Australia | Feb 07 2023
This story features PINNACLE INVESTMENT MANAGEMENT GROUP LIMITED. For more info SHARE ANALYSIS: PNI
Pinnacle’s investment spend drives weaker than anticipated affiliate revenue, but offers potential for improved returns longer-term.
-Analysts remain optimistic Pinnacle Investments can deliver net inflows in FY24, supported by positive underlying trends
-The company delivered a -24% year-on-year net profit decline in the first half
-More moderate declines in underlying metrics suggest growth strategies and a mix shift in investment exposure are proving beneficial to underlying business
By Danielle Austin
Despite delivering a year-on-year decline at the topline in its first half, analysts have been quick to point to more positive underlying trends that could support a positive outlook for investment management firm Pinnacle Investment Management ((PNI)).
Pinnacle’s net profit declined -24% year-on-year in its first half, but analysts have continued to find strength in underlying trends. It was highlighted that despite funds under management declining -11.1% year-on-year for the period, core revenue was flat and affiliate gross fees dropped a more moderate -7.0%. The result is considered demonstrative of benefit to Pinnacle’s underlying business from recent growth strategies and exposure mix shift.
The company reported net outflows of -$1.5bn, comprising retail inflows of $0.3bn plus offshore institutional inflows of $0.7bn and domestic institutional outflows of -$2.5bn. Retail inflows over the half were significantly lower than over the previous two years as market conditions worsened.
Among other revenue streams, Pinnacle holds equity in affiliate investment management funds, providing seed funding, distribution, office and infrastructure services, and general support to deliver investment services to clients. According to Pinnacle, it aims to work with affiliates demonstrating growth potential and with management teams with strong track records.
The company deployed $6.5m towards investment in its Horizon 2 affiliates – which includes Hyperion, Plato, Solaris, Palisade, Antipodes, Spheria and Firetrail – over the half, driving a -28% year-on-year decline in affiliate earnings in the half. The spend has seen a number of affiliates invest heavily in longer-term initiatives. While Pinnacle has acknowledged this investment spend will moderate near-term earnings, it anticipates these affiliates can deliver extremely high returns in the medium-term.
Brokers see potential in longer-term returns
Seeing room for operating leverage for Pinnacle from here, Morgans (Add, target price $10.95) finds longevity in the company’s growth profile. It anticipates investment in longer-term returns for its Horizon 2 affiliates and the scaling up of its current investment managers to drive leverage, while the addition of further affiliates offers additional upside. The broker expects Pinnacle can make a return to positive flows, aided by improvements in markets and subsequent returns.
Pinnacle’s first half underlying earnings per share were a -8% miss to Macquarie’s expectations, but despite this the broker (Outperform, target price $11.05) expects underlying trends revealed over the half offer potential to drive earnings in excess of its expectations. Macquarie lowered its earnings per share assumptions -5.2%, -0.6% and -1.75 through to FY25.
Ord Minnett (Hold, target price $9.50) similarly suggests Pinnacle looks likely to deliver improved profitability in the second half, but expects ongoing investment to constrain margins. For Ord Minnett, a miss in first half profit was largely the result of a lower than expected contribution from affiliates, underpinned by lower performance fees and higher investment in affiliate-level growth initiatives. This broker expects performance fees will improve in the second half of the year.
Ord Minnett also finds the outlook for flows challenging, and suspects Pinnacle’s near-term growth outlook to be more subdued given current volatility in equity markets. The broker expects Pinnacle can deliver a 3.1% earnings per share compound annual growth rate over the coming two years.
At the less optimistic end of the spectrum, UBS (Sell, target price $8.60) found Pinnacle’s weak affiliate fee margins to be indicative of the lack of predictability and visibility of these revenue streams that the market considers to be recurring.
UBS points out, despite Pinnacle believing affiliates can deliver performance fees regardless of market conditions, the reality is more affiliates outperformed during good times and underperformed during tough times. The broker does expect Pinnacle can shift from a net outflow to a net inflow by FY24, but remains more cautious on the trajectory of the company’s turnaround than consensus.
Outside of FNArena's daily coverage, Pinnacle’s first half net profit result disappointed Wilsons’ forecasts by -15.5%. While this broker (Overweight, target price $12.10) highlights inflow timing remains uncertain, it finds the company well positioned in the medium-term by investments.
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