A strong track record and long-term growth options have attracted Wilsons back to Pinnacle Investment Management ((PNI)), a multi-affiliate investment management company. The business has small requirements for significant amounts of capital but offers diverse areas of growth.
Wilsons highlights the fact Pinnacle Investment has seven affiliates with global equity strategies and is well-placed to take market share. The broker believes a premium in the stock is warranted given the diversified fund exposure and historical outperformance of funds.
Performance fees in FY20 were $25.8m compared with $15.3m in FY19, which Macquarie welcomes in what has been a “tough year”, retaining an Outperform rating and lifting its target to $4.62. Fees were earned across five affiliates including Hyperion, Palisade, Coolabah, Metrics and Firetail. The company expects a negative net return on Principal Investments in FY20.
The broker incorporates the fees update into forecasts, increasing estimates for FY21 and FY22 given the FY20 outcome. Despite the increase to estimates, Macquarie suspects affiliates have potential to materially exceed forecasts.
The company has typically benefited in the second half from performance fees from Palisade yet, given the group owns some unlisted airport/port infrastructure, Morgans suspects there could be pressure on several funds.
The broker expects a subdued second half in FY20 but remains positive about the long-term prospects. Morgans, with an Add rating and $4.03 target, concludes the share price recovery may be slower for Pinnacle compared with other market-leveraged stocks.
Wilsons acknowledges the recent performance has been mixed and in the medium term expects growth to come from international distribution while, in the longer term, this should come from non-equity asset classes. The best performing asset class is equities although, with the MSCI outperforming, the broker points out investors have continued to look offshore for more attractive options.
Macquarie has noted that the asset mix of Pinnacle means exposure to the MSCI World is around 25% compared with around 40% for the S&P/ASX300. Pinnacle funds under management were $57bn as of May 2020 and retail and institutional grew by 3.1% and 4.0%, respectively.
Wilsons, not one of the seven stockbrokers monitored daily on the FNArena database has an Overweight rating and $5.00 target, noting its valuation reflects a premium of 119.2% compared with listed peers, on a 12-month forward PE (price/earnings) basis.
Pinnacle has historically traded on a premium of 76.2% but, given 15% of funds under management are exposed to equity growth strategies, it may provide more upside versus its peers, in the broker’s view.
The company believes its model is superior as it allows funds to focus on performance and not be distracted by administration, and Wilsons believes its strong performance and impressive growth is a clear sign the strategy is working.