Pinnacle Investment Management

Transcription

1 The pinnacle of execution Pinnacle provided a FUM update and 1H18 guidance which were both well ahead of our expectation, driven by rapid retail and insto inflows. FUM at Dec-17 of $32.4b sits above our FY18 estimate, driving us to upgrade to $35.9b. Thanks to strong operating leverage, we have increased our EPS forecasts for FY18 and FY19 by 24% and 28%. PNI now trades on an FY19 PE ratio (excluding cash and investments) of 21.6x with forecast EPS growth of 37%, hardly a demanding multiple for a business expected to produce a three year (FY18-21) EPS CAGR of 25%. We continue to rate PNI a Buy and our price target rises from $3.60 to $4.88 per share. PNI remains a flow story - $4b in 1H18, 60% up on 2H17 Affiliates across PNI s portfolio generated $4b of net inflow in 1H18, up from $2.5b in 2H17 and $2.4b in 1H17. Retail accounted for $1.35b of the assets gathered, with insto ($2.65b) the remainder. Antipodes finished 2017 with $6.3b of FUM, up from $2.2b a year earlier, and up 64% over the half-year higher profit here accounts for 60% of our share of affiliate NPAT upgrade in FY18. Operating leverage driving profit PNI reported NPAT for 1H18 is expected to be $8.1m, up from $3.0m in the pcp, a 2.7x improvement. After adjusting for performance fees and investments income, we expect the improvement was near 8-fold (i.e. performance fees and investment performance were higher in pcp). Strong operating leverage within the affiliates and at the PNI parent level continue to magnify PNI s persistent FUM growth. We expect this to remain a strong feature, with a three-year FUM CAGR (FY18-21) of 16% expected to lead to an EPS CAGR of 25%. New growth options now priced into our forecasts We have factored in Two Trees and the ex-macquarie team into our forecasts and valuation. We assume small losses in the near-term before the reputation and quality of each manager delivers material FUM growth in the medium-term. We do not model any additional affiliates, nor acquisitions despite PNI maintaining >$40m of available cash and investments. PNI has exhibited impeccable manager selection and highly effective distribution which we believe will beget further investment opportunities in high-calibre teams. Maintain Buy. Key Financials Year-end June (A$) FY16A FY17A FY18E FY19E FY20E Year-end FUM ($m) 19,756 26,526 35,927 42,553 49,814 Management fee (b.p.) Mgmt fee revenue ($m) Perf. fee revenue ($m) Reported NPAT ($m) Reported EPS (c) Normalised NPAT ($m) Normalised EPS (c) EPS Growth (%) - (0.5) Dividend (c) Net Yield (%) Franking (%) EV/EBITDA (X) Normalised P/E (x) Normalised ROE (%) Source: OML, Iress, Pinnacle Investment Management *Mgmt & perf fee look-through, pre-tax Last Price A$4.39 Target Price A$4.88 (Previously A$3.60) Recommendation Buy Risk Higher Asset Management and Custody Banks ASX Code PNI 52 Week Range (A$) Market Cap ($m) Shares Outstanding (m) Av Daily Turnover ($m) Month Total Return (%) Month Total Return (%) 79.2 Benchmark 12 Month Return (%) 6.2 NTA FY18E ( per share) 52.7 Net Cash FY18E (A$m) 22.0 Relative Price Performance Jan-17 Apr-17 Jul-17 Oct-17 Source: FactSet PNI ASX 200 Consensus Earnings FY18E FY19E NPAT (C) ($m) NPAT (OM) ($m) EPS (C) (c) EPS (OM) (c) Source: OML, Iress, Pinnacle Investment Management Nicholas McGarrigle Head of Institutional Research (02) nmcgarrigle@ords.com.au 1 22 January 2018

2 Net flows ($b) Total affiliate FUM ($b) Pinnacle Investment Management FUM update PNI reported $32.4b of FUM across its Affiliates at Dec-17, up 22% on Jun- 17 and 38% on pcp thanks to strong growrh in net inflows ($4b) and market performance ($1.9b). We had forecast $31.9b for FY18, and have since upgraded to $35.9b thanks to the strong start in 1H18 The $4.0b of net inflow gathered was 60% better than its next-best ever HY: - Retail net inflows of $1.35b were in line with 2H17 - Insto net inflows of $2.65b were up $1.55b on 2H17 We had assumed net inflows of just $3.4b for the entire year, making $4.0b in 1H18 a significant improvement against OMLe. We have now upgraded to $6.3b of net inflows for the year The only boutique for which we can confirm FUM at Dec-17 is Antipodes, reached $6.3b, up from $2.2b 12 months prior. We had forecast $6.2b for Antipodes for FY18, making the mark hit at Dec-17 quite an achievement. Upgrades to our expected contribution from Antipodes drove 60% of the uplift in our estimated share of affiliate NPAT in FY18. Figure 1 Retail and Insto net inflows by HY 5 4 Figure 2 Affiliate FUM Source: OML and PNI Retail flow Guidance for 1H18 Insto flow PNI have guided to $8.1m of NPAT in 1H18, up from $3.0m in pcp. Source: OML and PNI The pcp included $2.4m of aggregate affiliate performance fee revenue, compared with 1H18 at $0.5m. Given PNI get a proportion of this, after tax, we see $0.7m of after-tax performance fees in the pcp result. Further, there was $1.3m of investments income in the pcp result (after tax) which we do not believe was cycled in 1H18. Stripping these two items from the pcp result implies a 1H17 NPAT of ~$1m against the 1H18 expected result of $8.1m a material improvement. We note that the bulk of performance fees earned across the PNI affiliates portfolio are in 2H due to Palisade which was responsible 63% of affiliate performance fees in FY17. Total FUM Retail FUM Insto FUM 2

3 PNI boutique performance update We show a summary of recent performance below. It is evident why performance fees were not a feature of the 1H result, with most key strategies underperforming on a six-month horizon. Solaris High Alpha and Total Return funds earn their fees on an annual basis, which bodes well for FY18 given the performance to date. We do not model performance fees for any affiliate other than Palisade, meaning any fee is a bonus against our forecasts. Figure 3 PNI affiliate performance overview (to Dec-17) Perf to 31-Jul Antipodes Global Antipodes Global (long) Hyperion Large Hyperion Small Plato Aus Core Plato Aus Income ResCap Global Solaris Core Solaris High Alpha 1m -0.7% -0.9% +0.7% +3.6% +1.9% +1.8% +1.9% +2.1% +2.2% Relative +0.9% +0.7% -1.2% +0.4% +0.1% +0.0% +0.3% +0.4% 3m +3.8% +5.4% +8.5% +9.5% +6.4% +5.0% +4.8% +8.4% +9.0% Relative -2.1% -0.5% +0.8% -4.1% -1.2% -2.6% +0.8% +1.4% 6m +7.2% +10.6% +4.5% +6.2% +7.9% +5.2% +6.3% +9.9% +11.1% Relative -1.2% +2.2% -4.1% -12.5% -0.4% -3.2% +1.5% +2.8% 12m +13.1% +20.5% +9.1% +8.1% +11.9% +7.6% +11.7% +13.9% +16.2% Relative -0.2% +7.2% -2.9% -11.9% +0.1% -4.2% +2.1% +4.4% 3yr p.a. +9.0% +11.6% +8.6% +8.3% +8.5% +10.1% +11.8% Relative +0.2% -2.7% -0.1% -0.3% +1.5% +3.2% 5yr p.a % +14.6% +11.2% +11.7% +11.9% +12.0% +13.8% Relative +2.9% +7.2% +1.0% +1.5% +1.8% +3.6% Source: OML and Morningstar Changes to forecasts Marked FUM to market, reduced PNI pared overhead loss due to higher expected affiliate revenues, factored in Two Trees and the Macquarie team Figure 4 Changes to forecasts FY18 Old FY18 New %Δ FY19 Old FY19 New %Δ Share of boutique NPAT % % PNI revenues % % Revenue % % PNI overheads (ex-ida) % % EBITDA % % D&A % % Net interest % % Tax expense Normalised NPAT % % Normalised EPS (diluted) % % DPS (cents) % % Year-end FUM Hyperion 6,299 6, % 6,752 6, % Palisade 1,828 1, % 2,165 2, % Plato 4,496 4, % 5,024 5, % Solaris 5,709 7, % 6,325 7, % ResCap 6,589 6, % 7,268 7, % Antipodes 6,158 8, % 8,397 10, % Spheria % 1,168 1, % Two Trees n/a n/a HCF 0 0 n/a n/a Total FUM 31,930 35, % 37,099 41, % Source: OML 3

4 Valuation and recommendation We continue to rate PNI a Buy following a material upgrade to our forecasts. PNI is forecast to grow EPS between FY18 and FY21 by 25% p.a. and trades on an excash and investments (>$40m available) FY19 PE of 21.6x which we consider too cheap relative to the growth. While we have priced in Two Trees and the new Macquarie team in earnest, PNI maintains significant growth optionality in new seed boutiques, fresh boutique investments and potential acquisitions, none of which are being priced in our target, nor by the market. Our price target of $4.88 (was $3.60 per share), implies a FY19 PE (excluding cash and investments) of 24.3x, which we consider reasonable given the points above. Figure 4 Price target derivation Price target derivation Implied FY19 PE DCF price target Affiliate PE SOTP price target Price target (average of DCF and SOTP) ($ ps) EPS growth 36.5% Dividend yield 3.5% Cash and investments adjusted PE 24.3 Source: OML We show the affiliate PE sum-of-the-parts below, noting that we capitalise group overheads and offset this with growth optionality, representing Two Trees and the ex-macquarie team presently. PNI s view is that if it were not endeavouring to launch and support new managers, its overhead cost would fall to zero. Figure 5 Affiliate PE sum-of-the-parts FY19-22 NPAT CAGR PNI stake value ($m) PNI stake value (p.s.) Boutique FY19e NPAT Multiple range Valuation range Mid-point PNI O'ship Hyperion % 15-17x % Palisade % 16-18x % Plato % 16-18x % Solaris % 15-17x % Resolution Capital % 16-18x % Antipodes % 32-37x % Spheria % 12-14x % Boutique valuation 1,920-2,195 2, % Overheads x (25)-(20) (23) 100.0% Growth optionality Enterprise value Net cash / (debt) Equity value Rolled forward at cost of equity 4.87 Less FY18 dividend Price target 4.75 Source: OMLText 4

5 About Pinnacle Investment Management Pinnacle Investment Management is a multi-boutique investor which currently holds minority equity stakes in seven Australian-based boutiques. Beyond simply owning equity stakes, Pinnacle offers support via: Seed funding, both working capital and fund investment Distribution to retail and institutional markets Administration support services, including compliance, finance, legal, responsible entity, technology and fund administration Operational and governance frameworks Pinnacle has been successful over its history in fostering growth for its boutiques, with all seven currently profitable and holding ~$32.4b in combined FUM at Dec-17. Unlike other multi-boutique investment firms, Pinnacle still provides support services to all of its boutiques, indicating close relationships with its managers and execution on its philosophy of supported independence. Risks The risks present in any funds management business apply to Pinnacle given its structure. The difference is that Pinnacle s risks are diversified across a number of managers. This diversification is worth keeping in mind when considering the following (non-exhaustive list of) risks: Performance Maintaining a strong track record is vital for funds management businesses in retaining FUM and generating inflows. Key person risks While the teams supporting these principals are strong, the risk remains that departure of a principal impacts flows and/or performance. Performance fees We do not forecast performance fee contributions in PNI s share of associate NPAT, but performance fees are important to the funds themselves as it facilitates the payment of bonuses which helps retain staff. Regulatory risk Changing regulatory landscape can pose risks for managers. Administrative risks Apply to all fund managers in relation to unit pricing errors, counterparty failures, fraud, failures of technology etc. Pressure on fees A hot topic among regulators and asset consultants, fee pressure risk has been present for some time. Increased competition Domestic equity managers are already in a very competitive market, while the alternative and small cap manager segments are less competitive markets. Risks more specific to Pinnacle itself include, but are not limited to: Investment risk As an investment business, PNI runs the risk of making poor investments whether driven by poor performance, poor flows or principal departures. Agency risk As a minority shareholder in human capital intensive businesses, Treasury s economic interest may not be represented fairly in business decisions. Tight shareholder agreements mitigate this somewhat. Divestment risk Should PNI wish to exit an investment it may be a challenge to find a buyer for its stake outside of management of the fund. Structure risk The opacity of the structure and some of the boutique investments makes analysis difficult and cash flow certainty weaker than a cleaner setup. 5

6 Pinnacle Investment Management PROFIT & LOSS (A$m) 2016A 2017A 2018E 2019E 2020E Revenue Operating costs Operating EBITDA D&A (0.0) (0.1) (0.1) (0.1) (0.1) EBIT Net interest Pre-tax profit Net tax (expense) / benefit Significant items/adj Normalised NPAT Reported NPAT Normalised dil. EPS (cps) Reported EPS (cps) Effective tax rate (%) DPS (cps) Dividend yield (%) Payout ratio (%) Franking (%) Diluted # of shares (m) CASH FLOW (A$m) 2016A 2017A 2018E 2019E 2020E EBITDA incl. adjustments Change in working capital (4.3) (8.9) 2.1 (3.1) (3.8) Net Interest (paid)/received Income tax paid Other operating items (4.3) (20.7) Operating Cash Flow (0.2) (17.4) Other investing items 3.9 (1.7) Investing Cash Flow 3.8 (1.8) (0.1) (0.1) (0.1) Dividends paid (4.0) (11.9) (13.7) (22.0) (28.9) Other financing items Financing Cash Flow (3.7) 16.6 (13.7) (22.0) (28.9) FX adjustment Net Inc/(Dec) in Cash (0.0) (2.6) BALANCE SHEET (A$m) 2016A 2017A 2018E 2019E 2020E Cash Receivables Other current assets PP & E Intangibles Other non-current assets Total Assets Short term debt Payables Other current liabilities Long term debt Other non-current liabilities Total Liabilities Total Equity Net debt (cash) (13.5) (10.9) (22.0) (27.8) (32.9) Buy DIVISIONS 2016A 2017A 2018E 2019E 2020E Affiliate NPAT share (A$m) Hyperion Palisade Plato Solaris ResCap Antipodes (0.2) Spheria (0.2) (0.2) HCF - - (0.2) (0.3) 0.0 HCF - - (0.1) (0.1) 0.3 Other (0.9) (0.5) Total Affiliate NPAT share Affiliate FUM (A$m) Hyperion 5, , , , ,189.5 Palisade 1, , , , ,435.6 Plato 3, , , , ,062.8 Solaris 4, , , , ,617.5 ResCap 4, , , , ,440.3 Antipodes , , , ,488.5 Spheria , ,087.2 Two Trees HCF ,557.4 Total Affiliate FUM 19, , , , ,813.6 KEY METRICS (%) 2016A 2017A 2018E 2019E 2020E Revenue growth EBITDA growth EBIT growth Normalised EPS growth - (0.5) EBITDA margin OCF /EBITDA EBIT margin Return on assets Return on equity VALUATION RATIOS (x) 2016A 2017A 2018E 2019E 2020E Reported P/E Normalised P/E Price To Free Cash Flow - - 2, , ,134.2 Price To NTA EV / EBITDA EV / EBIT LEVERAGE 2016A 2017A 2018E 2019E 2020E ND / (ND + Equity) (%) (37.6) (16.9) (35.1) (42.4) (47.3) Net Debt / EBITDA (%) (161.2) (90.4) (98.1) (91.1) (88.4) EBIT Interest Cover (x) EBITDA Interest Cover (x) SUBSTANTIAL HOLDERS m % Ian Macoun % Steven Wilson % Wilson Asset Management % VALUATION Cost of Equity (%) 10.1 Cost of debt (after tax) (%) 4.9 D / EV (%) - WACC (%) 10.1 Forecast cash flow ($m) Terminal value ($m) Franking credit value ($m) 13.2 Enterprise Value ($m) Less net debt / add net cash & investments ($m) 46.2 Equity NPV ($m) Equity NPV Per Share ($) 4.66 Multiples valuation method Affiliate SOTP Multiples valuation Target Price Method Rolled fwd DCF/SOTP blend Target Price ($) 4.88 Valuation disc. / (prem.) to share price (%) 11.2

7 Institutional Research Nicholas McGarrigle Head of Institutional Research nmcgarrigle@ords.com.au Jules Cooper Senior Research Analyst julescooper@ords.com.au John O'Shea Senior Research Analyst joshea@ords.com.au Phillip Chippindale Senior Research Analyst pchippindale@ords.com.au William MacDiarmid Research Analyst wmacdiarmid@ords.com.au Institutional Sales (Australia) Nick Burmester Head of Institutional Equities nburmester@ords.com.au Matt White Institutional Equity Sales mwhite@ords.com.au Richard Wolff Institutional Equity Sales rwolff@ords.com.au Stephen Jolly Institutional Equity Sales sjolly@ords.com.au Frida Bohlenius Institutional Equity Sales Support fbohlenius@ords.com.au Brendan Sweeney Operator bsweeney@ords.com.au Institutional Sales (Hong Kong) Timothy Last Managing Director (HK) tlast@ords.com.hk Christopher Chappel Institutional Equity Sales cchappel@ords.com.hk Sam Phillips Institutional Equity Sales sphillips@ords.com.hk Ord Minnett Offices Adelaide Level Pirie Street Adelaide SA 5000 Tel: (08) Fax: (08) Brisbane Level Eagle St Brisbane QLD 4000 Tel: (07) Fax: (07) Buderim Sunshine Coast 1/99 Burnett Street Buderim QLD 4556 Tel: (07) Fax: (07) Caloundra, Sunshine Coast Bulcock Street Caloundra QLD 4551 Tel: (07) Fax: (07) Canberra 101 Northbourne Avenue Canberra ACT 2600 Tel: (02) Fax: (02) Coffs Harbour Suite 4 21 Park Avenue Coffs Harbour NSW 2450 Tel: (02) Fax: (02) Gold Coast Level 7, 50 Appel Street Surfers Paradise QLD 4217 Tel: (07) Fax: (07) Mackay 45 Gordon Street Mackay QLD 4740 Tel: (07) Fax: (07) Melbourne Level Collins Street Melbourne VIC 3000 Tel: (03) Fax: (03) Newcastle 426 King Street Newcastle NSW 2300 Tel: (02) Fax: (02) Head Office Sydney Level 8, NAB House 255 George Street Sydney NSW 2000 Tel: (02) Fax: (02) International Hong Kong 1801 Ruttonjee House 11 Duddell Street Central, Hong Kong Tel: Fax:

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