In our view, the PPT/PDL is questionable at best. We see limited strategic/economic merit in the transaction. In the early years, the merger is expected to be dilutive to earnings at an EPS level.
PPT track record on M&A is mixed. Since 2018, Rob Adam’s has bulked up FUM by ~7.5x. In doing this, PPT net debt position has increased by >$300m, whilst its share count has increased by almost 25%. Despite a positive tailwind across asset markets, PPT’s EPS has gone backwards from $3.00 to an expected $1.86 per share in FY23E.
We question the strategic merit of going further down an acquisition strategy that has a mixed track record of delivering on expectations globally for asset managers. Locally, Insigna Financial (IFL) acquisitions of ANZ Wealth and MLC failed to deliver anywhere near the benefits promised at the time of acquisition.
We resist the urge to be more negative on PPT, given 1) share price already reflects a portion of our view; 2) near-term synergies do provide a useful story on earnings momentum; and 3) valuation at 12x PER is well below PPT’s long term PER of 16x, and PPT PER relative of 0.8x to the S&P/ASX 200 is at 10-15% discount to PPT long-term average. We rate PPT a HOLD.
Investment View
Share prices of asset managers need to see a period of positive fund inflows and risk-on-market sentiment to outperform the market.
There remains a risk post-merger that net fund-flows accelerate given fund overlap (something we have witnessed globally in mergers of asset managers).
The merger does provide PPT with scale benefits and will CEO Rob Adam’s strategic focus around synergies benefits over the next 2-3 years.
We remain sceptical that the merger creates inherent long-term value for PPT shareholders. The two most prospective higher growth businesses within PPT – Corporate Trust and Wealth Business will be effectively diluted under the merger.
PPT's track record of M&A over the last 5-years is patchy at best. Despite the growth of FUM and positive market tailwinds, PPT’s EPS has deteriorated by double-digit percentages along with a material increase in net debt. Erosion of earnings from here would increase balance sheet risk given the higher financial leverage. We rate PPT a Hold.
Figure 1: PPT FUM balance has halved over 2022
Figure 2: PDL has also suffered fund outflows through 2022
Risks To Investment View
The key risks for PPT include regulatory and compliance issues, key person retention (across key fund brands) and integration risks around the various acquisitions including the recently completed PDL acquisition. There are also risks around the various fund performance, particularly if it leads to FUM outflows.
Recommendation
We have retained our Hold recommendation.
Figure 3: PPT post-merger PER ~12x
Figure 4: PPT PER relative ~15% discount to the market
