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
 
Outstanding September quarter performance: Praemium Ltd.’s (ASX: PPS) stock rallied about 26% on October 10, 2017 as the group reported its September 2017 quarter result with record global quarterly inflows of $749 million, record Australian quarterly inflows of $587 million, and record levels of funds under administration (FUA) exceeding $6.6 billion. The Australian inflows were driven by strong inflows from new clients and growth from existing clients. The International business’ inflows of £97 million for the September quarter were the third highest on record. Further, there has been a 217% growth in the Smartfund range of multi-asset funds that reached £254 million in FUA, in the past 12 months. The group is progressing well with regards to its growth momentum and aims to invest in technology, product, sales and marketing, for the next leg of growth while leveraging opportunities from the rapidly growing SMA (Separately Managed Accounts) space.


Gross Inflows and FUA, platform & funds (Source: Company Reports)
 
Growth in assets:Praemium had crossed $6 billion of FUA in FY17. Particularly, the group’s FUA surged 28% year on year (yoy) to $6.1 billion during FY17 while the assets were enhanced by 24% yoy to $1.9 billion. The group’s revenues surged 17% on a yoy basis to $35.4 million during FY17 while their underlying EBITDA surged 54% yoy to $6.3 million. Praemium forayed into the UK pension market via their SIPP business (Self-Invested Personal Pension) acquisition. They launched a Praemium SIPP on the International platform as well as an IMA (Individually Managed Account) service in the UK. The group has transitioned major institution’s clients to the Praemium Portfolio service and is piloting a full SMSF portfolio service for SMA clients. 


Solid international performance (Source: Company reports)
 
Solid underlying EBITDA rise: The group’s revenue and other income enhanced 17% to $35.4 million during FY17 driven by their solid global investment platform revenue performance which rose 44% to $17.2 million. Strong FUA and their SMA platforms drove the group’s performance. Their Portfolio services’ revenue enhanced 8% to $14.7 million, as compared to a 20% rise in billable portfolios for Praemium Portfolio, administration and reporting software (formerly V-Wrap). The group also enhanced their gross margin to 79.3% in FY17 as compared to 78.9% in the same period last year on the back of their ongoing better operating leverage through rising recurring revenue streams. As a result, the group delivered a solid underlying EBITDA growth of 54% yoy to $6.3 million during the year. The group’s EBITDA for the Australian business segment reached $10.6 million, with EBITDA margin reaching 46%. The group’s UK business improved 33% controlling their EBITDA to $2.2 million, boosted by revenue in GBP which rose 26%. PPS’ Net Profit before Tax (NPBT) enhanced 42% yoy to $2.2 million. On the other hand, the group’s full year NPAT slipped by 12% yoy to $0.7 million impacted by a rising tax expense for Australian company profits. However, Praemium delivered a positive operating cash flow which rose 57% yoy to $1.5 million for the year to 30 June 2017. Underlying cash flows reached $6.5 million, on the back of a better operating leverage, which were used to pay $3.1 million in Australian company tax (FY16 and FY17 periods). The group reported for a cash reserve of $9.0 million as of June 30, 2017.


Improving top line (Source: Company reports)
 
Rising demand for SMA platform: The group’s SMA platform is witnessing a better productivity which is consequently leading to better profits. Their SMA platform has set new records across both the Australian and International platforms during FY17. Their Australian SMA delivered an outstanding performance during the year, with record inflows of $1.3 billion. The group’s FUA surged 29% to $3.9 billion, while their SMA investor accounts enhanced 41% to over 13,000. The group added five new managers and additional 71 model portfolios indicating their ongoing penetration. Their retail superannuation solution, SuperSMA, performed even better, surging 127% to $657 million during FY17. SuperSMA currently accounts over 17% of total platform FUA and currently provides over 300 model portfolios. The international SMA also had record inflows this year of £383 million, leading the international FUA to £1.3 billion, which is a 43% improvement as compared to the last year. The group’s IMA addition would be a major driver to their platform growth. Even their Smart Investment Management delivered a record year wherein their overall FUA surged 62% to £407 million. The group’s FUA of Smartfunds (protected and unprotected) surged 117% to £232 million with solid uptake of Smartfund which is 80% Protected with WealthCraft CRM.  


Praemium SMA is a proven market leader (Source: Company reports)
 
Market opportunity:The group expects their strong retail superannuation solution, SuperSMA, to continue in the coming periods as advisers manage a growing book of retail superannuation funds. Australian platform market is forecasted to grow to $900 billion by 2020 as compared to $732 billion in 2016. Further, SMA segment is expected to deliver a better CAGR of 35% from $18 billion to $60 billion by 2020. SMAs would be able deliver 75% of industry net flows. The group would be mainly focusing on the ability for international equities to be traded via their SMA platform. Moreover, the group’s international investments would comprise their Investor Portal platform for a complete picture of their financial position. The group’s launch of the Praemium Retirement Account, based on the Wensley Mackay SIPP, would boost their platform proposition. The group reported for a positive start to FY18 for platform inflows after delivering an outstanding performance in FY17 at Australia (FUA of $4.15 billion) as well as internationally (FUA of £1.37 billion). PPS continues to expand their client base from a strong global pipeline and enhanced product range, and is targeting to be a SMA leader. They are currently having a solid pipeline of new business, which would lead to be an ongoing momentum in SMA. As per the industry dynamics, rising regulation in Australia as well as the UK and current scenario across Europe and offshore markets, is driving financial advisers to look for new revenue sources and become wealth managers. Moreover, rising demand for transparency is leading more platforms for offering professional investment management, beneficial ownership of assets and tax advantages. Other driver is the expanding retirement savings in the global markets, with mandated superannuation and pension contributions which would sustain long-term industry growth. Independent financial adviser networks are growing with the new entrants which is a major shift away from institutional platforms, with technology disrupting incumbent business models. The group sees major opportunities through these industry changes and accordingly is offering an entire integrated and value-enhancing solutions’ platform to financial advice businesses. Their SMA technology would enable businesses to drive major efficiencies at scale, while the company is well positioned to enhance their penetration in financial services’ markets.


PPS diversified portfolio (Source: Company reports)
 
Stock performance: The stock of PPS has delivered decent gains in last couple of months given their record FUA. The group recently appointed Mat Walker as Head of Product and Marketing who would join the group next month. For quite some time, PPS has been making investments to boost the business, and accordingly, has enhanced their sales and marketing resources by 50%. The group finished implementation into portfolio for new institutional client while adding new functionality that comprises new reports, upload tools and major regulatory upgrades (AMIT, CRS). The group continues to improve their SMA with digital on-boarding, unique blended model functionality and has even expanded robo-advice platform. Their Retail superannuation investment menu expanded to over 300 model portfolios. The group has a 98% of recurring revenue and their second half performance was better than the first half of 2017 leading to a revenue of $18.2 million against a revenue of $16.4 million (excluding $0.8m R&D incentive) in the first half of 2017. The group expects their Platform and Smartfund inflows to continue to accelerate, and is also planning for a full rollout of digital investor portal and a new account opening portal planned for FY2018. We believe that the bullish momentum in the stock would continue, and accordingly, we give a “Buy” on the stock at the current price of $0.510
 

PPS Daily Chart (Source: Thomson Reuters)

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