Perpetual: Result 2012

Perpetual’s 2012 result was affected by restructuring costs related to the ‘Transformation 2015’ program announced by chief executive Geoff Lloyd in June (see 25 Jun 12 (Hold – $23.70)). Excluding the mortgage services business, which Perpetual accounted for as a ‘discontinued operation’, revenues fell 11% to $364.3m. After restructuring costs, net profit fell 57% to $26.7m.

The company’s underlying profit fell 7% to $67.6m, although the figure was inflated by various benefits that won’t recur next year, including a lower tax rate, writebacks of equity remuneration expense and the profit from the now-disposed mortgage services division. A fully franked final dividend of 40 cents was declared (ex date 7 Sep).

More progress on cost reductions was announced, with the company outsourcing most of its IT department. In the end, though, cost reductions matter less than fund flows and market movements. While the company was keen to emphasise that outflows are under control, at least $1bn looks likely to leak out again this financial year. The 5% increase in the All Ordinaries since 1 July will have helped funds under management but, as we’ve seen, market movements can’t be counted on.

The restructuring program has also reduced retained earnings to just $7m at balance date. This means Perpetual will be unable to fully frank its 2013 interim dividend.

The share price has jumped 12% since Perpetual: Crisis averted? from 1 Aug 12 (Hold – $23.91). The rise in the All Ordinaries has helped, as has positive sentiment surrounding Lloyd’s cost reduction program. While those reductions will become more obvious in 2014, profit will fall in the current financial year; the stock is trading on a prospective 2013 PER of 20.

While there remains a lot to like about the Perpetual business, including the continued excellent performance of its funds, holding the stock is a bet on outflows reducing and cost cuts taking effect from 2014. Rather too much of that optimism has been factored into the share price, and we’re switching to AVOID (following our former Sell recommendation).