Small Caps | Aug 07 2019
Significantly higher earnings are expected from Pinnacle Investment over the longer term, although the business is likely to wear some short-term volatility.
-Soft inflows in the second half in retail and institutional channels
-New affiliates to diversify asset class exposure
-Brokers find long-term value embedded in the stock
By Eva Brocklehurst
Brokers are confident in Pinnacle Investment Management's ((PNI)) mandates heading into FY20, believing there is long-term growth potential as the company targets at least two new affiliates per year. Given the FY19 performance, Wilsons believes the business will provoke the attention of potential new affiliates, turning the company into a "one-stop shop" for retail investors.
Morgans agrees there is structural growth in the business with the maturing profile of existing affiliates. While market direction will influence the short-term outlook, the broker expects significantly higher earnings over a longer period.
The company has three segments that drive profitability. This includes minority equity stakes in boutique investment managers, earnings from the Pinnacle parent that derive revenue from distribution and administration services and gains from principal investments in associate funds.
Funds under management (FUM) as of June 30 reached $54.3bn. FY19 net profit was up 32% and a final distribution of 9.3c was declared. Ord Minnett reduces its forecast for FY20 flows, to $2.4bn, but expects the uplift in funds under management over FY19 will provide a compelling tailwind.
The broker assesses volatility will continue in the short term as the market chops around and investors monitor the performance of affiliates, which has been patchy. Nevertheless, there is fundamental long-term value, in Ord Minnett's view.
Inflows in the second half were soft in the retail and institutional channels, Wilsons points out. While accepting the company's explanation, the broker does trim forecasts to increase the margin of safety. Inflows have formed a major part of the company's growth path since July 2017, the broker notes, and the strong performance of key affiliates such as the Antipodes Global Fund should underpin growth in average monthly inflow rates.
Retail inflow rates did fall -45% half on half in the second half of FY19, which Wilsons suspects relates to current market conditions for value-biased Antipodes Global. Despite the Antipodes Global funds remaining ahead of benchmark since inception, market strength lately has been driven by growth stocks, which has meant that outperformance versus the benchmark has gradually eroded.
The broker believes this erosion has been responsible for the slowing of retail flows into Pinnacle Investment. Wilsons supports its view with data from the company, which indicates the Antipodes Global share of retail inflows fell to 31% in FY19 from 71% in FY18. Hence this momentum in the "growth over value trade" poses the single largest risk to assumptions.
Management has pointed out that institutional funds under management are spread over 78 separate account clients and there is no single affiliate that is fully exposed to concentrated client FUM. Morgans interprets this to mean diversity is countering the risk of a loss of mandate.
The broker suspects the investment performance of key affiliates such as Antipodes Global and Firetrail Absolute Return will generate hurdles for Pinnacle but, further ahead, the maturing profile of more recently-acquired affiliates will provide support. Over the medium term, Macquarie expects operating leverage to increase, finding the potential return on investment in product and distribution attractive.
Outside of the growth versus value trade reverting to mean, Wilsons believes a successful marketing of Hyperion Global should support inflows. Hyperion Global was the top performing global equity fund in 2018 according to surveys from Morningstar and Mercer. The broker, not one of the seven stockbrokers monitored daily on the FNArena database, is attracted to the strength of the distribution platform and retains a Buy rating and $5.85 target.
Expenses were up 52% in FY19, Morgans points out, driven primarily by additional personnel. The company is investing heavily to support the long-term growth of its affiliates, although costs growth is expected to moderate in FY20.
FNArena's database shows three Buy ratings from three covering brokers. The consensus target is $6.01, suggesting 36.0% upside to the last share price. The dividend yield on FY20 and FY21 forecasts is 3.9% and 4.8% respectively.
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