and expand scale in its core businesses.

Five Years Financial Performance (Source: Refinitiv, Thomson Reuters)

Decent Revenue Growth in H1FY21: During the half-year ended 30 December 2020, the company witnessed decent growth across its non-market fiduciary and advisory operating revenue in Perpetual Private and Perpetual Corporate Trust. For H1FY21, reported operating revenue of $280.6 million, up 10% on the previous corresponding period (pcp), mainly driven by the newly formed operating segment of Perpetual Asset Management, International through the two completed acquisitions of Barrow Hanley and Trillium, and higher performance fees. Statutory revenue for H1FY21 stood at $285.8 million. Total expenses in H1FY21 stood $208.5 million, up 22% on H1FY20 driven by the acquisitions of Barrow Hanley and Trillium and higher variable remuneration. Underlying profit after tax (UPAT) and net profit after tax (NPAT) stood at $52.6 million and $29.2 million, respectively. During H1FY21, the company launched two new Trillium funds in Australia and also launched MyPerpetual, a new client portal for investors and financial advisers, delivering an improved client experience. As at 31 December 2020, the company had cash of $172.1 million and liquid investments of $133.7 million. Due to the acquisitions of Barrow Hanley and Trillium, the company’s goodwill and other intangibles grew by 133% YoY to $870.3 million in H1FY21.

H1FY21 Results (Source: Company Reports)

FY20 Result Highlights: For the year ended 30 June 2020, the company reported operating revenue of $489.2 million, down by 5% on FY19, impacted by lower levels of Funds under Management (FUM), driven by net outflows and prior period distributions within Perpetual Investments. Statutory revenue for FY20 stood at $491.3 million. Statutory net profit after tax (NPAT) and underlying profit after tax (UPAT) for FY20 stood at $82.0 million and $93.5 million, respectively. Despite the increased levels of investment in strategic initiatives to support future business growth, the company’s total expenses in FY20 were only 1% up on FY19 at $356.8 million, driven by the impact of the new operating model benefits and COVID-19 related discretionary expense savings. EPS and NTA per share stood at 172.8 cents and 3.95 cents, respectively in FY20.

Financial Indicators (Source: Company Reports)

Key Metrics: For H1FY21, the company reported EBITDA margin of 32.1%, up from 28.2% in H2FY20. Net Margin for H1FY21 stood at 10.2%. Current ratio for H1FY21 stood at 1.44x, up from 1.29x in H2FY20. Debt to Equity multiple for H1FY21 stood at 0.34x.

Past 5-year Financial Performance For Year Ending 30 June, Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 18.91% of the total shareholding while the top four constitutes the maximum holding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 5.02% and 3.12%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Decent Dividend Track Record: The company has a track record of paying decent dividends to its shareholders. For FY20, the company paid total full-year dividend of 155 cents per share, representing a payout ratio of 94%, in line with PPT’s policy of paying dividends within a range of 80% to 100% of NPAT on an annualised basis. For H1FY21, the company has declared an interim dividend of 84 cents per share payable on 26 March 2021, representing payout ratio of 90%. At CMP of $33.540, the company’s annual dividend yield stood at 4.12%.

Dividend Trend (Source: Company Reports)

Acquisition of Barrow, Hanley, Mewhinney & Strauss, LLC: In November 2020, PPT completed the acquisition of 75% interest in US-based asset manager, Barrow, Hanley, Mewhinney & Strauss, LLC. from BrightSphere Investment Group Inc. (BSIG). This acquisition has accelerated PPT’s global footprint, expanded PPT’s AUM to over A$871 billion and added 21 new key strategies across asset classes, strategies and geographies.

Change of Interests in Bega Cheese Limited: Perpetual Limited recently reduced its shareholding in Bega Cheese Limited from 6.58% to 5.58%. PPT now holds 16,877,623 ordinary shares of Bega Cheese Limited.

Key Risks: The company is exposed to the risks and uncertainties caused by the COVID-19 pandemic. The company is also exposed to the risk associated with legislative and regulatory reforms which could impact PPT’s operations.

Outlook: In response to the improving market dynamics, PPT is accelerating investment in key capabilities in order to improve its performance and achieve further growth. In FY21, the company expects EPS to grow over 20% on an annualised basis from the completion date of the Barrow Hanley acquisition. Further, it expects its DPS to grow over 10% in FY20, as compared to FY20. Due to improved exchange rate, lower transaction costs and timing of bolt-on acquisitions, significant items range for FY21 has been lowered to $50-$55 million (post-tax). Due to the acceleration of investment in distribution to take earlier advantage of improving market conditions as well as higher remuneration costs, the company’s Underlying expenses for FY21 is expected to be 1-3% higher than FY20. PPT’s new Perpetual Business Intelligence solutions are on track to be launched the second-half of FY21. With its diversified business model, solid merger and acquisition pipeline, recently completed transformational acquisitions, PPT seems well positioned for future growth.

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

Data Source: Refinitiv, Thomson Reuters, 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 three months, the stock has corrected by 5.733%.  At the current market price of $33.54, the stock is trading towards the higher band of its 52-weeks trading range of $19.65-$36.99. On the technical analysis front, the stock has a support level of ~$30.45 and resistance of ~$36.45. We have valued the stock using Price to Cashflow multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company might trade at a slight discount to its peer average, considering the impact of COVID-19 pandemic, reduced cash balance, while also taking into account the that the company has been trading at a discount in the past 3-years over its peer median. We have taken peers like, Challenger Ltd (ASX: CGF), Magellan Financial Group Ltd (ASX: MFG), Pendal Group Ltd (ASX: PDL), etc. Considering the company’s decent growth in H1FY21 revenue, recent transformational acquisitions, decent merger and acquisition pipeline, diversified business model, modest long-term outlook and valuation, we give a “Buy” recommendation on the stock at the market price of $33.54, up by 3.23% as on 18 March 2021.

PPT Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

---

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine do not hold interests in any of the securities or other financial products covered on the Kalkine website.