Difficult operating environment
Pendal is trapped in a ‘perfect storm’ where its earnings base is shrinking due to material net outflows, negative mark-to-markets, and the TSW acquisition failing to be accretive. The group is moving away from its growth messaging, indicating in the FY22 result that its main goal is now maintaining mandates. The defensive sentiment was targeted particularly toward the US where the group has lost -$3.5bn in 6 months.
Get out of jail free card?
Pendal’s deteriorating performance may land itself in the lap of a ‘get out of jail free card’ in the form of Perpetual’s (PPT) proposed acquisition. A degree of caution remains however as the group is now in a position where the deal may no longer be accretive for PPT. As a result of this, transaction risk is likely to grow. The current tone remains positive towards the completion of the deal, so it remains a likely possibility that PPT continue to go forward. If the deal does fall over, PPT will pay PDL a 1% break fee ($30m-$40m).
FY22 RESULT
The result was in-line with consensus. NPAT was A$194.m vs A$189m mkt. DPS of 3.5c was significantly lower than the 14.5c consensus due to the proposed Scheme of arrangement agreement with Perpetual. 50.7c EPS was in-line with consensus. Base fees saw a ~10% expansion whilst performance fees shrunk ~10%, expected to be a significant headwind for FY23. Outlook suggests difficult trading conditions with short-term flow pressures persisting into the next financial year. FUM decreased ~$35bn over the year and is expected to remain in a difficult position through to FY24.
Investment View
We expect the market will put through earnings downgrades off the back of this soft result. The outlook suggests that earnings revisions will be passed through to FY24 as operating conditions are to remain difficult. The loss of high-margin mandates paired with pricing changes makes it difficult for the group to focus on its growth strategy. Despite the soft performance, we believe the PPT/PDL deal is likely to reach completion. Transaction risk, however, will likely have considerably increased off the back of this result. The results suggest that the deal is no longer accretive and will remain dilutive into FY24/FY25 (assuming the deal completes FY23). We reiterate our Hold rating.
Risks To Investment View
Key risks to PDL are 1). FUM compression 2). transaction risk and 3). Persistent difficult operating conditions.
FUM outflows remain a notable risk for PDL’s FY23 operations. The group has lost ~25% of its FUM over the past year and we believe there is potential for this to continue into FY23. Returning to a healthy net flow is likely to remain a core focus for the group.
Risk remains surrounding the PDL/PPT transaction. The poor performance might impose some risk on the completion of the transaction. The deal is now expected to be dilutive into years 2 and 3 post-acquisition.
Operating conditions are expected to remain difficult through FY23. Risk remains that slower performance further hinders the direction of flows and fee earnings. Management is looking to be defensively positioned to reinforce the current earnings base.
Figure 1: Dividend payout lower given Scheme of Arrangement with Perpetual.
Figure 2: Net FUM outflows for FY22. Management commentary suggests short-term flow pressure remains a notable headwind.
