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Pendal Navigates Volatility With Cost Control

Australia | May 13 2022

This story features PENDAL GROUP LIMITED. For more info SHARE ANALYSIS: PDL

Evidence of cost control in Pendal Group’s latest market update should benefit the fund manager as volatile market conditions continue.

-Positive underlying trends, but a weaker top line result from Pendal Group in the first half
-Underlying profits largely beat market expectations, driven by cost control and management revenue
-A continuation of these trends should set up the company well in a volatile environment

By Danielle Austin

Lower than anticipated costs and higher investment income supported investment management company Pendal Group's ((PDL)) strong first half result, delivering underlying profits of $131.4m, up 49% year on year, while operating profits of $153m were 17% ahead of consensus expectations despite operating expenses increasing 20% year on year to $209.6m on a full contribution from the Thompson, Siegel & Walmsley (TSW) acquisition.

While strong cost control was a sizeable contributor to the result, with lower costs attributed to 25% of the beat, a further 20% of the beat was driven by a higher management fee margin of 48 basis points, allowing for fees of $317.7m in the half, up 35.2% year on year. With 10% of the beat attributed to a lower tax rate, the remaining 40% was attributed to one-off higher non-operating income. A reported 42% contribution to the profit margin from the TSW acquisition in the first half, up from 37% year on year, spurred the improved profit margin.

While the company’s operating performance was a result highlight, outflows remained a feature with negative market movements and international equities outflows contributing $5.6bn and $3.3bn respectively. Total net outflows over the half totalled $7.5bn, although this moderated substantially from $6.8bn in the first quarter to $0.7bn in the second quarter.


Looking forward for Pendal Group

Looking forward, cost control continues to be a feature of Pendal’s near-term outlook. Suggesting a normalisation of costs in the coming half and a second half cost skew, the company reduced its full year fixed-cost growth guidance to 3-5% from a previous 6-8%, excluding costs relating to the TSW acquisition.

Given the current volatility of market conditions, Pendal expects to maintain a flexible approach to investment, diversifying product range, leveraging global footprints and attracting best in class talent to support sustainable, long-term growth. The company has also suggested it will consider small, bolt on, accretive acquisitions, with its net cash position suggesting sizeable room for acquisitive growth, but it does not intend to seek major acquisition opportunities while it focuses on the integration of TSW.

After updating on Pendal's result, the six covering brokers in the FNArena database are split at two Buy (or equivalent) ratings and three Hold, while Macquarie remains on restriction.

While brokers are largely positive on Pendal’s outlook, some, including both Credit Suisse and Morgan Stanley, fail to see headroom for the company’s shares to improve further, limiting upside risk.

Retaining a Buy rating and increasing the target price to $6.00, Ord Minnett finds the stock to be trading cheaply at its current valuation, noting while first quarter outflows were disappointing medium- to long-term investment performance remains strong. The analysts noted three- and five-year investments outperformed 86% and 77% respectively, while one-year performance was weak with only 36% outperforming, and that the latest update did appear to reflect steadier flows than previous results.

Macquarie pointed to the tight cost control that drove the first half result, noting full year guidance suggests some normalisation in the coming half. The broker increased its earnings per share estimates 9.1% for the current financial year, but has cut -5.9% in FY23 and between -2% to -4% in the years following as market movements offset lower expenses.

For UBS, cost control will remain imperative to delivering operating improvements ahead with volatile market conditions likely to continue to drive challenging flows in the near-term, while a medium-term turn in flows could encourage a stock re-rating. The broker, Buy rated with a $6.45 target price, noting Pendal aspires to margins nearing 40%, does not expect significant margin improvement in the current inflationary environment. Further, UBS analysts noted the company can now execute its planned $100m buyback.

While not a database broker, Jarden noted the company’s cautious approach to costs appears sensible in the face of volatile markets. The broker liked company commentary that a more measured approach to investment would increasingly be adopted given current trading conditions, although not at the cost of revenue growth. Jarden, who is also Buy rated with a $6.50 target price, adjusts its forecasted cost price growth in line with Pendal Group’s, declining to 5.0% from 8.0% in the current year and lifting to 7.0% and from 5.0% in FY23.

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