Perpetual: Interim result 2014

A 17% rise in average funds under management (FUM) to $27.7bn at its funds management business, Perpetual Investments, has helped Perpetual to a 14% increase in revenue for the six months to December, to $205m, and a 37% rise in underlying net profit to $48m.

Underlying earnings per share of 116 cents were up slightly less – 34% – due to the increase in shares on issue to help pay for The Trust Company. A fully franked interim dividend of 80 cents will be paid (ex date 7 Mar), up from 50 cents.

The increase in FUM reflects the strong performance from the sharemarket, but also the company’s first two quarters of net fund inflows in more than four years, as we noted in Perpetual’s Q2 fund inflows on 22 Jan 14 (Hold – $49.22).

Helped also by $1.3bn of FUM from The Trust Company, Perpetual Investments had $30.4bn under management at the end of December, already well ahead of our estimate for 2014 average FUM of $26.6bn when we upgraded in Pulling the trigger on Perpetual on 19 Sep 13 (Buy – $38.72). That average now looks likely to be close to $30bn for the full year, assuming a flat market and that small inflows continue. Costs were held in check and, if that remains the case, we’d get a full-year pre-tax profit from this business of about $125m, compared to our original forecast of about $102m.

Perpetual’s fund performance continues to be excellent, with 11 of its 15 flagship funds in the top quartile over one year, three in the second quartile and one (the International Share fund, the management of which is outsourced) in the fourth quartile. Over ten years, seven out of ten are in the first quartile, with two in the second and the International Share fund in the third.

The private client business, Perpetual Private, also benefited from the rise in the market, with market-related revenue (mostly fees for managing shares) rising 14% to $39m, thanks to a 12% increase in funds under advice (FUA). However, non-market related revenues dropped 6% to $21m due to a fall in demand for accounting services. Expenses increased slightly mostly due to the cost of Perpetual’s new wrap platform, which went live in April 2013.

Excluding The Trust Company (the acquisition of which was only completed on 4 December), the Corporate Trust business saw overall revenues fall 2% due mainly to the disposal of the loan servicing administration business (for the remaining businesses, revenue rose 1%). However, expenses fell 14%, helped by the disposal, so that profit before tax rose 22%.

Tight-lipped on Trust Co

Management was tight-lipped on The Trust Company, which is understandable given the short time Perpetual has owned it. The same process that has been used for the Transformation 2015 program within Perpetual will be used on Trust Co, with the focus for the rest of the current half being to protect the acquired business. In the 2015 financial year the focus will shift to integrating the business with Perpetual. Management stuck to its target of at least $15m in annual run-rate synergies within two years of the completion of the acquisition.

In the first month of Perpetual’s ownership, TrustCo made a profit before tax of $1.1m on revenue of $7.5m. This was affected by the Christmas period, however, and if Perpetual had owned the company for the entire half, revenue would have been $52.7m. Extrapolating from the December margin, profit before tax for the half would have been $7.7m.

Net cash fell during the half from $172m to $106m due to the acquisition of TrustCo, and the lower interest income fed through to an increase in head office costs from $3.8m to $5.0m.

Putting it all together, Perpetual is on course to make about $2.50 in earnings per share for the full year, compared to our estimate of about $2.21 when we upgraded the stock in Pulling the trigger on Perpetual on 19 Sep 13 (Buy – $38.72). So even with the stock’s 31% gain since then, the price-earnings ratio has only expanded from 17 to 20.

The share price is up slightly since 22 Jan and, given the improved outlook and the potential from the Trust Co acquisition, we’re happy to raise our price guides again, to a Hold range of $50–$70 (from $45–$60). HOLD.

Note: Our Growth and Income portfolios own shares in Perpetual.