Pendal Group: Scaling up in the USA
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Date posted:
- 10 May 2021, 3:30 PM
- Sectors Covered:
- Contractors/Developers, Diversified Financials
- Pendal Group (ASX:PDL) reported Underlying NPAT of A$82.6m, up 7.8% on pcp (+2% vs forecast).
- Investment performance across UK/EU has rebounded meaningfully, which should support flows (stem outflows at a minimum) and performance fee prospects.
- PDL has acquired a US-based manger (“TSW”) for ~A$413m, partly funded by a placement (A$190m) and debt. PDL expect the acquisition to be ‘double digit’ EPS accretive. The acquisition is in-line with PDL’s stated strategy.
- Trading on ~13x FY22 PE, we continue to see value. Add maintained.
1H21 result: in-line; investment (expenses) weighted more to 2H
PDL reported 1H21 underlying NPAT of A$82.6m, up 7.8% on the pcp (re-stated for new accounting) and slightly (~2%) ahead of forecast. Revenue growth of 14% on pcp was inline, driven by performance fees (management fees were down 2.5% on lower average FUM).
The slight result beat was driven by expenses (vs forecast), with fixed expenses flat on the pcp. PDL stated that FY21 fixed cost growth is tracking to the lower end of previous guidance (8-10% growth on pcp), with planned strategic growth expenses to commence in 2H21.
The compensation ratio increased to 46.5% (from 43.3%) and in-line with previous guidance of 2-3% increase.
Acquisition of US-based manager - TSW
PDL has announced the acquisition of Thompson, Siegel & Walmsley (TSW), a US-based ‘value orientated’ equity manager. Consideration of US$320m (~A$413m) represents a ~7.6x EBITDA multiple (1H21 annualised) and will be funded via: equity (A$190m placement and additional SPP); new debt facilities (A$200m); and existing cash and seed capital (~A$47m).
PDL will acquire 100% of the business, with the current ownership structure being 75.1% BrightSphere Investment Group and 24.9% TSW management. Retention of key investment staff (20 in investment staff total) will be critical to the medlong term success of the acquisition.
Short-term, earnings accretion is attractive (guided to double digit in first full year) and the acquisition makes strategic sense.
Core business outlook improved
PDL enters 2H21 with staring FUM ~4.5% higher vs 1H21 average and broadly positive market moves since Mar-21 (partially offset by unfavourable currency moves).
Investment performance has recorded a marked improvement in several larger JOHCM value strategies (ie UK equity Income; UK Dynamic) and relative performance in major Global/International funds remains solid. Whilst we expect flows to remain subdued, investment improvement should assist reversing the outflow trend of recent years.
Our DCF/PE based valuation moves to (login to view). In our view, the base PDL business is showing solid signs of improving earnings potential and the addition of TSW makes strategic sense overall.
We view the current valuation (~13x FY22 PE vs 16x avg) as providing solid value, with the potential for meaningful earnings and multiple upside if management execute on the growth plan. We see key staff retention as the key risk for the TSW acquisition, especially past year 4 (given there is deferred consideration structures).
Other risks remain a severe/sustained market fall; adverse currency movements (higher AUD); loss of key managers; and investment underperformance leading to material net outflows.
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