Pinnacle Investment Management: Breaking new ground
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Senior Analyst
- Date posted:
- 05 August 2021, 1:30 PM
- Sectors Covered:
- Diversified Financials, Professional Services
- Pinnacle Investment Management (ASX:PNI) reported group NPAT of A$67m, +107% on the pcp. Excluding Principal Investment and performance fee contribution, NPAT was +73% to A$45.2m.
- Group FUM closed at A$89.4bn, up 52% on the pcp. The uplift was driven by net inflows (A$16.7bn) and investment performance (A$14.0bn).
- Net inflow momentum accelerated in 2H21, with retail inflows of A$2.6bn (1H21: A$1.9bn). We expect strong flows at +A$8bn in FY22.
- FY22 commences with starting FUM >20% above avg FY21 levels, supporting a ‘baseline’ earnings level (before performance fees) around FY21 levels.
- PNI has material embedded growth and future optionality from acquisitions and moving offshore. However, the stock is now trading in-line with our valuation and we move to Hold.
Event: Big FY21 year
PNI reported NPAT of A$67m (+107% on pcp) and NPAT (ex PI and performance fees) of A$45.2m (+73% on pcp). The result beat expectations by ~3.5%.
PNI’s share of Affiliate profit was A$66.4m, up 74.7% on the pcp. Performance fees were ~30% of NPAT at A$19.5m (1H: A$11.1m; 2H: A$8.4m).
Of the seven disclosed Affiliate earnings, NPAT (100% basis) was: Hyperion +71% to A$42.4m; Resolution Capital +45% to A$21.4m; Solaris + 10% to A$14.6m; and Palisades +25% to A$12.4m. Metrics (A$13.1m), Coolabah (A$17.5m) and Firetrail (A$22m) earnings were disclosed for the first time.
PNI held cash and PI of A$96.1m and drawn debt of A$100m.
Analysis: Baseline earnings take a step-up
Near-term outlook: PNI enters FY22 with starting FUM +28% on average FY21, or ~23% excluding the A$3.9bn low-fee Plato mandate. Significant profit contributors, Hyperion and ResCap, commence with 20% and 34% higher FUM respectively. Excluding performance fees, we expect PNI’s base management fee earnings have sustainably stepped up and can sustain around the FY21 level into FY22.
We expect the A$19.5m performance fee contribution will be difficult to hurdle in FY22, but see a reasonable range of A$10-18m as possible. Our forecasts imply a ~A$13m contribution from performance fees in FY22. FUM eligible for performance fees stands at A$28.7bn across 18 strategies.
Similarly, we expect net inflows to moderate however remain at very meaningful levels. We expect the primary FY21 contributors to flows were ResCap, Hyperion, Metrics and Coolabah and these groups are likely to repeat this in FY22. Our FY22 forecasts include A$8bn of net inflows. Medium term, scalable funds such as Hyperion Global have capability of drawing in significant FUM.
Investment outperformance is overall solid. Negative outliers include Solaris and Antipodes Global. Accelerated retail outflows in Antipodes poses a small risk.
Offshore expansion: PNI has previously signaled offshore expansion and stated offshore opportunities are becoming compelling. The inability to travel is impeding what we see as a probable offshore acquisition, however distribution and smaller ‘build’ opportunities are likely to feature nearer term.
Forecast and valuation update: Upgrades on higher FUM assumptions
We upgrade EPS by: FY22 4.4%; FY23 11.3%; and FY24 11.8%, which primarily reflects higher FUM levels.
Investment view: Move to a Hold recommendation
We believe PNI has significant further scale to be achieved within the current stable of managers and via further affiliates added (start up and acquisition). Successfully exporting the model offshore will also provide longevity to the growth profile. However, trading in range of our valuation (login to view price target), we move to a Hold recommendation.
Price Catalysts: Acquisitions
- Acquisitions; significant flows/mandate wins; significant performance fees.
- Heightened market volatility; sustained investment underperformance from a key manager; and lower than forecast performance fees.
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