Perpetual Under Pressure

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

Negative markets and outflows caused Perpetual to report a decline in funds under management in the December quarter and brokers expect the share price will remain under pressure in the near term.

-Equity market falls are expected to put pressure on the fund manager's margins in the first half
-Challenges for the incoming CEO in executing a turnaround
-Global equity business also showing little sign of traction
 

By Eva Brocklehurst

Fund manager Perpetual Ltd ((PPT)) is performing below historical levels, while the outlook for flows in the near term appears to brokers to be skewed to the downside. New management is also yet to provide detail on the long-term strategy.

The company reported funds under management (FUM) of $27.7bn in the December quarter, down -8% because of negative markets and outflows. Outflows were primarily driven by equities product. Perpetual has experienced – $3bn in outflows over the past year yet, while the disappointments continued in the second quarter, brokers assess there was an improvement from recent years.

The improvement quarter on quarter was mainly a function of reduced outflows from institutions and the first capital raising from the LIC channel in over four years also helped, Citi points out. Still, the Industrial Share Fund and the Australian Share Fund continue to underperform benchmarks by -200-400 basis points over one, three and, five years.

The fall in equity markets has meant a larger decline in higher-margin product that is expected to put pressure on the margins in the first half. The company has suggested, in the past, that low interest rates and a value-based philosophy underpin relative investment underperformance and, despite recent volatility, this still seems to Citi to be a feature.

Credit Suisse downgrades estimates for earnings per share by -3-4% over FY19-21. The broker believes the stock carries some value appeal, as it is trading at a -22% discount to the ASX 200 and bears a 7.5% net dividend yield.

Nevertheless, a weaker fund performance and a sell down in equity markets makes Credit Suisse pessimistic about a turnaround in flows any time soon. This could also make it challenging for the incoming CEO to execute a turnaround driven by organic growth.

Citi reduces estimates following the recent fall in equity markets. The valuation appears undemanding, but the combination of a less-than-optimal investment performance, depressed fund flows and lack of assurances over the strategic direction signals to the broker a Neutral rating is required.

Ord Minnett also expects the share price to remain under pressure, despite the supportive dividend yield, at least until markets recover and/or the new management team strategy can be assessed. The broker expects an interim underlying net profit in the first half of $62.7m, down -12.4%, mainly because of lower average FUM in the Perpetual Investments division.

First half investment losses

Morgan Stanley notes seed investments of around $75m could lead to – $5m in investment losses pre-tax, or around -5% of first half earnings. The broker also suspects there could be investment losses on the Exact Market Cash Fund.

In view of a fall in equity markets Citi estimates an unrealised loss of around -$7m for the first half but factors in gains in future periods, as new accounting standards will now require unrealised gains and losses on the financial assets to be taken in the income statement and this is likely to mean greater volatility in results going forward.

However, Morgan Stanley suspects the market is likely to look through this. FUM was -2% below forecasts, and this represents downside risk to the broker's earnings estimates for FY19 and FY20 by a similar amount.

Citi is also unsure whether the first half loss would be discounted in determining the interim dividend, although additions to retained profits should provide scope if the board chooses to do so. The global equity business also shows little sign of traction, and Citi would not be surprised if the new CEO ultimately considers acquisitions to fix the issue.

FNArena's database has four Hold ratings for Perpetual. The consensus target is $34.75, suggesting 6.7% upside to the last share price. The dividend yield on FY19 and FY20 consensus forecasts is 7.4% and 7.5% respectively.

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