Praemium’s first half result will give potential suitor, Netwealth, plenty of reasons to walk away. The result was underwhelming, and the Board may have overplayed its hand, in our view.
PPS’s underlying cash net profit is declining when it really should be growing. The Powerwrap acquisition in 1H21 was targeted to deliver $6 million in cost synergies by the end of FY22.
Given PWL was largely breakeven at the acquisition date, there appears to be no obvious upside coming through.
Since FY19, PPS has grown its Australian Platform FUA by over 200% but this has delivered little upside to net profit.
The International business loss rate of -$0.1 million EBITDA in 1H22 is the lowest on record. Although it has been sold (completion by end of the financial year), it is not the cause of PPS’s poor result.
Underlying EBITDA for 1H22 was $5.5 million but within that, Australia EBITDA surprisingly went backwards from $8.6 million in 1H21 to $8.2 million in 1H22.
Guidance for group EBITDA in FY22 is between $16.5-18.5 million.
Investment view
It appears that Powerwrap is not providing the uplift to earnings that was indicated with the promised synergies actually a gross figure that ignores the on-going investment required.
The problem for PPS is that the likelihood of attracting a higher bid from NWL has significantly faded following this result. The earnings are lower and the broader market pricing for growth stocks has also changed. This makes it difficult to see how or why NWL would increase its (implied) $1.50 per share scrip deal. We note that NWL’s share price has also declined in the meantime.
This may leave PPS stranded on a very high PE ratio of more than 90x FY23f eps. We add that NWL has shown very good acquisition discipline in the past and this alone might suggest that a deal is no longer realistic.
Deal logic aside, we point out that revenue margin in the Australian Platform business was relatively stable at 23bp.
The sale of the International business will bring in around $65 million gross and the company has flagged it will return this to shareholders with a special dividend or buyback.
Risks to investment view
The Platform market has seen acquisition activity in the last year so a deal for PPS may yet happen. The company could also deliver or exceed on expectations for the PWL asset. PPS may improve its performance on converting FUA growth into revenue and EBITDA growth.
Recommendation
We have reduced our recommendation to Sell from Hold.
