The Perpetual powerhouse
Recommendation
The government is keener than Big Kev on The Bert Newton Show to increase the number of self-funded retirees. The more of them there are, the fewer taxpayers' dollars it has to spend on pension payments. The funds management industry is like a tollgate on a growing financial road. How so?
Every dollar that flows through a fund's 'gate' pays a toll to get in (sometimes as high as 5% - take a look at your super fund charges). Once through the gate, it usually incurs an ongoing toll (typically 1% per annum).
And who's on the other side, stacking up the cash? Your smiling local funds manager. This really is one of the best games in town. It's why the Commonwealth Bank bought Colonial and it's why we like Perpetual, despite the ever-increasing share price.
Indeed, the whole industry has benefited from government-enforced tail winds. Perpetual's funds under management have more than doubled from $6.9bn to $15.6bn over the past two years.
Right place
This increase isn't just due to being in the right place at the right time, although that's helped. Perpetual has a very able investment team including the talented Peter Morgan - one of the few institutional investors who speaks out publicly against poor management and questionable corporate governance practices.
The success of Perpetual Investments is the main reason why the stock price has jumped from $5 to almost $40 over the past six years. But the company isn't resting on its laurels. MD Graham Bradley spotted another gravy train ripe for hijacking back in 1998.
At the time, Computershare's soaring stock price was a clear signal that the share registry business was a very tasty one indeed. Bradley struck a deal to buy Coopers & Lybrand's sleepy share registry business and, 18 months later, stitched together a joint venture with the ASX dubbed ASX Perpetual Registrars Limited (APRL).
Computershare challenge
Prior to the marriage, the registry depended on a bureau relationship with Computershare for its infrastructure. That was not a position Bradley thought sensible. Since then, the partners have beavered away at developing their own technology and will transfer all registry clients to their new system by the end of this calendar year.
Computershare didn't take this challenge lying down. Litigation ensued with Perpetual settling on confidential terms in July this year.
Since then resentments seem to be slowly settling down. In the long term, we think APRL will be be a nice earner once any teething problems are out of the way.
So, what does all this mean for the potential investor? Well, this a well-run company in the booming financial services sector.
The trouble is that it's trading on a hefty PER of 26 which is why our share price risk rating is relatively high. Any bad news could prompt a rather rapid fall.
Superb record
However, given management's superb record and the favourable government policies, we think further rewards are likely. There's also some degree of downside protection given that perpetual is an attractive takeover target, with Westpac mooted as a possible suitor.
Although the price is little changed since issue 90 (Hold for the Upside - $38.59) we now believe there's enough potential to justify an upgrading of our recommendation to LONG TERM BUY.