Pinnacle Investment Mgmt: Time for the next ascent

About the author:

Scott Murdoch
Author name:
By Scott Murdoch
Job title:
Senior Analyst
Date posted:
03 February 2022, 9:00 AM
Sectors Covered:
Diversified Financials, Professional Services

  • Pinnacle Investment Mgmt (ASX:PNI) reported group NPAT up 32% on the pcp to A$40.1m. Underlying NPAT (ex-principal investment/perform fees/impairment) was up 81% to A$33.5m.
  • Group FUM closed at A$93.6bn, up ~5% over six months. Net flows comprised: retail inflow A$2.9bn; insto outflow (ex Omega) A$0.7bn; Omega FUM outflow A$3.9bn. Starting 2H22 FUM is +4% on avg 1H22.
  • Offshore expansion has been clearly flagged, however no update or defined timing has been provided. PNI is capital ready with ~A$135m of funding capacity.
  • Recent equity market volatility has the potential to disrupt flows momentum. However, solid retail inflows are being experienced in non-equity funds and we think long term performers will continue to attract flows.
  • PNI isn’t cheap (28x FY22 PE), making it susceptible to any near-term market weakness/volatility. However, there is structural growth within the affiliate base (maturing of performing funds); and from the business model (new managers, offshore expansion). Upside to our valuation has materialised - we upgrade to Add.

1H22 result: underlying growth continues

PNI reported NPAT of A$40.1m, +32% on the pcp (A$30.3m); and underlying NPAT (ex-PI, PF’s and impairment) up 81.1% to A$33.5m. PNI’s share of affiliate profit was A$39.2m (+23.2%) which included performance fees of $6.4m (pcp A$11m). 

The headline result beat our forecast by ~5% and the underlying result by ~9%, with slightly better operating leverage achieved at both the group and affiliate level.

PNI closed 1H22 with A$93.6bn FUM, up 4.7% for the half (+3.5% excluding the acquired Five V). Starting 2H22 FUM is +4% on 1H avg (ex Five V).

Flows were mixed, with a headline outflow of A$1.7bn reported. Retail flows of A$2.9bn continued steady momentum through the half. Insto outflows of A$700m (ex Omega ~A$4bn loss) was the result of A$1.4bn lost in Nov/Dec (PNI stating ‘rebalancing’ rather than mandate losses). 

FUM composition improved, with retail now 25.4% of FUM (from 22.7% at June-21); and International FUM increasing to A$10.9bn (11.6% of FUM).

Capital available for investment is ~A$135m.

Analysis: flows and market volatility in focus

Market volatility a near-term variable: recent market weakness has seen meaningful FUM falls of ~5-14% across equity funds. Hyperion (growth manager) has had the sharpest fund falls through January (~14%), however did commence the half in a strong FUM position (+17% over 1H22).

Any sustained underperformance in Hyperion is a risk given it has dominated retail flows.

Flows in focus: PNI remains confident on the insto pipeline and the outflows in Nov/Dec being ‘rebalancing’ and not the start of a trend. Whilst we see solid retail inflows continuing, pockets of outflows in underperforming funds (Antipodes, Solaris) could accelerate.

FUM eligible for performance fees stands at A$31.bn across 18 strategies. PNI’s performance fee outlook remains robust, with a number of non-equity market funds (Palisade, Metrics, Coolabah) generating fees.

Forecast and valuation update

  • Forecast changes relatively minor: EPS FY22 +0.7%; FY23 -3.6%; FY24 -3.6%.

Investment view

PNI’s valuation (~28x FY22 PE; ~34x excluding performance fees) sees the stock still susceptible to market volatility short-term. However, we see longevity to PNI’s growth profile from scaling up the current stable of mangers and via further affiliates added (start up and acquisition).

In addition, PNI is building significant performance fee potential (a key ‘swing factor’ to outer year forecasts).

Price catalysts

  • Acquisitions; significant flows / mandate wins; significant performance fees.

Risks

  • Heightened market volatility; sustained investment underperformance from a key manager (outflows); and lower than forecast performance fees.

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