Perpetual Not Yet A Buy

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

While the share price has eased to levels considered more attractive, brokers are largely neutral on Perpetual as outflows are expected to persist over the medium term.

-Offers valuation appeal but are all risks fully priced in?
-Appears dependent on global equities to drive growth and margin
-Outflow risks continue for the medium term

By Eva Brocklehurst

Growth in Perpetual's ((PPT)) managed funds appears set to slow amid a more difficult economic backdrop, while areas of strength are increasingly envisaged among global equities.

Funds under management as of March 31 of $30.2bn were down -7.9% amid net outflows of -$1.3bn. These were the worst outflows since June 2015, Credit Suisse observes, predominantly from within the institutional channel and Australian equities.

The broker accepts the stock now offers some valuation appeal yet the pullback in the shares is justified, given the risks of a new CEO in the next 6-12 months, the persistence of outflows and volatility in equity markets.

Ord Minnett also points to the fall in the share price, which has meant the stock is trading on a forward PE multiple of less than 14x and a fully franked dividend yield of more than 6%. Amid more supportive valuation metrics the broker upgrades to Hold from Lighten and envisages less downside risk to the current share price relative to other listed fund managers.

UBS disagrees that the widening underperformance across key Australian equity funds and outflow risks over the medium term are fully priced into the stock, maintaining a Sell rating. The broker allows for a further -$500m in net outflows in the fourth quarter and modest outflow levels of -$800m over FY19. As a result forecasts for earnings per share are reduced -7.0% for FY19 and -8.8% for FY20.

The broker expects the company will underperform wealth manager peers in the absence of strong equity markets and cites minimal evidence for positive "jaws", as costs have exceeded revenue growth in eight of the last 10 years. The broker believes the risks to operating margins are skewed to the downside.

Bell Potter takes an alternative tack and believes now is a good time to re-visit the stock, given the yield on offer. Negative sentiment is seen emanating from what was largely a one-off loss of a mandate in the quarter and from share market volatility.

As the ASX200 is already up 2% in the current quarter the broker is encouraged that, if maintained, it will provide a catalyst for a positive re-rating. Bell Potter, not one of the eight stockbrokers monitored daily on the FNArena database, upgrades to Buy from Hold. Target is reduced to $47.50 from $52.10.

Morgan Stanley reduces earnings estimates and valuation by -10%. While the outlook for flows is less certain, the broker acknowledges trading multiples are not stretched. Also there is a growth option on global equities and the business is diversifying.

Citi reduces forecasts for FY18 earnings per share by -3% and FY19 by -8%. The broker agrees the stock now appears reasonable value, although cites the poor momentum.

A volatile market backdrop also remains a shorter-term concern. A significant level of net outflows from Australian equities meant the Concentrated Fund was the hardest hit. This was because of redemptions by two institutional clients, in particular.

Global Equities

The company now appears increasingly dependent on its global equities to drive growth and margins. Brokers observe there is still no signs of inflows into the Global Share Fund, despite the lift in rating from an asset consultant.

The Global Share Fund was recently upgraded by Lonsec to a "recommended" rating. In time, Citi suggests this may help the company attract international equities, providing the performance is strong.

Growth in funds under management was accretive to base fee margins but unable to offset the negative impact of the outflows. Performances in the Industrial Share Fund and Australian Share Fund were weak.

While the share price has corrected materially of late and the stock appears better value, there are a number of features of current trading that makes Citi cautious about recommending anything other than Neutral.

The broker believes progress in global equities is critical to attracting meaningful amounts of retail flow. Gross profits and margin could be significantly enhanced by international flows, with the domestic equities capability close to capacity.

Other Divisions

The company is trying to grow its other two divisions. Citi observes Perpetual Private is gaining modest traction, although it has ambitious growth plans and has only grown by two partners over the last 12 months. Acquisitions may be necessary to reach target and these may be on hold pending a new CEO.

Corporate Trust is growing steadily but the broker suspects it will be hard to achieve anything other than modest growth.

The database shows six Hold ratings and one Sell (UBS). The consensus target is $46.62, suggesting 15.0% upside to the last share price. This compares with $51.08 ahead of the update. Targets range from $41.35 (UBS) to $51.98 (Morgans, yet to comment on the quarter). The dividend yield on FY18 and FY19 forecasts is 6.7% and 6.8% respectively.

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