Pinnacle Investment Management: Performance begets performance

About the author:

Scott Murdoch
Author name:
By Scott Murdoch
Job title:
Senior Analyst
Date posted:
03 February 2021, 11:30 AM
Sectors Covered:
Diversified Financials, Professional Services

  • Pinnacle Investment Management (ASX:PNI) reported group NPAT up 120% on the pcp to A$30.3m. Excluding Principal Investment and performance fee contribution, NPAT was up 39% to A$18.5m.
  • Group FUM closed at A$70.5bn, up 20% over six months. The A$11.8bn uplift was driven by net inflows (A$5.5bn) and investment performance (A$6.3bn).
  • Net inflows of A$5.5bn were extremely strong (+175% on pcp). Several funds have strong inflow momentum which supports further significant inflows in 2H21.
  • Whilst significant performance fees were a driver of the earnings uplift, we see the base-level of earnings as having taken a sustainable step-up.
  • In our view, PNI has structural growth embedded in the business (the maturing profile of existing affiliates and investment strategies) and future optionality from adding new affiliates. Add maintained.

Big 1H21 result – with multiple drivers

PNI reported NPAT of A$30.3m, up 120% on the pcp (A$13.8m); underlying NPAT excluding Principal Investments (PI) up 120% to A$29.5m; and underlying NPAT excluding PI and performance fees (PFs) up 39% to A$18.5m.

The headline result beat our forecast by ~25%. PNI’s share of affiliate profit was A$31.8m (+80% on pcp) which included A$11m of performance fees (PNI share; pcp A$0.1m).

Excluding the performance fee impact, affiliate NPAT was up a solid ~18% (noting Coolabah was acquired late in the pcp). PNI Parent loss of -A$1.5m (-A$3.9m pcp) was also ahead of expectations on the back of improved service revenue (in part linked to the strong inflows).

PNI held cash and principal investments of A$51.4m and drawn debt of A$30m.

Net flows – strong across retail and insto

Net inflows of A$5.5m comprised: Institutional A$3.6bn (+220%) and Retail A$1.9bn (+115%). Retail flows accelerated through the half (1Q A$618m; 2Q A$1,282m), primarily driven by Hyperion (we estimate +A$1bn), Coolabah, Firetrail, Metrics, ResCap and Solaris.

The strength of Institutional flows was in part due to ‘deferred’ decisions to allocate capital during the COVID-19 period, however PNI stated that insto pipeline remains strong (including offshore).

We expect strong net inflows for the group to continue, with strong momentum in performing funds within Hyperion, ResCap, Firetrail, MCP and Coolabah. Our forecasts include 2H21 net inflows of A$4.8bn.

Big earnings upgrades – but looks like a new base level is set

PNI closed 1H21 with A$70.5bn FUM, up 20% on June-20; and commences 2H21 with starting FUM 14.4% higher versus average 1H21.

Significant profit contributors Hyperion and Rescap enter 2H21 with starting FUM +18% vs 1H21 avg. Whilst performance fees (PFs) will be ‘lumpy’, the scope for continued (and greater) fees is realistic given A$23bn of FUM (across 18 strategies) is eligible.

In 1H21 total PFs of A$45m (A$11m PNI NPAT share) were generated across four affiliates. Our forecasts are upgraded by ~32% across the forecast period.

Upgrades are driven by: higher starting FUM; increased 2H net inflow assumptions; higher PFs in outer years; and a lower earnings drag from PNI Parent.

Add maintained – scaling existing base + more to come

Our DCF increases (login to view target price). Whilst PNI trades on an elevated multiple, we believe significant scale is yet to be achieved within the current stable of managers (in our view, this result shows evidence of the earnings leverage within the current base).

Further affiliates will be added (part of the stated strategy) which provides further growth optionality.

Key near-term risks include heightened market volatility; sustained investment underperformance from a key manager; and lower than forecast performance fees.

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Disclaimer: 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.

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