Pinnacle Investment Management: Growing despite the market backdrop

About the author:

Author name:

By Scott Murdoch

Job title:

Senior Analyst

Date posted:

04 August 2022, 8:00 AM

Sectors Covered:

Diversified Financials, Professional Services

• Pinnacle Investment Management (ASX:PNI) delivered 14% NPAT growth to A$76.4m, in-line with expectations. Excluding non-operating items, growth was ~23%; and ex-performance fees +32%.
• Group FUM closed at A$83.7bn, - 6.3% on the pcp and -10.6% over the half.
• Net inflows slowed over 2H22 but remained positive (2H22 A$2.2bn: A$1.5bn Insto and A$0.7bn Retail). Softer retail flows were more market driven vs performance.
• Despite disruptive market conditions, PNI is showing the strength of the model. We expect material growth over the medium-term, however retain a Hold on valuation.

FY22: +14% growth despite market headwinds and some one-offs

PNI reported NPAT of A$76.4m (+14% on pcp) and NPAT (ex PI and performance fees) of A$59.7m (+32% on pcp). The headline result included a A$3.9m MTM loss on investments and a A$1.8m write-down on Reminiscent Capital.

PNI’s share of Affiliates NPAT was A$75.7m, up 14% on the pcp (A$66.4m), which included A$16.6m of performance fees (~22% of NPAT; down from A$19.5m in the pcp). Affiliate earnings fell ~7% half on half (1H A$39.2m; 2H A$36.5m); or ~20% ex performance fees which are structurally 2H weighted.

Of the disclosed Affiliate earnings, NPAT (100% basis) was: Hyperion -5.3% to A$40.2m; Resolution Capital +54% to A$33.1m; Solaris -12.1% to A$12.8m; Palisades +19% to A$13.8m; Metrics +76.9% to A$23.2m; Coolabah -24.6% to A$13.2m; and Firetrail -40.4% to A$13.1m.

PNI held cash and PI of A$178.2m and drawn debt of A$120m (fully drawn).

Flows outlook remains subdued; Offshore expansion the catalyst

Near-term outlook: PNI enters FY23 with starting FUM ~5.5% below average FY22 levels and with several significant contributors have starting FUM >10% below avg 2H22 (Hyperion, ResCap, Solaris, Spheria).

Despite this, PNI stated that the run-rate mgmt fee revenue commencing FY23 is ~20% above FY22 levels based on the FUM composition (including recent Insto flows replacing lower fee FUM). July market performance also assists the start to FY23. 

Notable affiliates attracting Insto FUM include Hyperion (~A$1.2bn in FY22), Antipodes (~A$1bn), Aikya, Metrics Credit; and strong demand for Real Assets (Palasade and ResCap). PNI achieved net Insto inflows of A$1.5bn, however noted large Insto inflows replaced lower margin (mostly domestic) Insto mandates. Outflows were experienced in Solaris and Coolabah.

PNI expressed high confidence in the Insto pipeline, despite some likely ongoing outflow from MySuper implications. Retail inflows slowed meaningfully through FY22, exiting with A$0.2bn in 4Q22 (A$0.5bn 3Q22; A$2.9bn 1H22).

Excluding LIC raisings in 2H22, we assume Retail flows were neutral. Whilst the run-rate has significantly deteriorated, we see this as an industry wide/ market driven slowdown rather than an investment performance led issue across the managers (only small pockets of sustained performance based outflows). 

PNI’s performance fee outlook remains robust, with strategies eligible increasing to 22 (from 18), representing ~36% of the current FUM base.

Acquisition led offshore expansion was less in focus (vs 6-mths ago), with PNI missing out on several opportunities (based on valuation). PNI quantified ‘Horizon 2’ investments within the existing affiliate base at a ~A$12m cost (PNI NPAT share), which is expected to continue to drive strong long-term organic growth within existing managers.

Minor changes to forecasts

FY23/24 EPS changes are within 1%.

Investment view: Hold maintained

We’re positive on the long-term prospects for PNI (noting the structural growth within the affiliate base and further planned acquisitive growth).

However, trading within range of our valuation, we maintain a Hold recommendation.

Price catalysts and risks

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

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

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