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Treasure Chest: Perpetual Needs To Expand

Treasure Chest | Apr 29 2019

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Recent strength in the share price and a weak March quarter update have caused Bell Potter to downgrade Perpetual to Sell.

-Risk to Bell Potter's revised rating if the company's scales up its business
-March quarter performance benefitted from global equity markets
-Brokers concerned about lack of clarity in the new CEO's strategy


By Eva Brocklehurst

While the March quarter update from fund manager Perpetual ((PPT)) was soft, many brokers remain prepared to accept a full valuation, given the recovery in markets and the expansion opportunities that lie ahead for the business.

Not so Bell Potter, which has downgraded to Sell from Hold. The recent strength in the share price and the weak March quarter update have catalysed the broker's reaction. Perpetual experienced the worst quarterly net flows from its investments division since 2011, with net outflows of -$1.9bn. Macquarie also downgraded recently, to Underperform from Neutral, envisaging downside risk to flows, and despite market conditions remaining supportive.

Outflows in the March quarter were derived primarily from the institutional channel but intermediary and retail channels also contributed to the shortfall. A $1.6bn increase in assets under management from market movements helped offset the outflows. The loss in the March quarter largely related to a single Australian equities mandate, at -$1.3bn of net outflows, and the recovery in markets offset the impact on funds under management.

Citi considers the company was a beneficiary of global equity markets. Otherwise, the March quarter would have been rather different. The broker is not cheered by the lack of clarity in the company's outlook and believes investors should ascribe a higher risk to its shares.

Continued outflows of around -$300m per quarter are likely for the foreseeable future, in Bell Potter's view. Nevertheless, the broker acknowledges the risk to its revised rating if the company utilises its cash and relatively high PE (price/earnings ratio) to scale up its business via acquisitions.

Expansion Potential

Morgan Stanley considers the March quarter performance strengthens the case for new growth opportunities. In this regard, and in order to refresh distribution, the broker notes Perpetual is raising up to $440m for a credit income trust and, hence, diversifying beyond Australian equities is already underway.

An elevated valuation can persist in the short term, Credit Suisse suggests, given several positive catalysts on the horizon, as the company has announced new investment teams and accretive acquisitions as part of the new CEO Robert Adams' strategy.

Regardless, Bell Potter believes the current PE at 17x, and moving to 18x in FY19, is too expensive and there is better value elsewhere. The broker, not one of the eight monitored daily on the FNArena database, downgrades estimates for earnings per share by -2.4%, -7.6% and -8.3% in FY19, FY20 and FY21, respectively. Bell Potter reduces the target to $35.17 from $36.50.

Morgans believes the stock is inexpensive for a fund manager, although remains cautious about outflows in the investments division and the potential execution risk from the new growth strategy.

The broker requires signs of progress under new management before becoming more positive and maintains a Hold rating. UBS also acknowledges the company is taking a bolder approach but considers the timing and scale of expansion is unclear.

FNArena's database shows six Hold ratings and one Sell (Macquarie). The consensus target is $39.14, signalling -4.5% downside to the last share price. The dividend yield on FY19 and FY20 forecasts is 5.9%.

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