Company Overview: Pinnacle Investment Management Group Limited is an Australia based investment management company which provides distribution services and business support and is engaged in developing and operating an investment management business. Pinnacle group provides its Affiliates with equity, seed capital and working capital and offers economies of scale and financial support services. It focuses on supporting each of its Affiliates with increased investment in distribution channels. The company has diversified into new asset classes including Metrics Credit Partners, Omega Global Investors, Firetrail Investments, Longwave Capital Partners and Riparian Capital Partners.


PNI Details
 
Diversified Asset Base and Strong Balance Sheet: Pinnacle Investment Management Group Limited (ASX: PNI) is an Australia based multi-affiliate investment management firm which provides superior distribution services, business support and responsible entity services, allowing the investment managers to focus on delivering investment outperformance. As on 3 March 2020, the market capitalisation of the company stood at ~$949.4 million. In the Annual General Meeting, the top management stated that the company has prospered in benign financial conditions and has expanded to cater current financial growth. During FY19, the company diversified into new asset classes, including Metrics Credit Partners, Omega Global Investors, Firetrail Investments, Longwave Capital Partners and Riparian Capital Partners and has a very diversified client base with 78 institutional separate account clients and 95 separate institutional accounts across its affiliates. Retail FUM as a % of total FUM has witnessed an increase from 8.3% in FY13 to 21.4% at FY19, demonstrating the growing resilience of PNI’s business. In the same time span, NPAT (net profit after tax) from continuing operations went up by 32% to $30.5 million from $23.1 million in the prior year. This resulted in earnings per share to increase by 28% from 14.3 cents in FY18 to 18.3 cents in FY19. In FY19 shareholders have benefitted from a fully franked ordinary dividend of 15.4 cents per share, up from 3.3 cents in FY16, representing a compound growth rate of 67% p.a. over the period. Over the span of 4 years from FY15 to FY19, the company witnessed a CAGR of 29.08% in revenue. In addition, the company has retained a strong balance sheet with cash and principal investments of $51.2 million at the end of FY19, up from $31.4 million in FY18.

The company has recently released its half-year results for the period ending 31 December 2019 and stated that it continued to invest in its diversified platform in order to boost growth. During 1H20, PNI has increased its exposure to global equities, private capital, fixed interest and credit, and liquid alternatives and has reported a substantial increase in net profit and retail FUM. 

PNI will continue to evolve because of its increasing exposure to industry funds and is well placed to receive higher fees in capacity-constrained strategies. The company remains open to potential Horizon 3 opportunities and will continue to invest in medium-term growth with horizon 1 and 2. The company’s decision for the diversified asset class and investment in distribution platform will result in corporate stability and will eventually meet the evolving needs of the clients. 


FY19 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Pinnacle Investment Management Group Limited. Macoun Generation Z Pty. Ltd. is the largest shareholder in the company, with a percentage holding of 11.42%. 


Top 10 Shareholders (Source: Thomson Reuters)
 
Increasing Returns to Shareholders and stability in Balance Sheet: During 1H20, EBITDA margin witnessed an improvement over the 1H19 indicating the increasing profitability of the company. In the same time span, net margin of the company stood at 121.1%, higher than the industry median of 27.2%. This indicates that the company is managing its costs well and is able to convert its revenue into profits. During 1H20, Return on Equity of the company was 7.8% as compared to the industry median of 4.2%. This implies that the company is well deploying the capital of its shareholders and is capable of generating profits internally. In the same time span, current ratio of the company stood at 6.33x, higher than the industry median of 1.42x. This indicates that the company is liquid enough to pay off its current liabilities using its current assets. During 1H20, Assets/Equity ratio of the company was 1.24x, lower than the industry median of 4.45x and Debt/Equity ratio of the company stood at 0.2x as compared to the industry median of 0.64x. This indicates that the business is financed with a significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet.  


Key Margins (Source: Thomson Reuters)
 
Pinnacle Partners with Coolabah Capital: The company has recently announced that it has entered into an agreement to acquire 25% equity interest in Coolabah Capital Investments Pty Ltd for a consideration of $29.1 million, along with additional $5 million to be paid upon the business reaching certain milestones over the next 18 months to 4.5-year period. The company, in another announcement, stated that it is undertaking an employee share scheme buy-back of 150,000 shares, which will be implemented on 4 March 2020. PNI also notified that 200,000 exercisable options have lapsed in accordance to the company’s Employee Option Share Plan (EOSP).

Significant Increase in Retail FUM and NPAT: The company has recently released its interim results for the period ending 31 December 2019, wherein it reported an increase of 32.6% in revenue to $11.4 million and a growth of 36.6% in NPAT to $13.8 million. This resulted in the EPS to increase by 33% to 8.1 cents per share, up from 6.1 cents in the pcp. The company has witnessed a growth of 13.4% in Affiliates’ funds under management (FUM), which stood at $61.6 billion at the end of the period, comprising net fund inflows of $2 billion, market movements or investment performance of $2.3 billion and acquired FUM of $3.0 billion. PNI remains well-positioned to deliver improved business and financial performance in the medium term, owing to its deep knowledge and continued outperformance in comparison to benchmarks. The company has proven stable distribution and sustained growth capabilities. Owing to the decent financial performance and its outperformance of benchmark since the past 5 years, the company has declared a fully franked interim dividend of 6.9 cents per share which is to be paid on 20 March 2020. In the same time span, the company reported a solid balance sheet with cash and principal investments of $44.7 million and a debt facility of $30 million.

During 1H20, the company has diversified its client base with over 170 institutional clients in Australia and an exposure of 18% to industry funds. In the same time span, the company has won new businesses from a diverse range of investors and domiciles. The company’s distribution has reached across approximately 9,500 advisers and 3,500 practices. Pinnacle Investment Management Group Limited has invested significantly in retail distribution and has generated substantial retail FUM of $14.9 billion in 1H20. 


Retail FUM Evolution (Source: Company Reports)

Growth Opportunities and Future Expectations: The company has laid the groundwork for further growth, diversity and resilience, and expects to deliver growth with existing affiliates with horizon 1 and 2. It communicated a range of Horizon 2 initiatives underway, including New affiliate ‘builds’, Direct to retail consumer, ETF builds, Offshore initiatives and ongoing high-quality new affiliate opportunities. The company remains open to potential horizon 3 opportunities and will maintain a culture to attract exceptional individuals. PNI will invest in distribution platforms in order to grow ahead of its affiliates. It aims to be ahead of the market and will bring further diversification to its asset base.

PNI will further invest in international and direct to retail customer distribution facility and is expecting a robust and flexible balance sheet in the upcoming years. The company is strategizing to provide high-quality distribution and infrastructure services and will remain focused on investing, to promote strong performance and FUM growth. The company continues to seek world-class investment teams in new asset classes. It is strategically valuable for Pinnacle group to have capital available to seed new Affiliates and facilitate Affiliate equity recycling. 


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: Price to Book Value Based Relative Valuation Approach

Price to Book Value Based Relative Valuation Approach (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of PNI gave a return of 17.66% in the past six months and a return of 9.15% in the past one month. The stock is also inclined towards its 52-weeks’ low level of $3.8, proffering a decent opportunity for accumulation. The company has proven its ability to build high-quality investment managers and facilitate substantial success quickly. In the past year, the company has outlined a strong and flexible balance sheet and has reported significant increase in net profit. Considering the returns, growth opportunities, improvement in margins and returns to shareholders, we have valued the stock using a relative valuation method, price to book value multiple, and arrived at a target price of higher single-digit upside (in percentage terms). Hence, we recommend a “Buy” rating on the stock at the current market price of $4.960, down by 3.314% on 03^rd March 2020. 

 
PNI Daily Technical Chart (Source: Thomson Reuters)

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