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Uncertainties Put A Brake On Pendal

Australia | Jul 11 2018

Several uncertainties prevailing in the June quarter delivered a mixed performance for wealth manager Pendal Group and brokers remain cautious for the year ahead.

-JO Hambro reports third consecutive quarter of outflows
-Asia ex-Japan strategies perform particularly poorly
-Trade war rhetoric may have affected sentiment

By Eva Brocklehurst

The share price of wealth manager Pendal Group ((PDL)) dived after a mixed June quarter report and brokers expect the stock to remain under pressure in the near term, given several uncertainties and the pending sell-down by Westpac ((WBC)).

Market movements and the performance fees more than offset net outflows and currency movements, Ord Minnett notes, while the JO Hambro division, historically the driver of flows, reported its third consecutive quarter of outflows, not seen in almost seven years of ownership.

The outflows were primarily in the European segment, Global Select and Asian open-ended investment company funds and strong flows have emanated from US pooled funds.Funds under management (FUM) at the end of June were $100bn, an increase of 1% on the prior quarter and 6% on the same period last year. Westpac redemptions were around -$400m, related to the reconfiguration of the MySuper portfolio. Accrued performance fees also deteriorated, with only $6.9m crystallising in June, Credit Suisse observes.

UBS forecasts -$4bn in net outflows for the company in FY18 and envisages significant downside risk to performance fee expectations over FY19-20. Nevertheless, as the stock has de-rated the emerging risks appear priced in and this supports a Neutral rating.

Ord Minnett also expects the share price will trade below historical valuation in the near term, as Westpac has announced an intention to sell its remaining 10% stake in the business.

The master relationship agreement with Westpac, which represents more than $10bn in FUM, is due for fee reviews at the end of the year. The broker is also cautious about the cost base, as branding is transferred to Pendal from BT.

JO Hambro

The -$1.1bn in outflows for JO Hambro disappointed most brokers but the division remains the driver of growth going forward because of its large FUM base that is subject to performance fees.

On a positive note, JO Hambro's retail outflows progressively improved throughout the June quarter and Credit Suisse suspects that the outflows in Europe may have been, in part, driven by an asset class rotation rather than performance.

Conversely, the broker points out the Asia ex-Japan strategies are performing particularly poorly and now experiencing outflows that could continue for some time.

Not only do continued fund outflows pose downside risk to earnings estimates, Credit Suisse suggests this will also prevent a PE re-rating. Hence, despite modest valuation appeal the broker also sticks with a Neutral rating.

Morgans downgrades to Hold from Add and believes a number of uncertainties including the prospect of further outflows, higher costs and potential sell down by Westpac will weigh on sentiment.

The broker agrees the major risks for outflows in the near term stem primarily from Asia ex-Japan, given the continued underperformance, as well as the UK Opportunities Fund, which also underperformed and sustained a change of manager.

There are both opportunities and risks in the domestic business arising from the increased independence of advice firms and while this aspect is relatively balanced at this stage, Morgans is mindful of the FUM managed on behalf of Westpac which previously attracted trailing commissions that have now ceased.

Bell Potter does not believe the current flows are that abnormal in the prevailing environment, nor that a long-term trend is being established. Rather, the broker suspects trade war rhetoric has affected sentiment and positive flows should return at some point in the year ahead.

Meanwhile, the stock is considered historically cheap and the broker, not one of the eight stockbrokers monitored daily on the FNArena database, retains a Buy rating with a $14.80 target.

There are two Buy ratings and four Hold on the database. The consensus target is $10.88, signalling 19.2% upside to the last share price. Targets range from $9.75 (Credit Suisse) to $12.00 (Morgan Stanley). The dividend yield on FY18 and FY19 forecasts is 5.5% and 5.9% respectively.

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