EUR 850.00 For Business Accounts Only

Morningstar | Continued Fund Outflows Prompt a Reduction of Perpetual's FVE to AUD 43.90, From AUD 45.50. See Updated Analyst Note from 17 Jul 2018

Narrow-moat Perpetual's fourth-quarter fiscal 2018 funds under management, or FUM, flows provide further evidence of our view that its core investment division is suffering from the structural issues of industry super funds moving more asset-management in-house and a trend to more passive investment styles. The results were moderately worse than expected, leading to a reduction in our fair value to AUD 43.90 per share, from the previous AUD 45.50. It also leads to a slight reduction in our fiscal 2018 earnings per share to AUD 2.97, from AUD 3.00 and dividends per share to AUD 2.67, from AUD 2.70.

The AUD 500 million net organic outflows from its Australian equity funds in the fourth quarter was higher than our forecast of AUD 350 million and resulted in net organic outflows for fiscal 2018 of 12.5%, higher than our forecast of 12%. Notably, this was despite the S&P/ASX All Ordinaries Index being about 9% higher in fiscal 2018. The results prompted us to increase our forecast of net outflows from its Australian equity funds to an average annual outflow of about 5.1% in the next five years, from the previous 4.2%. In the near term, we believe Perpetual will be increasingly reliant on strong equity markets and continued strong performance of its private business (21% of profit before tax, or PBT, in fiscal 2017) and trust segment (19% of PBT) to compensate for weak earnings in its investment division (60% of PBT).

We forecast PBT in Perpetual's investment segment to fall by a compound annual growth rate, or CAGR, of 1.9% in the next five years, inclusive of fiscal 2018. This assumes that its Australian equity funds return about 6% per year. We expect its private and trust divisions should compensate for the lower earnings in its investments division. We forecast its private business’ PBT to grow by CAGR of 3.3% and its trust business to grow by 3.4% over the same period. This leads to Perpetual generating relatively flat earnings growth in the next five years.

We expect a key focus of incoming CEO and managing director, Rob Adams, will be to address the organic outflows from Perpetual's core investment division. This will not be an easy task, and we do not see a near-term catalyst, with a period of strong fund performance required. We expect another key focus will be in improving the performance of its global equity strategy. We expect the trend of Australian investors allocating more funds to international equities should see global equity FUM to continue to grow at a faster rate than Australian equity FUM, but Perpetual is not well-placed to benefit from this trend. Its global equity strategy has not been able to compete effectively against better-known global equity managers like Magellan and Platinum and newcomers like Antipodes among others. In addition, we would also expect to see continued investments in its private and trust businesses as part of its diversification strategy from relying too heavily on its core investment division.