Small Caps | Jul 14 2020
Praemium is poised to obtain considerable scale with the acquisition of Powerwrap, positioning it as a major competitor in the wealth platform space.
-Significant synergies expected from Powerwrap merger
-Praemium will have scale to match Netwealth and HUB24
-Deal likely to reinvigorate interest in Praemium
By Eva Brocklehurst
Financial services platform Praemium ((PPS)) continues to stand out, exhibiting strong growth in both its Australian and international businesses, while also primed for an important acceleration in scale with the acquisition of Powerwrap ((PWL)).
Powerwrap currently uses the Praemium technology and significant synergies are expected through the consolidation of the platforms onto the most recent version of the infrastructure. As a result Bell Potter expects FY22 will be "stellar", with healthy flows and given the ANZ Private transition is largely behind the company. Moreover, the international business is expected to break even in FY22.
June quarter closing platform funds under administration (FUA) were $8.9bn. Net flows have returned and the quarter was the first quarter in three to be positive in terms of flow. The UK business was also better-than-expected, particularly given the larger impact from the pandemic on that market.
Goldman Sachs, with a Buy rating and $0.56 target, found the operating update solid, although the closing FUA in the international segment was below its expectations. This was largely because of a negative translation from the depreciation of the GBP/AUD. Bell Potter dismisses the impact of the lower GBP as the UK is not yet profitable and should not drag on earnings.
Shaw and Partners asserts the June quarter update provides evidence that the correlation between market movements and sales or FUA is a myth. Sales, particularly for Praemium, are derived around 50% from non-funds sources and this is growing strongly compared with asset-based market movements. Hence, the broker asserts it is not true that a -20% reduction in markets would yield a proportional -20% reduction in FUA or sales.
The broker assesses Praemium is an attractive investment prospect as it disrupts financial services in the wealth management sector. Growth rates are impressive, with double-digit profit growth expected in the next three years. The company has no debt and the tie-up with Powerwrap is considered a significant catalyst.
Shaw believes the merger will pit Praemium against the top two independent wealth management platforms, being Netwealth ((NWL)) and HUB24 ((HUB)). Once the Powerwrap deal is executed the value premium of these two is likely to narrow, as Praemium will have the much-needed scale and FUA to become a rival.
The wealth platform business is all about scale and flows. Moreover, Praemium is the lowest cost operator and has potentially significant synergies emanating from consolidation and removal of duplication costs. Around $5m in regulatory capital will also be unlocked now there is likely to be just one licence rather than two.
There is also Praemium's differentiated model, with international reach via existing business in the UK and its link to other offshore markets, unlike Netwealth, HUB24 and Powerwrap which are based in Australia. Hence the direct contact with the specialised customer base of Powerwrap will result in a larger balance sheet.
Powerwrap has a track record of strong growth in revenue and FUA, with a focus on the high net wealth market. The average account balance is the highest in the industry, Shaw points out, at $1.5m, and 58% of portfolios are SMSFs (self managed superannuation funds).
Powerwrap had $7.9m in FUA at the end of March 2020 and has maintained platform margins at 23 basis points in the first half. Shaw finds little not to like about the transaction and retains a Buy rating and $0.65 target. Baillieu believes the proposed acquisition of Powerwrap will proceed when voted on in August, although awaits the FY20 results from both companies before modelling the merger.
The main drivers of expected change in earnings velocity is higher FUA and the lower outflows relating to ANZ Private. Baillieu retains a Buy rating with a $0.55 target for Praemium and expects significant change in Australia's wealth management industry over the next few years.
Praemium is also itself a potential target in a consolidating sector and the proposed merger with Powerwrap does not alter this view. Praemium remains leveraged to a long-term recovery in global equity markets and to the migration of financial advisers and clients away from legacy bank-owned wealth management platforms.
Praemium will acquire Powerwrap for $55.6m via a mixed cash and scrip offer for the 84.9% it does not currently own. Bell Potter considers the deals sensible, given the potential synergies and the natural fit between the two, which have separate target markets but a shared technology base.
As scale becomes more important for platforms, Praemium is signalling it will be a key player and the broker envisages the deal will reinvigorate interest in the stock, retaining a Buy rating with a $0.59 target.
The bid is worth 26.44c a share equivalent in a mix of cash and scrip (at the time of announcement, but subject to share price movements), which translates to two Powerwrap shares for one Praemium share. Praemium has flagged at least $6m in cost synergies and up to $1.5m in capitalised cost savings. Bell Potter calculates at least 5% accretion by FY22 but acknowledges this could be even better if revenue synergies such as high cash margins from scale or increased cross selling are factored in.
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