While Perpetual’s flows have been “worse than expected” for fiscal 2024, Morningstar analyst Shaun Ler believes there are factors that still look to work in the asset manager’s favour.
In an ASX statement last week, Perpetual reported its largest quarterly outflows in FY2023–24, standing at $8.9 billion over the three months to 30 June.
This followed net outflows of $5.2 billion in the previous quarter, $4.3 billion in Q2, and positive inflows of $0.1 billion in Q1.
In a market note following the update, Ler observed the significant outflows over the year were likely due to “uninspiring investment performance” and “noise about the group strategy”.
“Net outflows of around $18.5 billion, 9 per cent of opening funds under management, exceeded our $14.5 billion forecast,” he said.
“We expect this to increase pressure on management to reduce costs, source funds from higher-margin client channels, and achieve a favourable outcome from the proposed sale of its wealth management and corporate trust assets to KKR.”
Earnings headwinds are likely to persist over the medium term, he added, and has seen Morningstar lower its fair value estimate for Perpetual to $24.50 per share, down from $26 per share due to larger-than-expected redemptions.
Still, the shares screen as “modestly undervalued” at current prices, Ler pointed out.
Looking at the broader industry, the analyst highlighted other active managers and wealth platforms have seen flows improve towards the end of the fiscal year as potential interest rate cuts raised investor appetite for stocks and other risk assets.
In contrast, Perpetual’s worsening net outflows “indicates prospective earnings headwinds from Perpetual’s subpar investment performance and overexposure to less sticky institutional clients, constituting about two-thirds of FUM excluding cash”, he said.
Roughly 80 per cent of the approximately $18.5 billion in net outflows came from Pendal’s brands, he added, despite Perpetual stating the integration of Pendal Group has “progressed well”.
However, despite cynicism surrounding the outlook for Perpetual, Ler maintained there are a few positives working in its favour, such as potential cost reductions.
Fee compression was less than expected, and as suggested in the latest update, there may be further room to reduce costs, he said.
“If net outflows persist, we expect management to reduce costs to align with revenue while working to distribute funds through higher-margin intermediary channels. Management also noted short-term delays in expected inflows into select strategies, which should materialise soon if they are already committed,” Ler said.
In addition to this, he expects redemptions will start to moderate as investor appetite for risk assets continues to improve, “prompting them to remain invested with Perpetual, and uncertainty over KKR’s acquisition of wealth management and corporate trust subsides”.
“We believe the market currently underappreciates these points,” Ler said.
Looking ahead, he expects underlying net profit after tax at the group level to increase “at very low single digits” over the four years to fiscal 2028.
The group cost/income ratio would likely remain largely flat at almost 80 per cent per year, similar to the first half of fiscal 2024, assuming there will be moderating asset management outflows, slightly lower fee compression, and cost reductions.
Ler also flagged potentially steady volume growth in Perpetual’s wealth management and corporate trust, both of which face less competition than the asset management business.
“Wealth management and corporate trust continue to increase volumes as expected. However, no details have been provided on the transaction costs, separation costs, and capital gains tax associated with their potential sale to KKR,” Ler said.
The analyst explained KKR’s gross cash consideration of $2.2 billion – or $19.10 per share – exceeds Morningstar’s combined $1.5 billion valuation for wealth management and corporate trust, or $13.30 per share.
The particulars of the deal are expected to be discussed further in Perpetual’s full-year results at the end of August.
“For the deal to be accretive to our fair value estimate, associated costs and taxes must be less than $630 million,” he said.
