Perpetual came out with its 3Q23 Business update and gave some insight to how the merger with Pendal has been progressing.
Whilst the updates included a lot of positive news around what the company has achieved throughout the merger process, it also highlights that there is a material cost blowout in the Pendal business.
PPT noted that its underlying cost base should be up ~6% excluding PDL. Including PDL, the underlying cost base is expected to rise between 37-39%. If we annualise the cost base for PDL, it comes out at ~A$201m (pre-synergies) which is ~16% ahead of PDL’s cost base a year ago.
With PDL’s FUM being lower today than it was 12 months ago, its arguable that costs should also be lower today. As we see it, the cost blowout will likely limit the upside that PPT will achieve post-merger.
PDL’s contribution to PPT’s FY24 EBITDA is expected to be roughly half of what it was in FY22 (~$140m). Representing a ~16x EV/EBITDA multiple vs PPT at 9x FY24e.
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.
Some outflow risk remains post-merger and given the accounting change, we won’t know how the net flows and FUM impact earnings until the FY23 result. Given the suggested cost blowout and lower FUM, we see it as unlikely that PDL go over and above on earnings contribution.
PPT's track record of M&A over the last 5-years is patchy at best. The EPS has deteriorated by double-digit percentages along with a material increase in net debt. With the lower contribution from PDL in FY24, there remains the possibility that this merger follows suit.
It remains difficult to get overwhelmingly negative on the stock given its trading at more than a 2 standard deviation discount to its long-term PER.
For now, we re-iterate our Hold rating.
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.
