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 positive cash flows for the year: For FY17, Praemium Ltd (ASX: PPS) reported a revenue and other income growth of 17% yoy (year on year) to $35.4 million, led by 44% increase in Global investment platform revenue to $17.2 million, and 8% increase in Portfolio services revenue to $14.7 million, from a 20% increase in billable portfolios for Praemium Portfolio. Gross margin improved to 79.3%, compared to 78.9% in the prior year, as the business continued to enhance its operating leverage through increasing recurring revenue streams. The company recorded 54% yoy growth in underlying EBITDA at $6.3 million, driven by record EBITDA for the Australian business segment at $10.6 million, with an EBITDA margin of 46%. Further, PPS witnessed 33% improvement in the UK business segment with EBITDA loss down to $2.2 million, driven by revenue in GBP up 26%, while expenses increased by 13% demonstrating improving scalability as it nears profitability. However, the company has reported NPAT of $0.7 million, which is 12% lower than FY2016 because of a higher tax expense for Australian company profits.
 

Financial summary; (Source: Company reports)
 
The company also recorded positive operating cashflows of $1.5 million for the year to 30 June 2017, a 57% improvement. Strong underlying cashflows of $6.5 million, reflecting improving operating leverage, were used to pay $3.1 million in Australian company tax (FY16 and FY17 periods) and absorb non-recurring costs, including $1.0 million for expenses incurred by the former board in terminating the CEO and defending the subsequent shareholder requisition which led to their removal. The Group’s net asset position at 30 June 2017 was $17,093,257 with $8,983,491 held in cash or cash equivalents, and the Group is now debt free.
 

Sustained revenue growth; (Source: Company reports)
 
Australian business maintains strong earnings: In Australia, PPS continued to invest in sales, marketing and implementation resources to accelerate new business on-boarding for the SMA platform (Separately managed account (SMA) is a modern investment platform solution providing a scalable proposition for wealth professionals). This has resulted in strong growth momentum, with record inflows this year of $1.3 billion. FUA was up 29% to $3.9 billion, with a 41% increase in the number of SMA investor accounting to almost 13,000. Further, it continues to attract new model managers by adding 5 new managers and 71 model portfolios. The Company’s retail superannuation solution, SuperSMA is up 127% to $657 million (comprising 17% of total platform FUA), and expects the trend to continue as advisers manage a growing book of retail superannuation funds.
 

Australian segment maintained strong EBITDA margin; (Source: Company reports)
 
Record year for International SMA: It has been a record year for the International business as the international SMA witnessed record inflows this year of £383 million, taking international FUA to £1.3 billion, a 43% improvement over last year, and the addition of the IMA is expected to contribute significantly to platform growth. The International platform has always offered 2 of the 3 key account types, the General Investment Account (GIA) and Individual Savings Account (ISA), but was missing the third key account type, the Self-Invested Personal Pension (SIPP). The International platform has seen strong uptake of the IMA solution offered in partnership with PortfolioMetrix since its launch in October 2016. Further, advisers are attracted by the ability to tailor a unique managed account solution based on very specific investor preferences as Praemium’s highly scalable platform technology is ideally suited for this application given its leading capabilities in portfolio rebalancing and reporting. On the other hand, CRM and financial planning suite is also making strong strides, with a new online fact find facility and several new key reports. Notably, PPS is seeing increasing take-up in the international market and expects this trend to continue with further important functionality.
 

International FUA; (Source: Company reports)
 
Smart Investment Management (Smart): The company’s in-house investment management team (Smart) has achieved high growth this year. FUA is up 62% to £407 million and investment performance has been exceptional with the performance of the Smartfund 80% Protected Fund, which protects 80% of fund value daily. The Growth fund is up 20% since launch in September 2015, so anyone who invested on day one is now at 120% of their original investment and hence is protected to 96% of the original investment amount (120% x 80% = 96%). Importantly, the ability to invest in higher risk, higher growth asset classes without the attendant risk makes Smartfund 80% Protected highly appealing in this low-yield environment.


Performance of Multi-asset strategies (1 July 2016 to 30 June 2017); (Source: Company reports)

Navigated through a period of extreme uncertainty: Despite the recent geo political uncertainties, global markets rallied and in many cases, reached new highs. Investors shrugged off worries about political uncertainty and flashpoints such as North Korea, and instead focused on fundamentals like company earnings and employment numbers. Over the period, PPS traded around these events but there were challenges owing to underweight UK equities that faced uncertainty while Brexit negotiations continued and, there was reduced exposure to Europe due to political uncertainty, while there was an increase in North American, Asian and Emerging Markets equities. Notably, Smart has navigated through a period of extreme uncertainty by taking sensible, risk-adjusted positions which added solid value to the portfolios.


Quarterly FUA movement; (Source: Company reports)

Opportunity across global wealth management markets: Following a record year for platform inflows in FY2017, the new year has started strongly both in Australia (FUA now $4.15 billion) and internationally (FUA now £1.37 billion). With an expanding client base from a strong global pipeline and enhanced product range, the company believes that Praemium as the SMA leader with the best reporting & rebalancing capability is ideally placed and expects to accelerate. In terms of capital management, the Company continues to record positive operating cashflows, and will utilize its free cashflow to re-invest in product delivery and expand its sales and marketing footprint.


Market forces are generating significant opportunities for Praemium; (Source: Company reports)

Improvement in UK business: UK revenue grew by 26% for the year, while expenses increased 13%. Notably, Smartfund 80% Protected FUA has reached £187m in the 21 months since launch and, further investments in the SIPP market have been planned post acquisition of Wensley Mackay. Particularly, there has been a reduction in losses of the International businesses with UK’s EBITDA loss reducing to $2.2 million, driven by revenue in GBP. The company acquired Wensley Mackay Self Invested Personal Pension (SIPP) business in November 2016. While the Australian business is growing & is profitable, international business is exhibiting strong operating leverage which will drive improving financial performance in the future (reduced Asia’s EBITDA loss to $1.2 million).
 

UK Revenue and Expenses trend; (Source: Company reports)

Stock Recommendation: The stock was down 8.5% in the last one year but has risen 17.1% in the past three months (as on 21 August 2017). PPS continues to deliver operating leverage through cost efficiencies and to drive the UK business towards profitability.  While the Australian business is on strong foot, with an expanding client base from a strong global pipeline and enhanced product range, the company’s investment platforms are positioning it in a better place to accelerate the revenue from international segment.  We give a “Buy” recommendation on the stock at the current price of $0.450


PPS Daily chart; (Source: Thomson Reuters)

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