The growth strategy initiated under a new CEO in 2019 has added several acquisitions with perhaps more to come. Perpetual has a strong brand and a specialised capability in fiduciary duty that will underpin diversified growth that is not entirely dependent on markets.
PPT has repositioned its business through acquisitions that have played to its strengths around its brand and fiduciary duty. The core business lines have been organised along four activities as follows: Perpetual Asset Management International (PAMI) includes the acquisitions of Barrow Hanley, a value-focused US/Global equity and fixed income manager, and Trillium, an ESG manager. ESG has been identified by PPT as a substantial growth area while value-based investing is experiencing a relative performance resurgence.
Perpetual Asset Management Australia (PAMA) is also a value manager and is experiencing a good period of performance and resilience in net funds flows. The improved equities performance could help to lift net flows along with further active ETF launches.
Perpetual Private (PP) has also expanded by acquisition, capitalising on the dislocation in the broader financial advice sector. The August 2021 acquisition of Jacaranda Financial Planning, a high net wealth business with FUA of $900 million and a healthy growth rate. PP has had over 8 consecutive years of positive net flows and the JFP acquisition has been just as successful averaging $100 million of net fund flow each year.
Corporate Trust (CT) is the largest business accounting for around 32% of forecast group EBITDA for FY22f. CT acquired Laminar Capital in October last year, a specialist debt solutions and advisory business with a particular strength in Treasury digital solutions. The latter part has fitted into CT’s digital offering creating three distinct areas of growth.
After six acquisitions since 2019, PPT still has capital of approximately $80-190 million left to be deployed which may occur before the end of the current financial year. Possibilities include alternative asset class capability, a further advice bolt-on in PP or more digital capability.
The two asset management businesses are experiencing strong relative performance. This has possibly contributed to a notable mandate win of $500 million in global equity strategies flagged for this quarter. ESG net flow gains, particularly in the international business and some meaningful performance fees in Australia should feature in upcoming results.
As with every asset management business, the cost-to-income ratio is very important. For example, at PAMI, the cost-to-income ratio at 70% is the highest across the group and should be closely monitored.
Investment view
PPT is no longer a mature business with limited growth options. The acquisition trail has reinvigorated PPT’s four key businesses and provided a growth path that could deliver annual eps growth of 5% in a normalised market over the long term.
Importantly, around 40% of PPT’s business is non-market facing and provides a high quality stream of earnings from its largest division, Corporate Trust. This type of business is very difficult to replicate and PPT’s business is market-leading. PPT currently has a net debt position of approximately $100 million and has issued around 10 million shares (about 20% of its shareholder capital) in order to deploy around $650 million on acquisitions.
We think it is too early to assess the relative success of these acquisitions, but it has certainly propelled PPT into a growth phase.
Risks to investment view
The key risks for PPT include regulatory and compliance issues, key person retention and integration risks around the various acquisitions. We also focus on the cost-to-income ratio that is a key earnings driver.
Recommendation
We have initiated our coverage of PPT with a Buy recommendation.
We highlight the excellent dividend yield (over 6% net) and the stock trades on an undemanding FY22f PE ratio of ~13x.
