The large increase in earnings and FUM, due to the TSW acquisition, has masked a messy FY21 result for Pendal Group.
PDL announced its FY21 results with underlying profit after tax increasing 25% to $165.3 million reflecting a substantial increase in annuity income from base management fees and a big lift in performance fees. The Board declared a final dividend of 24cps (10% franked, payment date 16 December 2021) taking the full year dividend to 41cps.
The acquisition of TSW has doubled the company's US FUM to US$47 billion and is expected to add double digit eps in its first full year of ownership.
That will enhance PDL's overall earnings growth which is on track for double digit eps growth in FY22f as the higher average FUM rolls through and TSW makes its contribution.
But while the FUM growth was being lauded, PDL glossed over its laissez-faire approach to cost control. JO Hambro's cost-to-income ratio has increased 10% in the last four years. Pendal Australia has drifted 5% higher over the same time frame, noting that it carries much of the group function. TSW's cost-to-income ratio is a much leaner 40% but will it put on the pounds as it joins its rotund cousins? PDL's operating expenses in FY21 were 23% higher at $377.8 million reflecting higher variable employee costs due to the uplift in fee revenue and investments associated with PDL's strategic initiatives. The cost increases gobbled up much of the 23% increase in total fee revenue.
FUM as at 30 September 2021 was $139.2 billion with most of the 51% increase due to the TSW acquisition. Higher markets and investment performance contributed $16 billion while foreign currency movements added $2.1 billion.
Investment view
Could it be that PDL is the Nick Kyrgios of the funds management industry - full of (expensive) talent but lacking application and hence no titles of any merit? PDL is a good business with plenty of promise, but it is not helping itself by playing loose with its cost base. With more discipline in this regard, it would sharpen up the appeal of this growth story.
As an investment manager, PDL carries the usual risk of losing FUM due to poor investment performance, or if key investment personnel leave the group.
The acquisitions of JO Hambro and TSW may not have happened if PDL was still in the grip of its former owner, Westpac. But perhaps neither would the ill-disciplined approach to cost control which remains a blemish on an otherwise attractive business. The company may need to rein in its entrepreneurial spirit with regard to its costs in order for its earnings to really flourish, but we believe this is still possible.
We maintain our Buy recommendation on PDL.
