Company Overiew: Praemium Limited is a provider of investment platforms, investment management, portfolio administration, client relationship management (CRM) solutions and financial planning tools to the wealth management industry with offices in Australia, the United Kingdom, Jersey, Armenia and Hong Kong. The Company's segments are Australia, the United Kingdom and Asia. Its investment platform is based on Separately Managed Accounts (SMA) technology. An SMA allows wealth managers to implement investment strategy changes across a number of client accounts and is available in both retail super (SuperSMA) and non-super. It provides Smart Investment Management (Smart), which is an in-house investment management solution. Its WealthCraft gives financial professionals the tools and services to develop and expand their wealth management business. Its V-Wrap system provides reporting solutions across a range of reports and for any date or range of dates.


PPS Details

Continued Growth Witnessed in Praemium 1H FY 2019 Results: Praemium Limited (ASX: PPS) happens to be a popular name which is engaged in the provision of managed accounts, investment administration and financial planning technology platforms. As on March 26, 2019, Praemium has a market capitalization of around $198.59 million. The company had reported results for 1H FY 2019 in which it posted underlying EBITDA amounting to $5.1 million which reflects the rise of 19% on YoY basis. During the same period, the company also witnessed an increase of 7% in revenue and other income to $22.9 million which was through the key product lines, in particular, Platform revenue, which witnessed the rise by 9% and stood at $12.9 million. As at December 31, 2018, the funds under administration stood at $8.4 billion which reflects the rise of 14% as compared to the prior corresponding period. The funds under administration comprise $5.9 billion for Australia platform and $2.6 billion for the International platform. The Company managed to deliver numerous strategic and growth initiatives which might support it in witnessing long-term growth. It witnessed a rise of 30% with respect to clients globally in 2018 calendar year, and there was also a major technology upgrade as well as a new rebrand for the company’s global investment platform which got released on February 4 after significant deployments towards R&D.

Moving forward, the company is expected to be helped by strong cash-generation capabilities, deployments towards technology and by an expansion of the addressable market in Australia because of the technology upgrade. Also, the company’s solid cash reserves can also act as a tailwind and it plans to utilize these reserves towards the growth and strategic opportunities. Along with the company’s expanded sales & marketing capability, PPS is focussed towards accelerating its growth.
 

Key Metrics Trend (Source: Company Reports)

Strong Cash Generation Capabilities Might Act as Key Catalyst: Praemium has a robust cash position which might help in making deployments towards its strategic business objectives and it can also provide it with sufficient headroom for growth. At the end of December 2018, the company is having a decent current ratio of 1.69x while its return on equity (or RoE) stood at 3.1%. The company’s gross margin stood at $17.1 million in 1H FY 2019 as compared to $15.6 million in the same period of previous year. The company has been maintaining respectable RoE from the past few years which demonstrates that it is efficient in delivering returns to its shareholders. This maintenance of a decent level of RoE might attract the attention of market players.

 
Margins (As a % of Net Revenues) (Source: Company Reports)

Favourable Momentum in Key Metrics Supported Australian Business: The favourable momentum in the Australian business was witnessed in 1H FY 2019 as its revenues rose by 13% on the YoY basis. The business encountered robust inflows to Managed Accounts investment platform and, as a result, there was a rise of 28% in SMA revenue, while portfolio services revenue grew by 2% from the growth of institutional clients on Praemium VMA (or Virtual Managed Account). The EBITDA of Australian business amounted to $6.5 million which implies a rise of 12% as compared to 1H FY 2018.

We expect that the company’s Australian business would be supported by the deployments which have been done to help the revenue generating opportunities. The business has also ramped up the R&D investment towards proprietary technology which might also act as a primary growth catalyst for the business moving forward. 

Performance of Global Equity Markets Weighed Over International Business: Praemium’s International business comprises of the United Kingdom and Asia business units. The EBITDA loss of International business fell by 4% and stood at $1 million which comprises UK’s EBITDA loss amounting to $0.6 million and Asia’s EBITDA loss of $0.4 million. The UK business got negatively impacted by declines witnessed in the global equity markets and outflows with respect to the Smartfund Protected range of managed funds.

However, EBITDA loss of the Asia business fell 31% and stood at $0.4 million and the revenue witnessed a rise of 116% as compared to the prior reporting period. This was because of a rise in WealthCraft CRM and planning software licences in 2018, which increased 43% internationally from 503 to 718. We expect that the UK business would continue to be influenced by the global equity markets’ performance and if the broader market environment stabilises, it might support this business to a large extent.

Decent Balance Sheet and Cash Flow: In the half year ended December 2018, Praemium managed to maintain a robust balance sheet with the net assets amounting to $20.9 million coupled with $11.3 million cash. The company’s total assets witnessed a rise of 7% and stood at $32.4 million in 1H FY 2019 mainly from $2.3 million in capitalization of the R&D costs. The company is debt free and managed to post positive cash flows. Its operating cash flows witnessed a rise of 4% above to $1.9 million. The higher operating cash flows primarily demonstrate the receipts from customers. However, these effects got partially offset by higher payments towards employees and suppliers. As of now, the company has strong cash reserves to further invest in earnings enhancing initiatives, including organic and strategic opportunities. It can also help in managing any future foreign currency impacts of the company’s overseas operations.


1HFY19 Cashflow Statement (Source: Company Reports)

Launch of Major Technology Upgrade: Praemium Limited had earlier made an announcement about the launch of major technology upgrade and new rebrand for the global investment platform. As a result, the company’s addressable market in Australia has been expanded from $62 billion Managed Accounts segment to $860 billion overall platform market. The company stated that financial advisers would now be having expanded investment universe consisting of 1,300 domestic and international model portfolios and single investment assets.

A Look at Key Updates: Praemium had earlier announced that they have renewed a major contractual arrangement with Asgard Capital Management Limited to provide portfolio administration services. PPS has been providing portfolio administration to Asgard Capital from the past several years and the current contract was to expire in the month of November 2019. However, Asgard’s contract has been extended beyond November 2019, for a further 6 years with a minimum period of 3 years. In the quarter ended December 2018, the company’s combined quarterly gross inflows stood at $768 million. The Australian business encountered gross inflows amounting to $585 million while the gross inflows with respect to international business stood at $183 million. The company stated that it witnessed inflow momentum even though there was significant volatility in the global markets.
 

December 2018 Quarterly Update (Source: Company Reports)

What Might Drive Growth for Praemium: The top management of Praemium Limited had recently given inputs with respect to Hayne Royal Commission report. The company stated that the advisers would be required to work harder in order to garner revenue given the increased compliance requirements. It would, therefore, be critical that they use technology to find the efficiencies elsewhere. The company makes the complex simple with the help of its superior corporate-actions capabilities, portfolio analytics, and rebalancing engine.

Moving forward, the company would be focusing on incorporating the new technology into its London-based platform. The UK market has been witnessing a steady increase in the usage of professionally-run model portfolios, and the company is seeing an increase in the interest in its managed accounts platform in the UK as well as in international markets.

Stock Recommendation: The stock of Praemium Limited has delivered -22.22% return in the span of the previous three months while, in the time frame of the previous six months, it posted -57.02% return. However, the prudent deployments towards technology might support its long-term growth objectives within the wider addressable market. Also, Praemium’s half-year results reflected that it is having a robust balance sheet which might help it financing the growth moving forward. From the analysis standpoint, the financials are expected to improve going forward and current trading levels offer a good investment opportunity post a 22.83% fall noted in last one month. Hence, we recommend a “Speculative Buy” rating on the stock at the current market price of A$0.510 per share (up 4.082% on 26 March 2019).

 
PPS Daily Chart (Source: Thomson Reuters)

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