Australia | Nov 06 2020
This story features PENDAL GROUP LIMITED. For more info SHARE ANALYSIS: PDL
Performance fees at JO Hambro made a welcome return for Pendal Group at the end of FY20 and continued delivery of stronger net flows could be the necessary re-rating catalyst.
-Investing in distribution, technology to drive growth
-Cost growth running ahead of FUM growth
-FUM growth target highly reliant on markets
By Eva Brocklehurst
The performance of fund manager Pendal Group ((PDL)) has improved as FY20 results revealed the return of JO Hambro performance fees, a key profit driver, after two periods of negligible contributions.
Morgan Stanley highlights only a small set of funds were due for performance fees. The performance fee contribution of $13.4m was ahead of the prior year but still low compared with historical performance. A final dividend of $0.22 was declared, equating to a cash pay-out ratio of 81%. From FY21 dividend policy will be to pay out 80-95% of underlying net profit.
Pendal is investing in the business to drive the next leg of growth and that will require an increase in the distribution team, updated technology and a shift to a global operating model.
The company will make a one-off $15-18m investment in a new operating platform and Credit Suisse assesses costs are likely to remain elevated for some time as a result. FY21 guidance is for 8-10% growth in fixed costs.
On the issue of fixed cost growth, it seems to Goldman Sachs this could be contained beyond FY22, when management will have range of new products to offer that should translate into a more sustained lift in organic growth.
Bell Potter expects a short-term hit to earnings from the re-investment as well as from changes in the way the company reports underlying profit. This should be offset by improving prospects for flows and performance fees.
Some funds were below benchmarks but Macquarie found Global Select, UK Opportunities and International Select encouraging and this should assist the distribution teams seeking flows.
Ord Minnett points out one quarter does not make a trend and fund flows over the past three years have been negative, while fixed cost growth has run ahead of growth in funds under management (FUM).
The broker is optimistic that diverse geography and asset class will mean the current share price offers an attractive risk/reward ratio for the medium term relative to other ASX-listed asset managers.
Alongside reinvestment plans, the company has issued a 50% growth target for FUM by FY25. This target is highly reliant on markets and Credit Suisse calculates it will be achieved through market movements of 6% per annum and flows of 2% or $2bn per annum.
The company has made an even more optimistic assessment of annual flows, at around $5bn in the outer years. If it can deliver on this assessment, Credit Suisse considers Pendal Group will not only be an earnings growth story but a price/earnings re-rating opportunity.
The broker focuses on flows, given the mixed fund performance, and prefers to wait on the sidelines, reiterating a Neutral rating. Macquarie agrees the market will require 1-2 more quarters before a further re-rating of multiples is comfortably considered while retaining an Outperform rating.
The target may be ambitious, yet Morgan Stanley believes the company can deliver with a strong product range and increasing investment. Pendal Group will bring three new vehicles to market and, amid less uncertainty in the UK, will also have JO Hambro to fall back on in late FY21.
Citi suspects the target probably requires material inflows from new environmental social and governance (ESG) products and this needs time to build up, while a sustainable rebound in fund flows is some time away. Goldman Sachs, too, believes scope for upside surprise is likely to be limited to better JO Hambro performance fees.
The market remains apprehensive about capitalising organic growth trends and further momentum over the next six months or so is required, in the broker's view, for sentiment to improve.
Morgans has a forecasts for 43.4% growth in FUM over five years and, at this stage, forecasts relatively modest net inflows compared with the company's target.
The broker finds the stock has solid value but is prevented from being more positive because of the underperformance across the JO Hambro UK/EU funds. If the company delivers on stronger net inflows then this could be the catalyst for a more sustained re-rating.
Among those stockbrokers that are not monitored daily on the FNArena database Bell Potter has a Buy rating and $8.40 target and Goldman Sachs has a Buy rating and $6.79 target.
The database has three Buy and four Hold ratings. The consensus target is $6.69, suggesting 8.9% upside to the last share price. The dividend yield on FY21 and FY22 forecasts is 6.0% and 6.4%, respectively.
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