Pendal Group: Flows slip back to negative
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Senior Analyst
- Date posted:
- 19 October 2021, 7:00 AM
- Sectors Covered:
- Diversified Financials, Professional Services
- Excluding the acquired Taswest Limited (ASX:TSW) business, Pendal Group (ASX:PDL) reported 4Q21 FUM (funds under management) of A$106.1bn, down marginally on 3Q21 (A$106.7bn). TSW closed with A$33.1bn FUM.
- Group net outflows were A$2.3bn, primarily across AU Insto (-A$1.1bn); EUKA (- A$0.9bn); and TSW (-A$0.6bn). US Pooled and AU Wholesale recorded inflows.
- Whilst disappointing to see PDL revert to outflows (post reasonable 2Q/3Q flows), the overall (immediate) earnings impact is relatively minor given the composition.
- We are mindful of the sub-advised FUM concentration within TSW (28% revenue concentration), which presents a medium-term risk. However, PDL’s share price fall looks overdone (<13x FY22 PE) and we maintain an Add recommendation.
Event: 4Q21 FUM update
PDL ended 4Q21 with A$139.2bn FUM, comprising: A$46.5bn Pendal Australia (PA); A$28.8bn JOHCM EUKA; and A$63.9bn JOHCM US (inc. A$33.1bn in TSW). ▪ Pendal: PA FUM closed 2.2% lower (qoq), driven by A$1.1bn in net outflows.
Outflows included A$1.1bn in Institutional (including a lower-margin fixed interest A$0.8bn outflow), partially offset by A$0.4bn in Wholesale channel inflow.
JOHCM (ex TSW): FUM closed 0.8% higher, driven by: investment performance - A$0.5bn; net outflow A$0.6bn; favourable currency moves A$1.6bn. Small outflows across EUKA/US Segregated mandates and OEICs, offset with A$0.5bn inflow in the US Pooled channel.
TSW: closed with A$33.1bn FUM, with A$1.4bn positive currency and A$0.6bn outflows for the qtr. FUM is marginally ahead of Mar-21 acquisition numbers.
TSW FUM up but sees an outflow; Result 5 November
Headline flows disappoint: PDL’s headline net outflows disappointed on two fronts: reversing the reasonable results posted for JOHCM in 2Q/3Q21 and TSW reporting an outflow in the first quarter of ownership.
Outflows represent 1.7% of FUM (~6.8% annualised), however given the composition of FUM we estimate had only a ~1% negative revenue impact.
TSW acquisition (settled late July): recorded A$0.6bn outflow (two A$300m outflows were the result of sub-advised channel asset allocation decisions). Given the concentration of sub-advised funds in TSW, we expect asset allocation swings like this are reasonably common.
We are mindful of client concentration in TSW (28% of revenue with one sub-advised client). This poses a clear risk, which we think could be more likely to materiallse on any retirement of PM’s post the acquisition earn-out periods (four years).
Investment performance remains broadly sound across key JOHCM funds: UK funds have regained ~6-7% relative performance in CY21 (within ~5% of HWM); Global Select (~A$3.3bn FUM) is ~1.9% above benchmark and above HWM.
FY21 result forecasts: 2H21 mgmt fee +12.3% on 1H to A$264m; FY21 UPAT +21.7% to A$161.4m (includes ~A$3.5m UPAT from TSW).
Forecast and valuation update
Forecast changes: FY21 EPS +1.8% (TSW contribution); FY22/23 -0.1% and - 4.2% respectively. Our FY22 forecasts include a JOHCM performance fee of A$12m, relatively subdued given the narrow concentration of JOHCM funds that are above HWM.
Our DCF/PE valuation moves to (login to view target price).
Whilst flows slipped negative and the opening quarter for TSW was negative, PDL’s share price reaction looked harsh compared to the extent and composition of outflows.
We acknowledge that growth is overly reliant on market direct short-term, however trading <13x FY22 PE, PDL presents value.
Improving net inflows and fund relative performance (performance fee leverage).
TSW acquisition: we note TSW has high client concentration (largest client ~28% of revenue); key staff retention (especially post deferred consideration periods).
A severe/sustained market fall; adverse currency movements (higher AUD); loss of key managers; and investment underperformance leading to net outflows.
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