Brokers Downgrade Perpetual

This story features PERPETUAL LIMITED. For more info SHARE ANALYSIS: PPT

Wealth manager Perpetual has revealed negative net flows in the June quarter and several brokers have become bearish on the fund manager's growth outlook.

-Market movements, investment performance likely drivers of growth in FUM
-Some support for the share price from the dividend yield
-Global equity strategy not seen attracting new flows
 

By Eva Brocklehurst

Wealth manager Perpetual ((PPT)) has revealed negative net flows in the June quarter and several brokers have become bearish on the growth fund manager's outlook.

Outflows consisted of -$700m worth of higher-margin Australian equities and -$300m in lower-margin cash and fixed income. Funds under management (FUM) decreased -$1.5bn in the quarter, driven by -$1bn in net outflows and -$400m in net annual distributions.

Outlook

Ord Minnett downgrades to Lighten from Hold, given the performance of the stock relative to the market since the first half result. This comes despite expectations for a benign flow environment in the near and medium term. Market movements and investment performance are likely to be the main drivers of growth in funds under management, in the broker's view.

Ord Minnett believes forecasts for a fully franked dividend yield of around 5% provide some support to the share price but with no sign of meaningful flows in the near term, earnings are largely in the lap of market movements.

Citi also downgrades to Sell from Neutral while UBS retains a Sell rating. Citi believes the June quarter should have been strong for super flows as investors moved ahead of regulatory changes yet this was not at all noticeable for Perpetual. Citi reduces estimates for earnings in FY17 by -0.2% and FY18 and FY19 by -3%. Valuation is reduced. As a result the stock is considered too expensive, hence the downgrade.

UBS forecasts negative net flows on a post-distribution basis in the outer years, with growth of only 3.0% per annum, and flat earnings per share in FY18. The broker's earnings outlook is now -8% below consensus estimates for FY18.

Credit Suisse sticks with a Neutral stance on the stock, albeit disappointed with the flows in the June quarter. The company continues to struggle to attract FUM, which the broker suspects is, in part, stemming from weak fund performances, as both the Industrial Share Fund and Australian Share Fund were behind benchmarks over most time horizons.

The broker considers the valuation is stretched and recent outflows and distributions are creating a headwind for earnings and margin. Meanwhile, growth initiatives appear to be only modestly incremental at this point in time.

Divisions

While most of the key funds shared in the quarterly reduction in FUM, Citi observes the worst hit was the Ethical Fund where FUM fell to $1.4bn at the end of June from $1.8bn at the end of March. In contrast, the Smaller Company Strategy increased FUM to $1.3bn from $1.2bn. At present, Citi gives the company the benefit of the doubt and presumes outflows are largely one-off. Nevertheless, the risk is envisaged to the downside.

Brokers also note, despite a recent pick up in performance of the Global Share Fund, the global equity strategy is not attracting new flows and FUM remains static at $1.2bn. Citi believes Perpetual may need to accelerate its transition and targeted growth strategies and will look to the FY17 result, due August 24, to see whether there is further growth in Perpetual Private from the Fordham strategy, which appears the best hope for growth outside of Perpetual Investments.

Credit Suisse estimates that initiatives for Fordham will only deliver around 1% per annum in additional earnings. Should fund performance re-emerge in the flagship funds, the broker suggests there is downside risk from higher compensation, as Perpetual has little exposure to performance fees to cushion the impact.

UBS also finds little evidence of an ability to generate non-market-driven organic growth in key divisions and continues to envisage downside risks to earnings expectations.

There are four Hold ratings and three Sell on FNArena's database. The consensus target is $48.89, signalling -6.1% in downside to the last share price. Targets range from $46.50 (Ord Minnett, Morgans) to $52.50 (Morgan Stanley, yet to comment on the June quarter). The dividend yield on FY17 and FY18 forecasts is 5.0% and 5.2% respectively.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms