Perpetual

Perpetual has announced a profit downgrade and restructuring that will slash costs in an attempt to ‘simplify, refocus and grow’ the company. The cuts are well overdue, as the company’s profit margins compare poorly with those of rival Platinum Asset Management, for example. Management expects to reduce costs by $50m per year by 2015 (18% of the current cost base), including $0.5m in annual non-executive director fees.

Underlying net profit for 2012 is expected to fall to $63-$67m, down from $73m in 2011. Reported net profit will slump to $22-$29m due to write-offs and other restructuring costs. The final dividend will be no higher than 40 cents, which would bring the full year total to 90 cents, putting Perpetual on a 3.8% fully franked yield.

The company announced some meek growth plans, but ‘Perpetual will update the market on the development of growth initiatives over the next two years.’ Cost cutting is the easy part, growing funds management profits while retail investors are retreating from the sharemarket in droves is not. Funds under management have fallen 3% since March to $22.9bn at 31 May 2012.

The company’s share price has fallen 7% since Tide going out at Perpetual from 30 Apr 12 (Sell – $25.62). With Perpetual trading on a forecast price-to-earnings ratio of around 14 and management finally adjusting to reality, we’re upgrading a notch to HOLD. We’ll revisit the recommendation guide when the company announces its full year results.