10 October 2017 INTERNAL ONLY RECOMMENDATIONS Rating BUY Risk High Price Target $0.58 Share Price $0.45 SNAPSHOT Monthly Turnover $9.2mn Market Cap $162mn Shares Issued 399.6mn 52-Week High $0.54 52-Week Low $0.32 Sector Information Technology BUSINESS DESCRIPTION Praemium is a technology provider to the global wealth management sector. It provides technology platforms for investment and portfolio administration, separately managed accounts (SMAs) and financial planning. PPS administers over 300,000 client accounts, has over $80bn in assets under administration and has relationships with over 900 institutions. PPS has operations in Australia, Europe and Asia. 12-MONTH PRICE & VOLUME RESEARCH ANALYST Nicolas Burgess, CFA + 613 9602 9379 nburgess@baillieuholst.com.au Piers Flanagan +613 9282 8127 pflanagan@baillieuholst.com.au Disclosure The author owns no shares in PPS. Praemium (PPS) COMPANY REPORT Quartermaster Overall: PPS has delivered 9% quarterly growth in funds under administration in 1Q18, maintaining recent strong momentum, with a record quarter of inflows for the Australian business. We reiterate a BUY. Funds under administration (FUA): PPS reported group FUA of $6.7bn, up 31% over the year and 9% over the quarter. In Australia, FUA increased to $4.3bn, up 30% over the year and 11% over the quarter. In the UK, FUA of $2.4bn was up 35% over the year and 6% over the quarter (34% and 4% respectively on a constant currency basis). Flows: Australia recorded gross inflows of $587m, a record quarter with even contribution between new and existing clients. UK gross inflows of $162m were the third highest on record but lower than the last couple of results given the quieter European holiday season (as expected). Other points: PPS s Australian Super SMA now has $716m in FUA and accounts for 17% of total Australian FUA. PPS s in-house investment management products and models continue to grow, up 53% over the year to 440m (A$753m). Meanwhile, PPS has flagged additional investment in technology, product, and sales and marketing to accelerate growth momentum. No quantification has been given, although this is a consistent theme from the company over the last two years. We note the recent hire (4 Oct) of a new Head of Product and Marketing. We make modest increases to our cost growth assumptions (see below) but generally we remain comfortable that our forecasts reflect the investment requirements of the business. Changes to EPS: We decrease our EPS forecasts by 1.5% and 0.5% in FY18F and FY19F respectively, adding $0.5-0.8m of investment which is largely offset by slightly better-than-expected revenue momentum. Our $0.58 price target remains unchanged. Investment view: PPS continues to show good momentum across new business flows and funds under administration. We reiterate a BUY rating. Key attributes of our investment thesis include a growing managed accounts market as retail investors switch from other fund structures; growth initiatives from higher margin products in international markets; new capabilities and scale following strategic acquisitions; and potential corporate appeal (wealth technology likely to be part of the next wave of financial service consolidation, in our view). Valuation is not demanding trading on an FY18F PE of 34x with a two-year EPS CAGR of 37%. INVESTMENT SUMMARY Year End: 30 June 2016 (A) 2017 (A) 2018 (E) 2019 (E) 2020 (E) Revenue $mn 29 33 39 47 52 EBITDA $mn 4.2 6.3 9.2 13.1 15.5 EBIT $mn 3.3 5.4 8.0 11.9 14.2 Reported Profit $mn 0.8 0.6 4.5 6.9 8.6 Adjusted Profit $mn 2.2 3.9 5.2 7.5 8.9 EPS (Reported) 0.2 0.2 1.1 1.7 2.1 EPS (Adjusted) 0.6 1.0 1.3 1.8 2.2 EPS Growth % - 75.7 31.8 41.5 19.1 PER (Reported) x 218.2 283.7 40.0 26.3 21.3 PER (Adjusted) x 79.8 45.4 34.5 24.4 20.4 Dividend 0.0 0.0 0.0 0.9 1.1 Yield % 0.0 0.0 0.0 2.0 2.4 Franking % 0 0 0 0 100 Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report. Page 1
Financial summary Code: PPS Rating: BUY Analyst: Nicolas Burgess Price Target: $0.58 Date: 10 October, 2017 Upside/downside: 29.3% Share Price: $0.45 Valuation: $0.48 Market Capitalisation: $180m Valuation method: DCF / EV/EBITA Year End: 30 June Risk: High PROFIT & LOSS (A$m) FY16A FY17A FY18E FY19E FY20E EARNINGS FY16A FY17A FY18E FY19E FY20E Net revenue 29.30 32.80 39.08 46.74 51.79 EPS - Underling cash (diluted) 0.6 1.0 1.3 1.8 2.2 Operations -6.20-6.80-7.82-9.35-10.36 EPS Growth - underlying 214% 76% 32% 41% 19% Gross Margin 23.10 26.00 31.26 37.40 41.44 EPS - Reported (diluted) 0.2 0.2 1.1 1.7 2.1 Costs -18.90-19.70-22.06-24.27-25.97 Diluted shares (m) 395.3 397.8 400.6 403.8 405.5 EBITDA 4.20 6.30 9.20 13.13 15.47 DPS (cps) 0.0 0.0 0.0 0.9 1.1 Depreciation & amortisation -0.86-0.94-1.16-1.21-1.27 Payout Ratio 0% 0% 0% 49% 50% EBIT 3.35 5.36 8.04 11.92 14.20 Franking 0% 0% 0% 0% 100% Other -1.73-3.20-1.10-1.30-1.00 Net interest 0.00 0.00 0.00 0.00 0.00 VALUATION FY16A FY17A FY18E FY19E FY20E PBT 1.62 2.16 6.94 10.62 13.20 Underlying P/E (x) 79.8 45.4 34.5 24.4 20.4 Tax -0.80-1.53-2.43-3.72-4.62 EV/EBITDA (x) 40.4 27.2 17.9 11.9 9.6 Minorities 0.00 0.00 0.00 0.00 0.00 EV/EBIT (x) 50.8 32.0 20.4 13.1 10.5 Reported NPAT 0.82 0.63 4.51 6.90 8.58 Dividend Yield (%) 0.0% 0.0% 0.0% 2.0% 2.4% Price/Book (x) 11.0 10.5 8.1 6.9 6.0 Add back: Price/NTA (x) 14.9 14.1 10.0 8.3 7.0 Non-recurring items (net tax) 1.41 3.31 0.72 0.56 0.35 Price/FCF 344.7 268.8 26.1 18.7 15.9 Underlying cash profit 2.23 3.94 5.23 7.46 8.93 GROWTH FY16A FY17A FY18E FY19E FY20E Revenue growth 20.1% 11.9% 19.1% 19.6% 10.8% BALANCE SHEET (A$m) FY16A FY17A FY18E FY19E FY20E Operating cost growth 1.6% 9.7% 14.9% 19.6% 10.8% Assets EBITDA growth 90.9% 50.0% 46.0% 42.7% 17.8% Cash 10.43 8.98 15.89 23.80 31.21 PBT growth 8.1% 33.8% 221.2% 53.0% 24.3% Receivables 5.34 6.69 5.08 6.08 6.73 Underlying NPAT growth -138.5% -22.6% 615.1% 53.0% 24.3% PPE 0.90 1.24 1.24 1.24 1.24 Reported NPAT growth -216.6% 76.8% 32.7% 42.6% 19.6% Intangibles 4.31 4.38 4.38 4.38 4.38 MARGINS & RETURNS FY16A FY17A FY18E FY19E FY20E Tax assets 0.62 0.63 0.63 0.63 0.63 EBITDA Margin 14.3% 19.2% 23.5% 28.1% 29.9% Other assets 1.79 2.24 2.24 2.24 2.24 EBIT Margin 11.4% 16.3% 20.6% 25.5% 27.4% Total Assets 23.38 24.17 29.46 38.37 46.43 NPBT Margin 5.5% 6.6% 17.8% 22.7% 25.5% Liabilities ROIC 42.0% 26.4% 82.2% 194.1% 1127% Payables 3.81 5.36 5.08 6.08 6.73 ROE 13.9% 23.7% 26.5% 30.8% 31.4% Debt 0.00 0.00 0.00 0.00 0.00 ROA 18.3% 26.5% 34.3% 38.7% 36.5% Provisions 1.04 1.13 1.13 1.13 1.13 Effective Tax Rate 49.5% 70.8% 35.0% 35.0% 35.0% Other liabilities 2.3 0.6 0.9 5.0 7.9 Total Liabilities 7.1 7.1 7.1 12.2 15.8 GEARING FY16A FY17A FY18E FY19E FY20E Equity Net Debt / (cash) (A$m) -10.4-9.0-15.9-23.8-31.2 Share capital 64.1 64.8 64.8 64.8 64.8 Enterprise value 169.9 171.3 164.4 156.5 149.1 Retained earnings -48.4-47.7-42.5-38.6-34.2 Net Debt/Equity (%) -64% -53% -71% -91% -102% Other equity 0.54-0.04-0.04-0.04-0.04 EBITDA/Net interest na na na na na Total shareholders equity 16.24 17.09 22.32 26.16 30.63 OPERATIONAL DATA FY16A FY17A FY18E FY19E FY20E Revenue by Product (A$m): BV per share (cps) 4.11 4.30 5.57 6.48 7.55 Portfolio Services 13.60 14.70 15.86 16.16 12.43 NTA per share (cps) 3.02 3.20 4.48 5.39 6.47 SMA - Australia 6.50 8.40 11.20 14.32 17.56 SMA - Intenational 5.20 7.50 10.23 14.64 20.35 Financial Planning 1.90 2.10 2.30 2.41 2.53 CASH FLOW (A$M) FY16A FY17A FY18E FY19E FY20E Corporate / other 2.90 2.70 2.36 2.36 2.38 Cash at Start 11.1 10.0 8.6 15.5 23.4 Group revenue 30.10 35.40 41.94 49.89 55.26 Cash from from ops 1.0 1.5 7.7 10.7 12.5 Growth 23.4% 17.6% 18.5% 19.0% 10.8% Capex -0.5-0.9-0.8-0.9-1.0 Free cash flow 0.5 0.7 6.9 9.7 11.5 Funds on Platform (A$bn): Free cash flow per share (cps) 0.1 0.2 1.7 2.4 2.8 Australia 3.01 3.87 5.08 6.37 7.67 Cash flow from investing -1.0-2.1-0.8-0.9-1.0 International 1.76 2.20 3.18 4.32 5.85 Cash flow from financing 0.0 0.0 0.0-1.8-4.0 Group 4.77 6.07 8.26 10.70 13.53 Cash at end 10.0 8.6 15.5 23.4 30.8 Growth 25.2% 27.3% 36.1% 29.4% 26.5% GOCF / EBITDA 20% 76% 95% 95% 95% FCF / Underlying cash NPAT 23% 17% 132% 130% 128% Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report. Page 2
Quartermaster Overall: PPS has delivered 9% quarterly growth in funds under administration, maintaining recent strong momentum. We reiterate a BUY. FIG.1: PPS 1Q18 FUNDS UNDER ADMINISTRATION AND FLOWS Source: Company reports Funds under administration (FUA): PPS reported group FUA of $6.7bn, up 31% over the year and 9% over the quarter. In Australia, FUA increased to $4.3bn, up 30% over the year and 11% over the quarter. In the UK, FUA of $2.4bn was up 35% over the year and 6% over the quarter (34% and 4% respectively on a constant currency basis). FIG.2: PPS 1Q18 FUNDS UNDER ADMINISTRATION AND FLOWS Source: Company reports Flows: Australia recorded gross inflows of $587m, a record quarter with even contribution between new and existing clients. UK gross inflows of $162m were the third highest on record but lower than the last couple of results given the quieter European holiday season (as expected). FIG.3: PPS IN-HOUSE INVESTMENT MANAGEMENT Source: Company reports Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report. Page 3
Other points: PPS s Australian Super SMA now has $716m in FUA and accounts for 17% of total Australian FUA. PPS s in-house investment management products and models continue to grow, up 53% over the year to 440m (A$753m). Meanwhile, PPS has flagged additional investment in technology, product, sales and marketing to accelerate growth momentum. No quantification has been given, although this is a consistent theme from the company over the last two years. We note the recent hire (4 Oct) of a new Head of Product and Marketing. We make modest increases to our cost growth assumptions (see below) but generally we remain comfortable that our forecasts reflect the investment requirements of the business. Changes to EPS: We decrease our EPS forecasts by 1.5% and 0.5% in FY18F and FY19F respectively, adding $0.5-0.8m of investment which is largely offset by slightly better-thanexpected revenue momentum. Our $0.58 price target remains unchanged. Investment view: PPS continues to show good momentum across new business flows and funds under administration. We reiterate a BUY rating. Key attributes of our investment thesis include a growing managed accounts market as retail investor s switch from other fund structures; growth initiatives from higher margin products in international markets; new capabilities and scale following strategic acquisitions; and potential corporate appeal (wealth technology likely to be part of the next wave of financial service consolidation, in our view). The company s valuation is not demanding trading on an FY18F PE of 34x with a two-year EPS CAGR of 37%. From a relative perspective, PPS remains priced at the lower end of sector metrics, as shown in the table below. FIG.4: WEALTH PLATFORM SECTOR EV/Sales EV/EBITDA PE Adjusted YE Adjusted YE Adjusted YE Company Price YE FY18F FY19F FY18F FY19F FY18F FY19F Praemium 0.45 Jun 4.2 3.7 16.7 11.9 25.0 17.3 HUB24 8.23 Jun 5.5 4.6 34.0 20.3 47.3 27.7 Managed Accounts 0.31 Jun 5.0 3.9 17.0 11.0 31.0 18.2 OneVue Holdings 0.58 Jun 2.5 2.2 14.5 10.3 22.3 13.8 IRESS Ltd 11.70 Dec 4.8 4.4 16.6 14.8 24.2 21.6 Average 4.4 3.7 19.8 13.7 30.0 19.7 Source: Bloomberg Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report. Page 4
Appendix FIG.5: LONG TERM MOMENTUM INDICATORS Source: Iress FIG.6: SHORT TERM MOMENTUM INDICATORS Source: Iress Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report. Page 5
This document has been prepared and issued by: Baillieu Holst Ltd ABN 74 006 519 393 Australian Financial Service Licence No. 245421 Participant of ASX Group Participant of NSX Ltd Analysts stock ratings are defined as follows: Buy: The stock s total return is expected to increase by at least 10-15 percent from the current share price over the next 12 months. Hold: The stock s total return is expected to trade within a range of ±10-15 percent from the current share price over the next 12 months. Sell: The stock s total return is expected to decrease by at least 10-15 percent from the current share price over the next 12 months. 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