Perpetual (PPT) Oversold, upgrade to Buy. Over 6% yield, with upside in market rally. Quarterly highlights. Earnings revisions

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1 16 April 2018 Analyst Lafitani Sotiriou Authorisation TS Lim Perpetual (PPT) Oversold, upgrade to Buy Recommendation Buy (Hold) Price $42.09 Target (12 months) $47.50 (previously $52.10) GICS Sector Diversified Financials Expected Return Capital growth 12.9% Dividend yield 6.4% Total expected return 19.3% Company Data & Ratios Enterprise value Market cap $1.74bn $1.96bn Issued capital 46.6m Free float 100% Avg. daily val. (52wk) $9.76m 12 month price range $41.99-$57.34 Price Performance (1m) (3m) (12m) Price (A$) Absolute (%) Rel market (%) Over 6% yield, with upside in market rally PPT has delivered a disappointing quarterly update which includes a lost mandate and unfavourable market movements. However, the share price is already down over -21% since the highs seen as recent as February and we believe this has more than captured the earnings revision seen today. We believe now is a good time to revisit the stock with over a 6% dividend yield on offer, and while there is negative sentiment on the stock from what we see as largely a one-off negative flow in the period and from a difficult period in the share market with volatility and a general decline across the board. However, the ASX200 is already up ~2% this June quarter, providing an early encouraging sign, which if maintained, provides the catalyst for a potential positive rerating. Quarterly highlights PPT has released its March quarter net-flows and FUM update, highlights include: Closing FUM of $30.2 billion. vs BPe $32.8 billion; Net-flows of -$1.3 billion vs. BPe -$0.1 billion, due to a lost mandate; and Market and other flows of -$1.3 billion, vs. BPe +$100m. Earnings revisions Following the March quarter update, we have downgraded our underlying EPS estimates by -2.9%, -9.5%, and -8.7% for FY18, FY19 and FY20 respectively. The changes are driven by lower share market and net-flow levels versus expectation. The ASX200 was down -5% during the period, and there was a lost institutional mandate which we see as one-off. Following the revisions our revised Price Target is $47.50 per share (previously $52.10), with an upgrade to our recommendation to Buy (previously Hold). Absolute Price $60.00 $55.00 $50.00 $45.00 $40.00 $35.00 $30.00 Apr 16 Oct 16 Apr 17 Oct 17 Apr 18 SOURCE: IRESS PPT S&P 300 Rebased BELL POTTER SECURITIES LIMITED ACN AFSL Earnings Forecast Year end June e 2019e 2020e Revenue (A$m) EBITDA (A$m) NPAT (reported) (A$m) NPAT (adjusted) (A$m) EPS (adjusted) (cps) EPS growth (%) 7% 3% -2% 6% PER (x) Price/CF (x) EV/EBITDA (x) Dividend ( ps) Franking (%) 100.0% 100.0% 100.0% 100.0% Yield (%) 6.3% 6.4% 6.5% 6.9% ROE (%) 22.1% 22.0% 21.0% 21.8% SOURCE: BELL POTTER SECURITIES ESTIMATES DISCLAIMER: THIS REPORT MUST BE READ WITH THE DISCLAIMER ON PAGE 6 THAT FORMS PART OF IT. Page 1

2 Quarterly FUM Figure 1 - Perpetual Investments quarterly FUM and net-flows Perpetual Investments FY16 1Q 2Q 3Q 4Q FY17 1Q 2Q 3Q 4Qe FY18e 1Qe 2Qe 3Qe 4Qe FY19e FY20e Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Jun-19 Jun-20 Asset Type Australian Equities Open Net-flow s Market & Other Close Global Equities Open Net-flow s Market & Other Close Cash & Fixed Income Open Net-flow s Market & Other Close Other Open Net-flow s Market & Other Close LIC Open Net-flow s Market & Other Close Total Open Net-flow s Market & Other Close Channel Retail Open Net-flow s Market & Other Close Intermediary Open Net-flow s Market & Other Close Institutional Open Net-flow s Market & Other Close All Channels Open Net-flow s Market & Other Close SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Page 2

3 Perpetual overview Company description Perpetual is a diversified financial, with about half of earnings attributed to Perpetual Investments (product manufacturer and distribution), with the two remaining quarters split between Private Wealth (fiduciary and financial advisory) and Corporate Trust (corporate trustee). In December 2013, PPT acquired TRU, with its business to fall within the three divisions noted below: Perpetual Investments is a traditional product manufacturer with some structured products. We believe the business has scale, a strong brand and is well positioned to capture a market recovery. Perpetual Private is split across financial advisory and fiduciary services. The income is less volatile as it is diversified with varying income structures, including fee based services which provides greater stability. Corporate Trust is the largest provider of corporate trustee services and transaction support in Australia. Investment Strategy We currently have a Hold recommendation given our valuation, although would review this on share price weakness. Risks Key risks for the stock include: Key people risk Similar to other wealth management businesses, the loss of any key investment personnel may result in the loss of investment mandates; Performance risk Investors are wary of investment managers that charge active management fees and that have underperformed the index over a prolonged period of time. It is important for Perpetual to maintain reputable performance metrics across its product offering; Financial Advice risk On the back of Storm Financial, Managed Investment Schemes and other well-known collapses in the industry, there is an added focus on any unsavoury practices and Perpetual will do well to steer clear of any negative headlines; and Market Risk PPT is exposed to adverse and sudden stock market changes, whether driven by natural or manmade disaster or event. Page 3

4 Interim earnings and revisions Figure 2 - Interim earnings INTERIM INCOME STATEMENT Y/e June 30 ($m) H17 2H H18 2H18e 2018e 1H19e 2H19e 2019e 1H20e 2H20e 2020e Sales revenue EBITDA Depreciation & Amortisation Equity Grant Amortisation EBIT Net Interest Pre-tax profit Tax Adjusted profit One-off items Reported net profit SEGMENTALS Y/e June H17 2H H18 2H18e 2018e 1H19e 2H19e 2019e 1H20e 2H20e 2020e Perpetual Investments Revenue ($m) Costs ($m) EBITDA ($m) Closing FUM ($ billion) Average FUM ($ billion) Margin (%) 0.76% 0.74% 0.71% 0.73% 0.75% 0.72% 0.74% 0.74% 0.73% 0.73% 0.74% 0.73% 0.73% Private Wealth Revenue ($m) Costs ($m) EBITDA ($m) Closing FUM ($ billion) Average FUM ($ billion) Margin (%) 0.84% 0.85% 0.86% 0.86% 0.91% 0.91% 0.91% 0.91% 0.91% 0.91% 0.91% 0.91% 0.91% Corporate Trust Trust revenue ($m) FS revenue ($m) Total revenue ($m) Costs ($m) EBITDA ($m) Closing FUM ($ billion) Average FUM ($ billion) Margin (%) 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% Group and Support Services Revenue ($m) Costs ($m) Remaining Trans. Synergies ($m) EBITDA ($m) SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Figure 3 - Earnings revisions SOURCE: BELL POTTER SECURITIES ESTIMATES Earnings revisions Following the March quarter update, we have downgraded our underlying EPS estimates by -2.9%, -9.5%, and -8.7% for FY18, FY19 and FY20 respectively. The changes are driven by lower share market and net-flow levels versus expectation. The ASX200 was down -5% during the period, and there was a lost institutional mandate which we see as one-off. Earnings Revisions FY18e FY18e (new) (previous) % Change FY19e FY19e (new) (previous) % Change FY20e FY20e (new) (previous) % Change EPS (adjusted) (cps) % % % Dividend ( ps) % % % Page 4

5 Perpetual as at 16 April 2018 Recommendation Buy Price $42.09 Target (12 months) $47.50 Perpetual (PPT) 16 April 2018 Table 1 - Financial summary Perpetual (PPT) Price Target (A$) Share Price (A$) Recommendation: Buy Market Cap (A$m) 1,961 INCOME STATEMENT VALUATION DATA Y/e June 30 ($m) e 2019e 2020e Y/e June 30 ($m) e 2019e 2020e Sales revenue Net profit adj ($m) Cost base Adjusted EPS (c) EBITDA EPS growth (%) -2% 7% 3% -2% 6% Depreciation & Amortisation P/E ratio (x) Equity Grant Amortisation CFPS (c) EBIT Price/CF (x) Net Interest DPS (c) Pre-tax profit Yield (%) 6.1% 6.3% 6.4% 6.5% 6.9% Tax Franking (%) 100% 100% 100% 100% 100% Adjusted profit EV/EBITDA (x) One-off items Price/book (x) Reported net profit NTA ($) CASHFLOW PROFITABILITY RATIOS Y/e June 30 ($m) e 2019e 2020e Y/e June 30 ($m) e 2019e 2020e EBITDA EBIT/sales (%) 37% 37% 38% 36% 37% Change in provisions Return on assets (%) 16% 17% 17% 16% 17% Working capital change Return on equity (%) 22% 22% 22% 21% 22% Net interest ROIC (%) 16% 17% 18% 17% 18% Tax paid ROIC ex structured products (%) 24% 26% 27% 27% 29% Other Dividend cover (x) Operating cashflow Effective tax rate (%) -28% -28% -28% -28% -28% Capex Investments LIQUIDITY AND LEVERAGE RATIOS Asset sales Y/e June 30 ($m) e 2019e 2020e Other Net debt/(cash) ($m) Investing cashflow Net debt/equity (%) -32% -37% -34% -37% -39% Change in borrowings Current ratio (x) Equity raised Dividends paid INTERIMS Other Half end December 31 ($m) 1H16 1H17 1H18 1H19e 1H20e Financing cashflow Sales revenue Net change in cash EBIT Cash at end of period Pre tax profit Adjusted profit BALANCE SHEET One-off items Y/e June 30 ($m) e 2019e 2020e Reported profit Cash Interim DPS (cents) Receivables Structured Products SEGMENTALS PPE Y/e June e 2019e 2020e Intangibles Other Perpetual Investments Total assets Revenue ($m) Payables Costs ($m) Debt EBITDA ($m) Provisions Closing FUM ($ billion) Structured Products Average FUM ($ billion) Other Margin (%) 0.76% 0.73% 0.74% 0.73% 0.73% Total liabilities Shareholders equity Private Total shareholders funds Revenue ($m) Costs ($m) W/A diluted shares on issue EBITDA ($m) Closing FUM ($ billion) Average FUM ($ billion) Margin (%) 0.84% 0.86% 0.91% 0.91% 0.91% Corporate Trust Trust revenue ($m) FS revenue ($m) Total revenue ($m) Costs ($m) EBITDA ($m) Closing FUM ($ billion) Average FUM ($ billion) Margin (%) 0.01% 0.01% 0.01% 0.01% 0.01% Group and Support Services Revenue ($m) Costs ($m) Remaining Trans. Synergies ($m) EBITDA ($m) SOURCE: BELL POTTER SECURITIES ESTIMATES Page 5

6 Recommendation structure Buy: Expect >15% total return on a 12 month view. For stocks regarded as Speculative a return of >30% is expected. Research Team Staff Member TS Lim Sam Haddad Chris Savage Title/Sector Head of Research Phone tslim shaddad csavage Hold: Expect total return between -5% Jonathan Snape jsnape and 15% on a 12 month view Tim Piper tpiper Sell: Expect <-5% total return on a 12 month view John Hester Tanushree Jain Financials Healthcare Healthcare/Biotech jhester tnjain Speculative Investments are either start-up enterprises with nil or only prospective operations or recently commenced operations with only forecast cash flows, or companies that have commenced operations or have been in operation for some time but have only forecast cash flows and/or a stressed balance sheet. TS Lim Lafitani Sotiriou Resources Peter Arden David Coates Analysts James Filius Alexander McLean Banks/Regionals Diversified Financials Resources Resources Analyst Analyst tslim lsotiriou parden dcoates jfilius amclean Such investments may carry an exceptionally high level of capital risk and volatility of returns. Bell Potter Securities Limited ACN Level 38, Aurora Place 88 Phillip Street, Sydney 2000 Telephone The following may affect your legal rights. Important Disclaimer: This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. In Hong Kong this research is being distributed by Bell Potter Securities (HK) Limited which is licensed and regulated by the Securities and Futures Commission, Hong Kong. This is general investment advice only and does not constitute personal advice to any person. Because this document has been prepared without consideration of any specific client s financial situation, particular needs and investment objectives ( relevant personal circumstances ), a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the representative of such licensee, who has provided you with this report by arrangement with Bell Potter Securities Limited) should be made aware of your relevant personal circumstances and consulted before any investment decision is made on the basis of this document. While this document is based on information from sources which are considered reliable, Bell Potter Securities Limited has not verified independently the information contained in the document and Bell Potter Securities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility for updating any advice, views opinions, or recommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued. Except insofar as liability under any statute cannot be excluded. Bell Potter Securities Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Disclosure of interest: Bell Potter Securities Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the securities referred to in this document. ANALYST CERTIFICATION Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. Page 6