Praemium Gambles On Marketing Spend

This story features PRAEMIUM LIMITED. For more info SHARE ANALYSIS: PPS

Brokers have hurriedly reviewed forecasts as Praemium has significantly increased sales and marketing expenses to take advantage of the structural shift occurring in Australia's investment platform and advice industry.

-Two-year, $4m program to improve overall functionality
-Expansion of sales and marketing personnel to drive earnings growth
-Increased focus on product management and marketing
 

By Eva Brocklehurst

Praemium ((PPS)) has noted the structural shift occurring in Australia's investment platform and advice segment and intends to pursue growth while there is a gap in the market. To this end the company has significantly increased its sales and marketing expenses.

The company offers investors exposure to the growth in funds under administration on its platforms in Australia in the UK.

Premium reported a significant rise in underlying cash earnings in the first half, up 51%. Growth in the separately managed account (SMA) platform pushed revenue up 25%, as incremental gross margin of approximately 45% translated into expansion of operating earnings.

The structural shift in the market involves more independent advisers and SMAs and some of the large operators opting out. The company is increasing expenditure to target the SMA platform opportunity and also R&D, to increase the SMA platform functionality. This should allow for a broader range of assets to become available and appeal to a wider audience.

Wilsons suspects, despite SMAs being the fastest-growing markets sub-segment, recent advances in independent platform offerings by peers have eroded some of this competitive advantage.

The broker has evidence that Praemium does lag some peers in terms of interface and overall functionality and may have been forced to increase its efforts to overcome a relative deficiency.

To counter this, the company estimates it will take around two years and spend $4m to improve its offering. The program expenditure will be capitalised and amortised over a three-year period.

In addition to platform investment, the company will make investments in sales and marketing, expanding personnel and increasing its focus on product management and marketing.

Strong Earnings Growth

The company provided strong growth in operating margins in the first half. The size of the UK losses shrunk considerably as benefits of scale came into play.

Morgans reduces estimates to reflect higher sales and marketing expenditure, but because of a reduction in assumptions regarding the weighted average cost of capital, the valuation increases. As the shares are now trading close to the revised target the broker downgrades to Hold from Add. Target is $0.69.

Morgans notes the company's SMA technology is widely regarded as one of the best platforms available. Yet, the business trades on high multiples and needs to maintain a substantial level of revenue growth to sustain the current share price.

Canaccord Genuity, not one of the eight monitored daily on the FNArena database, resets its revenue and cost base after the results. The broker notes the domestic business has absorbed the vast majority of the investment in sales and marketing, yet the top line was strong.

Funds under administration were driven by gross inflows of around $1.5bn, which has delivered net inflows of $1.3bn. With development work for the Dah Sign Bank now complete that business should begin to move towards a break even in the second half. The broker retains a Buy rating with an $0.83 target.

Revenue beat Wilsons estimates by 5% but the increased costs were greater than expected. The broker concedes the decision to invest in platform functionality is positive but believes this acts as a further drag on earnings because of increased amortisation charges.

The scale of the increase in sales and marketing surprised the broker and operating earnings forecasts for FY18, FY19 and FY20 are reduced by -12.6%, -8.1% and -5.2% respectively.

The downgrades overwhelmed the broker's valuation, which forces a rating downgrade to Hold. Strong inflows are expected to continue nonetheless. The broker, also not one of the eight, has a target of $0.61.

If achieved within the timeframe and budget, Bell Potter suggests the investment appeal of the stock will significantly improve. The broker, not one of the eight, retains a Buy rating and $1.06 target and notes valuation has held up in the wake of the results, underpinning its confidence that the quality of the business is set to improve.

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