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Has The Market Over-Reacted To Pendal Group?

Australia | Oct 18 2021

This story features PENDAL GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: PDL

In what could be classed as an overreaction Pendal Group disappointed the market, as outflows from the latest acquisition dominated the headlines

-Reversal of JO Hambro flows and outflow for TSW dominated the September quarter
-Yet outflows were mainly about institutional flows which are lumpy
-Sector also needs to absorb a large amount of liquidity


By Eva Brocklehurst

Concerns about outflows dominated the reaction to Pendal Group's ((PDL)) fourth quarter report. The company attributes the outflows to re-balancing by clients and brokers assess the reaction was overdone.

Ord Minnett points out the reaction was significant, pushing the stock back towards its May price when equity was raised and the acquisition of Thompson Siegel and Walmsley was announced.

While disappointed Pendal Group reverted to outflows after a reasonable performance in the second and third quarters, Morgans emphasises the earnings impact is relatively minor and the slump in the share price was overdone.

The disappointment in the headline came from two areas, a reversal of what the broker described as "reasonable" results for JO Hambro in the prior quarters and an outflow for TSW in the first quarter of ownership.

TSW fills the gap in product that existed for the company in its international/US business which is expected to reduce the volatility in its performance, yet recorded -$600m in outflows in the quarter.

The economic impact of the outflow is overstated, Ord Minnett asserts, being offset by currency benefits to the tune of $3bn. The broker suspects, after several quarters of positive flows and in view of almost four years previously of consistent outflows, the market was daring to hope the outlook had improved.

At the time of the acquisition Pendal Group guided to TSW providing double-digit accretive earnings on a full-year basis. Regardless, the broker acknowledges the turning point in the outlook may now be further afield.

Total outflows of -$2.3bn were offset by positive market movements and FX, Credit Suisse agrees, and the volume of outflow, while unexpected, is not likely to persist. The overreaction is also evidenced by the fact outflows were skewed to institutional flows that amounted to -$2.8bn and countered by $500m worth of retail inflow.

The broker points out institutional flows tend to be more lumpy and largely lower-margin while the inflows from retail are higher-margin. Hence, the quarterly outcome should not be extrapolated.

Given the concentration of "sub- advised" funds, making independent allocation decisions, Morgans expects swings like this will be reasonably common. The broker also remains mindful the client concentration is high at TSW, as 28% of revenue is with one sub-advised client. Morgans accepts growth is excessively reliant on market direction for the short term yet still believes there is value.

Moreover, Ord Minnett points out a substantial amount of liquidity in the sector needs to be absorbed, namely the sell-down of Platinum Asset Management ((PTM)) and the upcoming IPO of GQG Partners (GQG).

Australian outflows were -$1.0bn in the quarter while in the UK/Europe/Asia category outflows were -$900m, with the company flagging the loss of a UK dynamic mandate. In the US there was $300m of inflows.

The report may have had a negative tone yet Morgan Stanley concludes the growth options are intact. Jarden agrees the fundamentals are unchanged, as revenue/cost synergies from the acquisition are yet to be realised, and there is performance fee potential with most of the funds close to high watermarks.

Pendal Group reported September quarter funds under management (FUM) of $139.2bn, up 30.5% quarter on quarter largely because of the inclusion of TSW. Excluding the TSW business the fourth quarter FUM was down marginally.

Jarden, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating with a $9.10 target. The database has five Buy ratings and one Hold (Citi, yet to comment on the update). The consensus target is $8.35, suggesting 19.8% upside to the last share price. The dividend yield on FY21 and FY22 forecasts is 5.8% and 6.6%, respectively.

See also, Pendal's Transformational Shift Into Value on May 11, 2021.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

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