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Praemium Ltd

Sep 26, 2016

PPS:ASX
Investment Type
Small-Cap
Risk Level
Action
Rec. Price ($)
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
 
Acquisition of Wensley Mackay: Praemium Ltd (ASX: PPS) has entered into an agreement to acquire Wensley Mackay Limited which is a pension provider in the United Kingdom. The group is acquiring this for the consideration of £600,000 in cash. This transaction is pending approval including one from the Financial Conduct Authority (FCA), the UK regulator. Once the transaction is completed, it is expected to be earnings accretive in the first year. Moreover, PPS operates in UK for its discretionary investment platform by the company’s proprietary Separately Managed Account (SMA) technology. Meanwhile, PPS offers the advisers to access to investment options through the Individual Savings Accounts (ISAs) and General Investment Accounts (GIAs). However, around two-thirds of household wealth in the UK comes from private pension savings, primarily via Self Invested Personal Pension (SIPP). Based in Cumbria, England, Wensley Mackay is a privately owned SIPP provider authorized by the Financial Conduct Authority (FCA), the UK regulator. There are currently over one million SIPP schemes in a market that is rapidly expanding, due in large part to recent legislative changes in the UK. The platform based SIPPs have captured a large part of this growth and accounts for around half of all current SIPPs. Additionally, the strategic acquisition of Wensley Mackay would enable PPS to enter the UK private pension space and access a significant new source of funds under administration (FUA) through its existing adviser relationships. The acquisition would also offer PPS with the immediate access to the market that would be supported by a company with a strong reputation for service delivery. In addition, the UK, platform providers have observed that the retirement market started to grow rapidly after the pension reforms was introduced in April 2015, which de-mandated the use of annuity investments. The investors are exiting annuities and seeking other alternative options for their retirement savings, with a major shift to pension schemes like SIPPs that offer a wide range of investment options. Meanwhile, adding a SIPP solution to PPS’ UK platform proposition enhances the growth prospects by offering a complete package to the clients. Additionally, coupled with the range of innovative investment products that PPS offers including the 80% Capital Protected funds, the solution is ideal for retirees. Accordingly, there is an expected considerable upside from the UK and international distribution channels.
 
Turnaround in FY 16:PPS reported the revenue growth of 23% on a year over year (yoy) basis to $30.1 million for the year ending on 30th June 2016. The group delivered a 72% growth in the underlying earnings before interest, tax, depreciation and amortization (EBITDA) to $3.8 million, as compared to $2.2 million in the fiscal year ending 2015. The revenue growth is contributed from the global investment platform revenue growth of 43% yoy to $12.0 million during the period as compared to the prior corresponding period, driven by 25% growth of the funds under administration on PPS’ SMA platforms to $4.8 billion. The revenue also grew due to the portfolio services revenue growth of 12% yoy to $13.6 million, from continuing growth in PPS’ portfolio administration and reporting software (V-Wrap). On the other hand, PPS reported net profit after tax (NPAT) of $0.8 million during the period, as compared to a $2.1 million loss for the prior corresponding period. Even though PPS has reported a positive operating cash flow of $1.0 million, these were lower as compared to the fiscal year of 2015, on the back of the timing of working capital inflows (received in July 2016). Moreover, the Australian R&D incentive is no longer available as a cash rebate and the inaugural payment of company tax. The closing cash reserves were $10.4 million as at 30th June 2016, and despite the sharp appreciation of Australian dollar in June 2016 after the impact of Brexit, PPS has strong cash reserves to support its strategic objectives and is making ongoing investment in the business.
 

Fiscal year of 2016 Financial Performance highlights (Source: Company Reports)
 
Improving Fiscal year of 2016 EBITDA by segment:PPS is building scale in key markets. In Australia, PPS has delivered strong earnings as the EBITDA grew 10% from prior year (24% increase to FY15 normalized) and PPS has maintained strong EBITDA margins of 48%. Moreover, PPS has significantly reduced UK losses. The EBITDA has improved 42% (32% in GBP) and the revenue grew 66%, while expenses rose only 20% (in GBP). Additionally, Asia is supporting the product development with $0.5 million billed in the second half of 2016 for Hong Kong bank project; further milestone billing is in FY17. There is a re-alignment of Asia cost base post completion of project build.


EBITDA by segment in Fiscal year of 2016 (Source: Company Reports)
 
New sales and new product development: Apart from the strong financial performance in FY 16 there was new sales and new product development. PPS global SMA platforms achieved record inflows and received a strong uptake in the newly launched Smartfund with 80% protected range. For this PPS was awarded as the International Platform of the Year. PPS V-Wrap portfolio administration software was further enhanced, including the launch of SMSF compliance and reporting. The ongoing enhancement of the V-Wrap product helped the company to deliver subscriber growth (in particular the major client win of JBWere).
 
International Business:PPS international platform business has continued its strong growth momentum, particularly in the past two years, which has resulted in narrowing of the operating losses. As there is potential for the significant upside from the international platform in the future, PPS has continued to build a quality proposition and remains focused on reaching inflexion to profitability in the near term.
 

SMA Adoption Scenario (Source: Company Reports)
 
Huge target market opportunity:The Australian platform market is currently worth of $672 billion and is expected to be rapidly growing to $900 billion by 2020. The SMA market is forecasted to grow from the current $18 billion to $60 billion by 2020 (35% CAGR). PPS’ SMA industry is leading with 17% market share. Moreover, SMA’s could deliver 75% of industry net flows as the financial services in Australia, continues to embrace SMA platform technology at an accelerating rate. As the market leader in the Australian SMA sector, PPS is well placed to benefit from advisers shifting from wrap platforms to SMA, and the company is much focused on delivering on the growth opportunities.


AUS Platform market (2016-2020) (Source: Company Reports)
 
Stock Performance:The shares of PPS stock rose 32.76% in the three months (as of September 23, 2016). We believe the rally to continue further as PPS continues to grow funds under administration through the acceleration of on-boarding of new SMA clients, by securing new clients to transform their business with a more efficient platform experience, to secure new model portfolio business for the Smartim and to expand distribution channels for the Smartfund 80% Protected range. Moreover, PPS continues to invest in product innovation to expand the platform capability and intends to focus on the key retirement market globally, including the acquisition of a UK pension business. Additionally, PPS continues to deliver operating leverage through the increase in profitability while continue to invest in growth, to drive the UK business towards inflexion and intends to consider potential bolt-on acquisitions which would deliver synergies. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $0.415
 

PPS Daily Chart (Source: Thomson Reuters)



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