We initiate coverage on Perpetual

About the author:

Author name:

By Richard Coles

Job title:

Senior Analyst

Date posted:

10 June 2015, 10:54 AM

Sectors Covered:

Insurance, Diversified Financials

We have been impressed by the turnaround at Perpetual (PPT) driven by the transformation 2015 program, with the Trust company integration also tracking in line with targets.

However, while management appears to have done a good job in simplifying the organisation and restoring focus, we think the low hanging fruit is now largely gone with management needing to prove up PPT’s growth strategy to justify a further re-rating.

We re-initiate coverage with a Hold recommendation. Morgans clients can login to view our price target.

Solid recent execution

It's hard to fault the strategy of CEO Geoff Lloyd since taking the reins at Perpetual.

The transformation 2015 program has significantly reduced costs and simplified the business, while we believe the Trust company acquisition is highly complementary, not only in synergies but also in increasing PPT's presence in both the Private client and Trust management areas.

However, while a strong platform for growth now arguably exists, we note driving organic growth in the Australian wealth management space, ex markets movements, has historically proved difficult with fee pressure a recurring headwind for investment managers.

Flows have gone positive but new strategies are the key

PPT has achieved seven consecutive quarters of net inflows into its Perpetual Investments business, reversing negative fund flow trends seen previously.

However, given PPT's very strong position already in Australian equities, we feel upside must come from executing on new growth strategies like its international equities fund and participation on investment platforms.

While these strategies are logical, it remains to be seen if they can deliver sustainable growth, with PPT having struggled particularly in the international equities space before.

Investment view

PPT's delivery on T15 cost-out targets and integration of the TRU acquisition have provided strong growth and increased PPT’s leverage to rising markets.

However, we still believe driving organic growth from here remains more of a challenge and on 18x FY16 PE we feel the stock is fair value at current levels.

More information

Morgans clients can access our full report on Perpetual Limited (PPT). If you are interested in finding out more, please contact your nearest Morgans office.

Disclaimer(s): Analyst owns shares. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.