Company Overview: Praemium Limited (ASX: PPS) is one of the leading contributors of scalable managed accounts technology, portfolio administration and CRM & financial advice software for the wealth management industry. Management has determined the operating segments that are used to make strategic decisions. It considers performance on a geographic basis and has identified 2 reportable segments, being Australia and International. Praemium Group has a distinctive proposition and has introduced several developments over the year to offer API links, trade matching that goes above and beyond on the crucial regulatory requirement.


PPS Details

 
Strong Financial Results and Broadening of the Addressable Market: Praemium Limited (ASX: PPS) is one of the leading providers of scalable managed accounts technology, portfolio administration and CRM & financial advice software for the wealth management industry. As on 31 March 2020, the market capitalization of the company stood at ~$93.98 million. In FY19, the company achieved solid progress across several growth-focused initiatives and focused on various key strategic initiatives in combination for delivering strong financial results. The company reported record annual gross inflows across Australia and International markets of $3 billion and platform Funds under Administration (FUA) of $9.5 billion in FY19. In the same time span, the company reported an increase of 12% in revenue to $45.1 million and reported an 11^th consecutive half of profit growth with underlying EBITDA of $11.4 million. During FY19, the company also witnessed a significant growth of 80% in NPAT to $2.5 million, which further resulted in an increase of 78% in earnings per share to 0.6 cents, up from 0.4 cents in FY18. Additional diversification of the business and the significant broadening of the company’s addressable market and product offering have resulted in a strong growth in international business, which continues its drive towards inflection. During the year, the company added VMA Administration Service (VMAAS), enabling financial planning practices to outsource the administration of its client portfolios to PPS, freeing up advisers from the time-consuming tasks associated with managing clients’ investment portfolios. With the inclusion of VMAAS, total FUA has hit the $20 billion mark and thus, has become an important driver of future growth. PPS’s International platform also delivered a strong performance in FY19, with record gross inflows of $849 million, up by 62% on the prior comparable period. Over the span of 3 years from FY16 to FY19, the company reported a CAGR of 15.88% in revenue and a CAGR of 48.42% in net income, reflecting a shift in advisors’ intentions and capturing of new opportunities over the years.

The company has also released its interim results for the period ending 31 December 2019 wherein it reported record H1 profit and record gross inflows in 6 months. The company is continuing to invest in products with enhancements to be delivered in FY20. PPS reported a positive momentum this half with investments supporting revenue-generating opportunities.

The company has upgraded to a fully integrated managed accounts platform and hence is competing with its full-service peers. PPS expects to deliver on its strategic initiatives by building upon the great strides it undertook in FY19. 


FY19 Financial and Operational Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Praemium Limited. BlackRock Investment Management (Australia) Ltd. is the largest shareholder in the company, with a percentage holding of 6.30%


Top 10 Shareholders (Source: Thomson Reuters)

Increased Profitability and Returns to Shareholders: During 1H20, EBITDA margin witnessed an improvement over the previous year and stood at 20.8%, up from 13.6% in 1H19. In the same time span, net margin of the company went up to 6.1% from 2.9% in 1H19. This indicates that the company is managing its costs well and is capable of converting its revenue into profits. During 1H20, Return on Equity of the company witnessed an increase over the previous year and stood at 5.6%, up from 3.1% in 1H19. This indicates that the company is well managing the capital of its shareholders and is capable of generating profits internally. In the same time span, current ratio of the company stood at 1.69x and Asset/Equity ratio of the company was 1.70x. 


Key Margins (Source: Thomson Reuters)

Continued Growth in Revenue and Substantial Increase in EPS: The company has recently released its interim results for the period ending 31 December 2019 wherein it reported an increase of 12% in revenue to $24.2 million and a record underlying EBITDA of $7 million, reflecting an increase of 24% on 1H19. The continued growth in revenue was a result of an increased Australia and International platform FUA, growth in platform services revenue and financial advice software revenue. In the same time span, the company reported a 12^th consecutive half of profit increase with net profit after tax of $1.4 million, an increase of 122% on 1H19. This resulted in a substantial increase of 120% in EPS. PPS delivered several strategic growth initiatives in half, including Global FUA surpassing a $20 billion for the first time and record platform gross inflows of $1.9 billion. During 1H20, platform revenue went up by 22%. Strong incremental revenue margins and future process automation to maintain scalability for new and lower margin products resulted in an improvement in gross margin to 85%, up from 83% in FY19. 

The group maintained a strong balance sheet during the half-year with net assets of $26.4 million and a cash balance of $14.7 million. PPS is debt-free and continued to generate positive cash flows, with operating cash flows increasing by 99% to $3.8 million.


1H20 Financial Highlights (Source: Company Reports)

Segment Performance: The Australian business continued its positive momentum this half with an increase of 13% on 1H19. In the same time span, Australia platform revenue went up by 22%, mainly due to the inflows to the Managed Accounts investment platform and increased portfolio services revenue by 6% from the growth of VMA and VMA Admin (VMAAS) portfolios. The company continued to invest in support revenue-generating opportunities, with a 36% increase in sales & marketing for supporting the pipeline of new business and maintain inflows momentum. The international segment of the company comprises the United Kingdom and Asian business units. During 1H20, platform revenue went up by 27%, due to an accelerating momentum in platform FUA, which witnessed an increase of 22% in this half-year. In the same time span, International’s EBITDA loss decreased by 1% to $1 million.

Future Expectations and Growth Opportunities: The company expects Australian specialist platforms to grow from 5% to 12% in 5 years and anticipates improving adviser efficiencies from VMAAS. The upgradation to a fully integrated managed accounts platform, including a new digital portal for advisers lifted the company to a position wherein it could compete with its full-service peers and has drawn great feedback from clients and prospects. The company is optimistic about the predictive capability of Insights (first AI app of PPS) and its potential to grow and expand. The company has placed its focus on improving the efficiency and effectiveness of the advice process and on assisting advisers to reduce client attrition.

PPS will continue to invest in products with enhancements to be delivered in FY20. It has strong cash reserves to further invest in earnings enhancing initiatives, including organic and strategic opportunities, as well as manage any future foreign currency impacts of its overseas operations. 


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: Price to Earnings Based Relative Valuation Approach

Price to Earnings 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 PPS is trading close to its 52-weeks’ low level of $0.190, proffering an excellent opportunity for the investors to enter the market. The company is pioneering R&D advancement that can support advisers in understanding and awareness of client satisfaction. PPS is also expanding its sales team in Australia and is recruiting for the UK and in key offshore markets for a bigger business development resource for 2020. Considering the trading levels, improvement in margins, decent financial performance despite softer market conditions and long-term positive outlook, we have valued the stock using price to earnings based relative valuation approach and have arrived at an indicative target price of lower double-digit growth (in percentage terms). For the said purposes, we have considered OneVue Holdings Ltd (ASX: OVH), EQT Holdings Ltd (ASX: EQT), etc. as peers. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of $0.240, up by 4.348% on 31 March 2020. 


PPS Daily Technical Chart (Source: Thomson Reuters)

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