Australia | Apr 22 2020
This story features PERPETUAL LIMITED. For more info SHARE ANALYSIS: PPT
There are some positive stories emanating from Perpetual's initiatives but one broker questions whether the dividend may still need to be cut.
-Net inflows occurring in Private Wealth
-Citi suspects dividend may need to be cut
-Acquisitions may be the best way to overcome outflows
By Eva Brocklehurst
Perpetual ((PPT)) delivered another weak fund performance over the March quarter, although improvements were noted towards the end of the period. The majority of flagship products are underperforming over the one, three and five-year scenarios, Credit Suisse notes, that could leave the business further exposed to outflows.
The investment division reported a -19% decline in funds under management as of March, to its lowest level since 2003. While organic prospects across other divisions are robust, and cost growth guidance has been lowered, UBS expects earnings per share will decline -9% in FY21 and grow 4% from FY22.
Morgan Stanley anticipates outflows over the next two quarters in Perpetual Investments because of the tough macro backdrop. The broker was impressed by the outcome in Private Wealth, where there were net inflows, given the volatility late in the quarter and a seasonally quiet period at the start.
Citi, meanwhile, notes some resilience in the Investments performance as fund outflows ease back, partially because of the absence of large institutional mandate losses.
Extra cost savings reflect reduced travel and entertainment expenses as well as lower regulatory and acquisition-related expenditure in the second half. Most of these costs are expected to rebound when the business returns to normal, although more initiatives on the cost front may be required if the challenging revenue environment is prolonged.
Citi , the most negative across the FNArena database, assesses there are some positives, in that new strategies are delivering in certain areas and account for the bulk of the performance fees of $2.2m in the quarter.
While the broker continues to believe Perpetual is well-positioned to benefit from the current dislocation in advice, because of delays in this area most the benefits are likely to accrue in FY21 or later.
UBS envisages limited value upside in Investments. Moreover, margin impacts from outflows are rising, with 68% of 12-month outflows from retail & intermediate channels compared with only 17% in the previous corresponding quarter.
The valuation may be a little stretched, but there are still options from markets and growth initiatives, in Credit Suisse's view. Still, the broker concedes it is likely this latest update will trigger a reduction in consensus earnings forecasts.
Morgan Stanley is more confident, asserting there is compelling value in Perpetual, as the company is adding critical ESG (environmental, social and governance) capabilities and offers more diversity in its Wealth and Corporate Trust divisions. The broker also highlights the strong brand in Investments.
The transformation offered by the pending Trillium acquisition is expected generate stronger flows and diversify earnings. In this way, Perpetual will be more diverse compared with other asset managers under Morgan Stanley's coverage via its Corporate Trust and Private Wealth.
Citi envisages challenges for future flows as well as cost and dividend concerns. Dividends are key to many of the company's shareholders and the broker wonders whether unrealised market losses will be set aside again in order to pay the dividend. The broker suspects, even so, this will not be enough to prevent a reduction to the dividend, now expecting $0.80 in the second half.
Acquisitions may be delayed and more are likely. This appears to be the best way to overcome found outflows from equities, Citi asserts, despite the inherent risks. Still the strategy may be on hold for a period as current conditions make it difficult to negotiate transactions.
The main issue appears to be a problem with determining the inherent value of potential acquisitions as well as the challenges in performing due diligence in the case of offshore opportunities. While domestic acquisitions may be easier to settle these do not appear to be on the original agenda, the broker points out.
The database has one Buy (Morgan Stanley), five Hold and one Sell (Citi) for Perpetual. The consensus target is $32.49, suggesting 17.6% upside to the last share price. The dividend yield on FY20 and FY21 forecasts is 6.5% and 6.4% respectively.
See also, Perpetual Kicks Off 2020 With the US Expansion on February 3 2020.
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