Strong Growth Ahead For Praemium

This story features PRAEMIUM LIMITED, and other companies. For more info SHARE ANALYSIS: PPS

Australia underpinned Praemium's stellar growth in funds under administration in FY18 and brokers expect the current momentum to continue.

-New customer potential not adversely affected by BT Panorama fee reductions
-Slower path to UK profitability and increased risk to the Asgard contract
-Opportunity to benefit from changing financial advice environment
 

By Eva Brocklehurst

Wealth manager Praemium ((PPS)) provided an attractive return profile in its FY18 results, in what brokers observe is a tough industry. Several have lauded the company's separately managed accounts (SMA) platform as the best in business.

Australia drove the full year results, with strong growth on the SMA platform. Revenue rose by 18.7% to $27.3m. Operating earnings (EBITDA) in the second half in Australia were $6.3m, a record for this division. FY18 operating earnings were $8.8m, up 40%, driven by a 35% increase in funds under administration (FUA).

Morgans believes the SMA technology is one of the best platforms currently available. Nevertheless, the stock trades on high multiples and, thus, needs to maintain a high level of revenue growth in order to sustain the share price. Morgans has an Add rating and $1.07 target.

The company has stated that its potential for new customers has not been adversely affected by the recent decision by Westpac ((WBC)) to cut administration fees on the BT Panorama platform.

Wilsons expects, following the changes to BT Panorama pricing, that Westpac will move the legacy BT Wrap and Asgard product accounts to Panorama before de-commissioning these platforms. The broker lifts FY20 net profit estimates by 2.4% but acknowledges this figure will be affected if Asgard is not renewed.

The broker acknowledges the company's managed account technology leads the market and the uptake of managed accounts in Australia is increasing. Still, the slower path to profitability in the UK and an increased risk to the Asgard contract, which may not be renewed in November 2019, are considered not reflected in current trading multiples. The broker cuts the target to $0.68 and reduces its rating to Sell from Hold.

After adding sales and marketing costs in FY18, the company has flagged additional investments to be made in FY19. Wilsons assumes a relatively short pay-back period and supports the move.

Shaw and Partners initiates coverage on the stock with a Buy/High Risk rating and a target of $1.20. The broker observes the company generates strong and attractive returns of 25% and operating earnings margins of 45% in Australia and the balance sheet is solid, supported by strong cash flow. Earnings appear to be at an inflection point, with contract wins and increasing FUA representing a pivotal point in the the company's history.

Financial Advice

Shaw and Partners believes there is an opportunity to benefit from the changing financial advice environment and industry dynamics. There is growing awareness of the benefits of using SMAs and the broker suggests the company is disrupting the platform market, with superannuation contributions the main catalyst.

The transition to independent models, where large institutions have been losing advisers and moving to independents like Praemium, has meant that just 4% of the market took 40% of the prior year's net inflows. Hence, Praemium is likely to be a significant beneficiary of the fall-out from the Financial Services Royal Commission.

Bell Potter agrees FY19 is shaping up as a year of transformation, as there will be another step-change in flows at a similar growth rate to that achieved in FY18. The broker envisages growth coming from the eight new client transitions that have already been flagged, representing $1bn in FUA.

UK

The UK business remains a drag, with a larger second half loss because of a lack of R&D tax credits. Nevertheless, the UK is on a trajectory to break even, Morgans asserts, although a regulatory crackdown on fund administrators has, nonetheless, affected SIPP (self-invested personal pension) acquisitions.The broker notes the company is frustrated it has not been able to build scale in the UK through the purchase of SIPP administrators.

Still, Canaccord Genuity observes the UK business shows improvement, as the loss is not as severe as in the previous year. Net revenues, which exclude commissions paid in relation to the Smartfund, increase to $9.3m, up 20%. The broker expects management to pursue an acquisition the UK market, likely to be necessary to reach profitability.

Wilsons agrees a major rider for the UK obtaining an earnings inflection point is an acquisition to bolster the Smartfunds portfolio. This is yet to happen and the company has admitted that are purely organic growth outlook in the UK may not mean the unit breaks even until at least FY20. The broker had previously assumed the UK would exit FY18 on a profitable run-rate basis.

Meanwhile, stronger flows are expected as the UAE licence helps to generate more flow into the higher-margin Smartfunds. After attributing a lower risk weighting in valuation, and given the maturing and more stable footprint, the broker has moved to a $1.42 target with an unchanged Buy rating.

The Asian operation delivered an operating loss of -$1.0m, an improvement on the prior corresponding year. Canaccord Genuity expects, with development work for the Dah Sign Bank now complete, the business should deliver improved earnings into FY19. Canaccord Genuity has a $0.93 target and a Buy rating.

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