Perpetual

Don’t get too excited about Perpetual’s profit upgrade today. The company announced that first half underlying profit—due to be reported on 23 February—would be $35m. This is above the disappointing guidance range of $26m-$31m provided at the November annual meeting—see 4 Nov 11 (Buy – $20.74), as well as the $32m the company reported for the second half of 2011. The interim dividend is expected to be between $0.43 and $0.54 per share.

The company gave two reasons for the upgrade. The first, and probably the least important, is that the cost reductions put in place by former chief executive Chris Ryan are having some effect. This is pleasing, and should continue under new chief executive Geoff Lloyd.

The second reason for the upgrade was because of a reduction in ‘equity-based remuneration expense’. These share-based payments are incentives provided to employees for performance, but they’ve been difficult to estimate from period to period. Lower incentive payments could mean employees aren’t performing, it could mean the hurdles have been lifted, or it could relate to staff changes such as John Sevior’s departure. Whatever the case—and presumably more detail will be provided at the results presentation—it’s not necessarily cause for celebration.

The timing of the upgrade is noteworthy. Perpetual is under pressure to lift performance, especially now it has emerged that corporate raider Gary Weiss is hoping to join the board to launch a shake-up. Weiss’s interest once again confirms there’s value lying dormant within Perpetual, but uncertainty can end up damaging a business like this.

We’d likely support Gary Weiss’s election to the board and will watch the situation with interest. The stock has jumped 11% since 7 Feb 12 (Hold – $20.84) and remains a HOLD.

The model Growth and Income portfolios own shares in Perpetual.