Company Overview: Pinnacle Investment Management Group Limited (ASX: PNI) is an Australian based investment management company that provides distribution services and business support and is engaged in developing and operating 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 Healthy Balance Sheet: Pinnacle Investment Management Group Limited (ASX: PNI) is an Australian based multi-affiliate investment management firm that provides superior distribution services, business support and responsible entity services, allowing the investment managers to focus on delivering investment outperformance. As on 21 July 2020, the market capitalization of the company stood at ~$816.42 million. The company has prospered in benign financial conditions and has expanded to cater to current financial growth. During FY19, the company diversified into new asset classes and retains a diversified client base with 78 institutional separate account clients and 95 separate institutional accounts across the company’s affiliates.
During FY19, Retail FUM 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 went up by 32% to $30.5 million from $23.1 million in the prior year. This resulted in basic 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. The company also reported a healthy balance sheet with cash and principal investments of $51.2 million at the end of FY19, up from $31.4 million in FY18.
During 1H20, the company continued to invest in a diversified platform to boost growth. 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 is likely to evolve because of its increasing exposure to industry funds and seems to be 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.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
Increasing Returns to Shareholders and Stability in Balance Sheet: During 1H20, EBITDA margin witnessed an improvement over 1H19, indicating increased profitability of the company. In the same time span, net margin of the company stood at 121.1%, higher than the industry median of 27.9%. This indicates that the company is managing its costs well and can convert its revenue into profits. During 1H20, Return on Equity of the company was 7.8% as compared to the industry median of 3.8%. This implies that the company is well deploying the capital of its shareholders and can generate profits internally. In the same time span, current ratio of the company stood at 6.33x, higher than the industry median of 1.38x. 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 4.51x and debt/equity ratio of the company stood at 0.2x as compared to the industry median of 0.56x. 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: Refinitiv, Thomson Reuters)
Decent Increase in Retail FUM and NPAT: During 1H20, the company reported an increase of 32.6% in revenue of $11.4 million and 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) to $61.6 billion, which comprises of net fund inflows of $2 billion, market movements or investment performance of $2.3 billion and acquired FUM of $3.0 billion. The company has proven stable distribution and sustained growth capabilities. In the same time span, the company reported a healthy 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 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)
Outlook: 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 expects a range of Horizon 2 initiatives including New affiliate ‘builds’, Direct to the 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 to grow ahead of its affiliates. It aims to add further diversification in its asset base from Global equities, Fixed income, Private capital, and absolute return.
PNI will further invest in international and direct to retail customer distribution facilities 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 enabling decent performance and FUM growth. It is strategically valuable for Pinnacle Group to have capital available to seed new Affiliates and facilitate Affiliate equity recycling.
Key Risks: The investment in the company is subject to various risks and uncertainties, which may have a material impact on the company’s performance. These include the fixed income risk, i.e., duration and market risks. COVID-19 has also exposed the company to illiquidity risks which are associated with high private market exposures and impacted the magnitude of rebalancing into the oversold assets. The short-term market volatility makes the portfolio transaction risky.
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)
Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months
Stock Recommendation: PNI seems to be well-positioned to deliver improved business and financial performance in the long term owing to its deep knowledge and its ability to outperform benchmarks. As per ASX, the stock of PNI gave a return of 34.66% in the past three months and a return of 11.42% in the past one month. The stock is trading close to its 52-weeks’ average level and is proffering a decent opportunity for accumulation. The company has proven its ability to build high-quality investment managers and facilitate substantial success quickly. The company has earned performance fees totaling approximately $25.8 million at 100% gross, in aggregate. This may have a positive impact of ~$6.7 million on the PNI’s NPAT. We have valued the stock using the Price to Earnings multiple based illustrative relative valuation and have arrived at a target price, offering an upside of low double-digit (in percentage terms). Considering the decent returns in the past three months, long-term growth opportunities, improvement in margins and returns to shareholders, we recommend a “Buy” rating on the stock at the current market price of $4.44, up by 1.139% on 21 July 2020.
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PNI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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