Company overview - 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

Record inflows in June quarter drives FUA for FY17:  Praemium Ltd (ASX: PPS) has reported 34% yoy growth in funds under administration (FUA) by surpassing $6 billion for the June 2017 quarter. The overall growth in FUM is driven by robust quarterly inflows of $554 million across Praemium’s global platforms; inflows of $364 million for the Australian business and $190 million (£113 million) for the International business. In Australia, quarterly inflows of $364 million were the highest ever reported with growth in retail superannuation. Further, FUA in Praemium’s retail superannuation offering (SuperSMA), reached $657 million and now comprises 17% of the Australian SMA (Separately Managed Account) platform, up from 15% in the previous quarter. Moreover, international 2017 quarterly inflows are 64% higher than the average quarterly figures for 2016, while a key highlight for the UK platform has been the success of the IMA (individually managed account) service that was launched in late 2016. Globally, annual inflows grew by 24% yoy to $1.9 billion were a 24% increase over the prior financial year, driven by enhancements to market-leading SMA platform as well as the expansion of sales, marketing and implementation resources. Moreover, PPS has launched its new pension offering on March 31, 2017, the Praemium Retirement Account for UK and international markets after a full roll out to all IFA partner firms.
 

Funds under administration; (Source: Company reports)

During FY17, the company witnessed increasing adoption of the Australian SMA platform, with a 41% increase in investor accounts and 71 new model portfolios added, broadening the platform’s functionality and distribution capability. The International business also recorded robust growth, with increasing engagement from existing clients and new clients driving account numbers up 24%. Praemium’s in-house investment management proposition of model portfolios and multi-asset funds grew to £407 million (equivalent to $689 million) as at 30 June 2017, representing a 65% increase in the past 12 months in local currency. The Smartfund range of multi-asset funds has reached £232 million in FUA, following record inflows of £46 million for June quarter.


Quarterly funds flow summary; (Source: Company reports)

Improvement in UK business: Praemium Ltd (ASX: PPS) recently reported its financial results for the half year ending 31 December 2016 entailing a record 39% growth in EBITDA to $2.6 million over H1 FY16. There was a 16% rise in revenue and other income to $17.2 million. However, the net profit declined by 57% yoy to $0.58 million due to increased costs and commissions. This was the sixth consecutive half of profit improvement for the group. The Australian SMA market is expanding quickly and EBITDA was of the order of $4.6 million with EBITDA margins of 41%. At the same time, PPS also commented that it is witnessing an improvement in UK revenue (21% growth) relative to the expenses. Particularly, there has been a reduction in losses of the International businesses with UK’s EBITDA loss reducing by 34% to $0.7 million. In local currency, UK revenue and other income witnessed a rise of 51% including 2% from the acquisition of the Wensley Mackay Self Invested Personal Pension (SIPP) business in November 2016.  The group also reduced Asia’s EBITDA loss by 31% to $0.8 million. PPS also reported that record inflows during 1H FY17 led to a 29% growth in Global FUA to $5.4 billion at 31 December 2016.  The Group’s net asset position at 31 December 2016 was $16.9 million with $8.2 million held in cash.

The Group is debt free and continues to generate positive cashflows, representing further improvement in the company’s financial position. With the Australian operations now paying company taxes, $2.3 million was paid this half representing tax on company profits for the 2016 financial year and instalments for the 2017 financial year. The Group also funded the acquisition of Wensley Mackay from cash reserves, totaling $1.0 million. The Group has strong cash reserves to further invest in earnings-enhancing initiatives, including organic and strategic opportunities, as well as managing any future foreign currency impacts of overseas operations.


H1FY17 financials summary; (Source: Company reports)

Collaboration with fintech company, OneVue: Praemium Ltd has appointed OneVue as its superannuation administration partner which added 2,700 members and $425 million in assets to OneVue’s superannuation service while PPS will leverage from fast-growing retail superannuation offer. OneVue Holdings is an Australian listed company on the All Ordinaries Index. OneVue is a fintech company that partners to disrupt the superannuation value chain. OneVue was winner in 2014 for Best Online SMSF and winner in 2013 for SMSF Providers Premium Service.

Acquisition of Wensley Mackay: Praemium Ltd (ASX: PPS) acquired United Kingdom based pension provider, Wensley Mackay Limited for the consideration of £600,000 in cash and the same is expected to be earnings accretive in the first year. 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).


UK SIPP (Self Invested Personal Pensions) market; (Source: Company reports)

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 also offers PPS with the access to the market that would be supported by a company with a strong reputation for service delivery. PPS believes that the acquisition will help it gain a well-run regulated position although the business has a relatively small pension book of £50 million. Further, the SIPP sector is expected to get support from an ageing population. Thus, PPS indicates that this move with the current acceleration of platform assets is expected to drive the UK business toward profitability.


UK revenue and expenses trend; (Source: Company reports)

Turnaround in FY 16: PPS reported the revenue growth of 23% on a year over year (yoy) basis to $30.1 million and delivered a 72% growth in the underlying earnings before interest, tax, depreciation and amortization (EBITDA) to $3.8 million for the year ending on 30th June 2016. The revenue growth was driven by 43% yoy growth in the global investment platform revenue to $12.0 million and 25% growth of the funds under administration on PPS’ SMA platforms to $4.8 billion. 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.


FY16 Financial summary; (Source: Company reports)

Recommendation: The shares of PPS stock rose 21.2% in the past one year (as on 11 July 2016), while it is down 17.5% in the last six months. 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, and driving the UK business towards profitability. Hence, we give a “Buy” recommendation on the stock at the current price of $0.39
 

PPS Daily chart; (Source: Thomson Reuters)
  

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