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Pinnacle Scales Higher Peaks

Australia | Aug 16 2021


While FY21 results for Pinnacle Investment Management prompted some downgrades to broker ratings, target prices rose materially and offshore expansion opportunities beckon.

-Pinnacle increases FUM by 52%
-Distribution is gaining traction in international markets
-Macquarie expects ongoing performance to exceed market expectations
-Successfully exporting the model should provide longevity to the growth

By Mark Woodruff

Pinnacle Investment Management ((PNI)) recently reported FY21 results, revealing higher than average funds under management (FUM), which should generate a strong start for FY22.

The company holds equity interests in 16 boutique investment managers that collectively manage assets across a diverse range of asset classes. It provides the managers with access to capital, distribution capability and infrastructure.

Pinnacle holds minority equity interests (typically 23-49%) in the affiliated firms, which include some names that may resonate with the reader, such as Hyperion Asset Management, Firetrail Investments and Coolabah Capital Investments. 

The company stands to benefit as affiliates grow FUM and as new affiliates are added to the platform.

In FY21, group FUM climbed 52% on the previous corresponding period to close at $89.4bn, driven by net inflows of $16.7bn and investment performance of $14.0bn.

Other features of the result included a 107.1% year-on-year rise in profit, which beat consensus by 7.2%. Affiliate gross revenue and margin performance also climbed and were considered the standout metrics by Wilsons. Pinnacle's share of affiliate’s profit of $66.7m was an increase of 75% versus the previous corresponding period.

Retail FUM flows were also encouraging, with the monthly net flow average increasing materially year-on-year and likely to continue, predicts the broker. This is considered typical when funds achieve positive ratings with agencies and asset managers.

Wilsons, not one of the seven stockbrokers monitored daily on the FNArena database, increases its target price to $16.50 from $11.90. Upside from post-result earnings upgrades leaves room to lift its rating to Overweight from Market Weight. This is due to the good position of affiliates, offering current net margin upside. Additionally, distribution is gaining traction in international markets and the aforementioned growing retail FUM flows are achieving a higher margin and exhibiting more stickiness.

Meanwhile, Macquarie maintains its Outperform rating and increases its target price to $15.33 from $12.28.

Despite upgrading its FY21 forecasts by more than 80% during the second half, the company still reported FY21 EPS around 6% ahead of the broker’s expectation. 

The broker expects Pinnacle’s earnings performance will continue to exceed market expectations. It has the potential to add accretive M&A and there’s also an attractive organic growth outlook. The latter is backed by net flows, performance fees and operating leverage, and continues to support upside risk to the broker’s estimates in FY22 and beyond.

While maintaining a positive outlook, both Ord Minnett and Morgans downgrade respective ratings as the stock is now trading in line with valuation. The former downgraded to Accumulate from Buy and raised its target price rise to $15.20 from $12.50 after a strong beat across all of its forecasts. Meanwhile, Morgans downgraded its rating to Hold from Add and increased its target price to $14.48 from $11.85.

Offshore expansion?

Pinnacle has stated offshore opportunities are becoming compelling. The inability to travel is currently impeding progress and Morgans envisages distribution and smaller ‘build’ opportunities are likely to feature nearer term.

While successfully exporting the model offshore will provide longevity to the growth profile, the broker believes there is significant further scale to be achieved within the current stable of managers and via the addition of further affiliates.

Ord Minnett points to $155m of “dry powder” cash and equivalents for further acquisition opportunities in both Australia and offshore markets.

Performance Fees

Affiliates achieved gross performance fees of $85.9m in FY21, resulting in a second half net fee to Pinnacle of $8.4m. Wilsons remains comfortable with the investment manager’s risk-weighted approach and forecasts gross/net performance fees of $50m/$13m in the medium-term.

This essentially builds into forecasts the potential for $25m in gross fees to not eventuate for the 15 strategies outside of the affiliates Palisade, Coolabah Capital Investments and Metrics, which have more certain performance fees.

FNArena’s database has two Buy ratings and one Hold for Pinnacle Investment Management with a consensus target price of $15, which signals -4.1% downside to the last share price.

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