14 August 2017 INTERNAL ONLY RECOMMENDATIONS Rating BUY Risk High Price Target $0.58 Share Price $0.41 SNAPSHOT Monthly Turnover $9.5mn Market Cap $165mn Shares Issued 398.5mn 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 Josh Kannourakis + 613 9602 9265 jkannourakis@baillieuholst.com.au Disclosure The author owns no shares in PPS. Praemium (PPS) COMPANY REPORT Model performance Overall: PPS s underlying earnings result was a touch ahead of our expectations, with excellent revenue trends and margin expansion. BUY. FY17 result: PPS reported underlying EBITDA of $6.3m, up 54% over the year and just ahead of our equivalent forecast of $6.0m. Pre-tax profit of $2.2m was just below our $2.6m forecast due to one-off expenses (total normalised costs of $3.2m were higher than our $2.5m forecast due to restructuring). Profit after tax of $0.7m was also less-than-expected with a tax expense of $1.5m, much higher than our $1.0m forecast. Drivers/surprises: FY17 gross revenue of $35.4m was up 17% and in line with our forecast of $35.8m. By product type, SMA revenue was up 44% to $17.2m on the back of 28% growth in funds under administration (FUA) and improving sales from PPS s in-house investment management products. Portfolio Services recorded 8% revenue growth to $14.7m, driven by new client wins. Underlying expenses of $29.1m were up 11% over the year and less than our forecast $30.3m, driving 54% growth in EBITDA to $6.3m. The Australian business reported EBITDA of $10.6m at a margin of 46%, whilst the UK saw its EBITDA loss improve 33% over the year to -$2.2m. Overall, the company improved its EBITDA margin from 14% in FY16 to 18% in FY17. Key takeaways: Since 1 Jul-17, PPS has grown its Australian SMA FUA by 7.2% to $4.15bn and the International SMA FUA by 5.4% to $ 1.37bn, reflecting a very strong start to the year. Meanwhile, the company remains well capitalised with no debt and $9.0m cash in the bank. Changes to EPS: We increase our FY18F underlying EPS forecasts by 2.6% and reduce our FY19F forecasts by 9.4%. Our valuation and price target increase from $0.55 to $0.58 given the roll-forward. Investment view: PPS continues to show good momentum across new business flows, funds under administration, revenue and profit. 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 31x with a two-year EPS CAGR of 37% EPS growth. INVESTMENT SUMMARY Year End: 30 June 2016 (A) 2017 (A) 2018 (E) 2019 (E) 2020 (E) Revenue $mn 29 33 39 46 51 EBITDA $mn 4.2 6.3 9.3 13.2 15.4 EBIT $mn 3.3 5.4 8.2 12.0 14.2 Reported Profit $mn 0.8 0.6 4.6 6.9 8.6 Adjusted Profit $mn 2.2 3.9 5.3 7.5 8.9 EPS (Reported) 0.2 0.2 1.1 1.7 2.1 EPS (Adjusted) 0.6 1.0 1.3 1.9 2.2 EPS Growth % N/A 75.7 33.8 40.1 18.2 PER (Reported) x 198.8 258.4 35.8 23.9 19.4 PER (Adjusted) x 72.7 41.4 30.9 22.1 18.7 Dividend 0.0 0.0 0.0 1.0 1.1 Yield % 0.0 0.0 0.0 2.3 2.7 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: 14 August, 2017 Upside/downside: 41.8% Share Price: $0.41 Valuation: $0.48 Market Capitalisation: $163m Valuation method: DCF / EV/EBITA Year End: 30 June Risk: High PROFIT & LOSS (A$m) FY16A FY17A FY18E FY19E FY20E EARNINGS FY16A FY17A FY18E FY19E FY20E Net revenue 29.30 32.80 38.74 46.01 50.88 EPS - Underling cash (diluted) 0.6 1.0 1.3 1.9 2.2 Operations -6.20-6.80-7.75-9.20-10.18 EPS Growth - underlying 214% 76% 34% 40% 18% Gross Margin 23.10 26.00 30.99 36.81 40.70 EPS - Reported (diluted) 0.2 0.2 1.1 1.7 2.1 Costs -18.90-19.70-21.67-23.62-25.27 Diluted shares (m) 395.3 397.8 400.6 403.8 405.5 EBITDA 4.20 6.30 9.32 13.19 15.43 DPS (cps) 0.0 0.0 0.0 1.0 1.1 Depreciation & amortisation -0.86-0.94-1.16-1.21-1.27 Payout Ratio 0% 0% 0% 51% 50% EBIT 3.35 5.36 8.16 11.98 14.16 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 7.06 10.68 13.16 Underlying P/E (x) 72.7 41.4 30.9 22.1 18.7 Tax -0.80-1.53-2.47-3.74-4.60 EV/EBITDA (x) 35.2 23.7 15.2 10.2 8.2 Minorities 0.00 0.00 0.00 0.00 0.00 EV/EBIT (x) 44.1 27.8 17.4 11.2 9.0 Reported NPAT 0.82 0.63 4.59 6.94 8.55 Dividend Yield (%) 0.0% 0.0% 0.0% 2.3% 2.7% Price/Book (x) 10.0 9.5 7.3 6.4 5.4 Add back: Price/NTA (x) 13.6 12.8 9.1 7.6 6.4 Non-recurring items (net tax) 1.41 3.31 0.72 0.56 0.35 Price/FCF 314.1 244.9 23.5 16.9 14.5 Underlying cash profit 2.23 3.94 5.31 7.50 8.90 GROWTH FY16A FY17A FY18E FY19E FY20E Revenue growth 20.1% 11.9% 18.1% 18.8% 10.6% BALANCE SHEET (A$m) FY16A FY17A FY18E FY19E FY20E Operating cost growth 1.6% 9.7% 13.9% 18.8% 10.6% Assets EBITDA growth 90.9% 50.0% 48.0% 41.4% 17.0% Cash 10.43 8.98 15.98 23.84 31.14 PBT growth 8.1% 33.8% 226.9% 51.2% 23.2% Receivables 5.34 6.69 5.04 5.98 6.61 Underlying NPAT growth -138.5% -22.6% 627.6% 51.2% 23.2% PPE 0.90 1.24 1.24 1.24 1.24 Reported NPAT growth -216.6% 76.8% 34.7% 41.2% 18.7% Intangibles 4.31 4.38 4.38 4.38 4.38 MARGINS & RETURNS FY16A FY17A FY18E FY19E FY20E Tax assets 0.62 0.63 0.63 0.63 0.63 EBITDA Margin 14.3% 19.2% 24.1% 28.7% 30.3% Other assets 1.79 2.24 2.24 2.24 2.24 EBIT Margin 11.4% 16.3% 21.1% 26.0% 27.8% Total Assets 23.38 24.17 29.51 38.31 46.24 NPBT Margin 5.5% 6.6% 18.2% 23.2% 25.9% Liabilities ROIC 42.0% 26.4% 83.4% 197.9% 1237% Payables 3.81 5.36 5.04 5.98 6.61 ROE 13.9% 23.7% 26.9% 30.9% 31.5% Debt 0.00 0.00 0.00 0.00 0.00 ROA 18.3% 26.5% 34.7% 38.9% 36.5% Provisions 1.04 1.13 1.13 1.13 1.13 Effective Tax Rate 49.5% 70.8% 35.0% 35.0% 35.0% Other liabilities 2.3 0.6 0.9 5.1 8.0 Total Liabilities 7.1 7.1 7.1 12.2 15.7 GEARING FY16A FY17A FY18E FY19E FY20E Equity Net Debt / (cash) (A$m) -10.4-9.0-16.0-23.8-31.1 Share capital 64.1 64.8 64.8 64.8 64.8 Enterprise value 147.6 149.1 142.1 134.2 126.9 Retained earnings -48.4-47.7-42.4-38.7-34.3 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 22.40 26.07 30.52 OPERATIONAL DATA FY16A FY17A FY18E FY19E FY20E Revenue by Product (A$m): BV per share (cps) 4.11 4.30 5.59 6.46 7.53 Portfolio Services 13.60 14.70 15.86 16.16 12.43 NTA per share (cps) 3.02 3.20 4.50 5.37 6.45 SMA - Australia 6.50 8.40 10.89 13.66 16.75 SMA - Intenational 5.20 7.50 10.19 14.55 20.24 Financial Planning 1.90 2.10 2.30 2.41 2.53 CASH FLOW (A$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 15.6 23.4 Group revenue 30.10 35.40 41.60 49.15 54.34 Cash from from ops 1.0 1.5 7.8 10.7 12.5 Growth 23.4% 17.6% 17.5% 18.2% 10.5% Capex -0.5-0.9-0.8-0.9-1.0 Free cash flow 0.5 0.7 7.0 9.8 11.4 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 5.05 6.33 7.63 Cash flow from investing -1.0-2.1-0.8-0.9-1.0 International 1.76 2.20 3.16 4.30 5.82 Cash flow from financing 0.0 0.0 0.0-1.9-4.1 Group 4.77 6.07 8.22 10.63 13.45 Cash at end 10.0 8.6 15.6 23.4 30.7 Growth 25.2% 27.3% 35.3% 29.4% 26.5% GOCF / EBITDA 20% 76% 95% 95% 95% FCF / Underlying cash NPAT 23% 17% 132% 130% 129% Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report. Page 2
Model performance Overall: PPS s underlying earnings result was a touch ahead of our expectations, with excellent revenue trends and margin expansion. BUY. FY17 result: PPS reported underlying EBITDA of $6.3m, up 54% over the year and just ahead of our equivalent forecast of $6.0m. Pre-tax profit of $2.2m was just below our $2.6m forecast due to one-off expenses (total normalised costs of $3.2m were higher than our $2.5m forecast due to restructuring). Profit after tax of $0.7m was also less-than-expected with a tax expense of $1.5m, much higher than our $1.0m forecast. FIG.1: PPS FY17 RESULT SUMMARY FY17 gross revenue of $35.4m was up 17% and in line with our forecast of $35.8m. By product type, SMA revenue was up 44% to $17.2m on the back of 28% growth in funds under administration (FUA) and improving sales from PPS s in-house investment management products. Portfolio Services recorded 8% revenue growth to $14.7m, driven by new client wins. Underlying expenses of $29.1m are up 11% over the year and less than our forecast $30.3m, driving 54% growth in underlying EBITDA to $6.3m. The Australian business reported EBITDA of $10.6m at a margin of 46%, whilst the UK saw its EBITDA loss improve 33% over the year to -$2.2m. Overall, the company improved its EBITDA margin from 14% in FY16 to 18% in FY17. Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report. Page 3
FIG.2: PPS FY17 RESULT BY GEOGRAPHY Key takeaways: Since 1 Jul-17, PPS has grown its Australian SMA FUA by 7.2% to $4.15bn and the International SMA FUA by 5.4% to $ 1.37bn, reflecting a very strong start to the year. Meanwhile, the company remains well capitalised with no debt and $9.0m cash in the bank. FIG.3: PPS FY17 RESULT AUSTRALIA HIGHLIGHTS Changes to EPS: We increase our FY18F underlying EPS forecasts by 2.6% and reduce our FY19F forecasts by 9.4%. Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report. Page 4
FIG.4: PPS FY17 RESULT INTERNATIONAL HIGHLIGHTS Investment view We reiterate a BUY rating. Our valuation and price target increase from $0.55 to $0.58 due to the year-end rollforward. PPS continues to show good momentum across new business flows, funds under administration, revenue and profit. 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 31x with a two-year EPS CAGR of 37% EPS growth. FIG.5: PPS STRATEGIC PRIORITIES Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report. Page 5
Appendix FIG.6: LONG TERM MOMENTUM INDICATORS Source: Iress FIG.7: 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 6
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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Baillieu Holst Ltd ABN 74 006 519 393 Australian Financial Service Licence No. 245421 Participant of ASX Group Participant of NSX Ltd www.baillieuholst.com.au Melbourne (Head Office) Address Level 26, 360 Collins Street Melbourne, VIC 3000 Australia Postal PO Box 48, Collins Street West Melbourne, VIC 8007 Australia Phone +61 3 9602 9222 Facsimile +61 3 9602 2350 Email melbourne@baillieuholst.com.au Adelaide Office Address Ground Floor, 226 Greenhill Road, Eastwood SA 5063 Postal PO Box 171 Fullarton SA 5063 Phone +61 8 7074 8400 Facsimile +61 8 8362 3942 Email adelaide@baillieuholst.com.au Bendigo Office Address Level 1, 10-16 Forest Street Bendigo, VIC 3550 Postal PO Box 84 Bendigo, VIC 3552 Phone +61 3 4433 3400 Facsimile +61 3 4433 3430 Email bendigo@baillieuholst.com.au Geelong Office Address 16 Aberdeen Street Geelong West Vic 3218 Postal PO Box 364 Geelong Vic 3220 Australia Phone +61 3 5229 4637 Facsimile +61 3 4229 4142 Email geelong@baillieuholst.com.au Gold Coast Office Address Suite 202 Level 2, Eastside Building 6 Waterfront Place, Robina QLD 4226 Phone +61 7 5628 2670 Facsimile +61 7 5677 0258 Email goldcoast@baillieuholst.com.au Newcastle Office Address Level 1, 120 Darby Street Cooks Hill, NSW 2300 Australia Postal PO Box 111 The Junction, NSW 2291 Australia Phone +61 2 4037 3500 Facsimile +61 2 4037 3511 Email newcastle@baillieuholst.com.au Perth Office Address Level 10, 191 St Georges Terrace Perth WA 6000 Australia Postal PO Box 7662, Cloisters Square Perth, WA 6850 Australia Phone +61 8 6141 9450 Facsimile +61 8 6141 9499 Email perth@baillieuholst.com.au Sydney Office Address Level 40, 259 George Street Sydney, NSW 2000 Australia Postal PO Box R1797 Royal Exchange, NSW 1225 Australia Phone +61 2 9250 8900 Facsimile +61 2 9247 4092 Email sydney@baillieuholst.com.au Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Page 7