The planets are aligning for Pinnacle Investment Management ((PNI)), which produced what Ord Minnett describes as an “stellar” result in FY20. Affiliate Hyperion Asset Management sustained a record performance and continues to attract significant funds.
No specific guidance was provided for FY21 but stronger institutional flows have been noted for May and June. There were no changes in ownership during the second half, although the company expects to increase its share of affiliates over time.
Morgans assesses market direction will dictate the short term outlook and notes the company has stabilised the earnings drag from parenting costs, which are expected to remain relatively stable over FY21-22.
Pinnacle remains positive about institutional flows for the next year or so and, as the broker highlights, this is a lumpy item. Aggregate retail funds under management (FUM) of $13.1bn as of June were down -8.4% on December 2019 and aggregate affiliates FUM of $58.7bn was down -4.7%.
Still, as Macquarie points out in the second half the S&P/ASX 300 index was down -11.9% in the MSCI World Index was down -7.1%. Otherwise, there was plenty to like and the results beat the broker’s estimates at both the revenue and cost lines.
Net inflows were $1bn in the second half. Moreover, amid heightened offshore distribution efforts, it may be possible to obtain some meaningful mandates. Hence, there are plenty of levers to pull, Morgans concludes, including a scaling up and reversal of losses from early-stage affiliates.
While overheads were worse, as flows proved hard to secure, Ord Minnett expects an improvement in FY21, forecasting net profit of $35m. The broker does not factor in material success in the medium-term from new ventures, but assesses up to 20% potential upside to FY25 net profit forecasts in a successful scenario.
Net profit from affiliates was up 15% and the company asserts early evidence of increased diversity along with the investment strategies of affiliates underpinned the results.
Hyperion Asset Management has been exceptional and Morgans expects inflows to be forthcoming from Metrics and Coolabah as well, with outflows from Antipodes. Around 90% of affiliate strategies are outperforming on a five-year view. Moreover, around 32% of FUM is capable of earning performance fees.
Gross performance fees of $26.7m were largely driven by the top five affiliates and Wilsons is also encouraged by the fee potential for Metrics and Coolabah. While the broker is uncomfortable capitalising performance fees, early evidence of a return to strong institutional inflows and growth in international markets should be catalysts for more positive ratings.
Wilsons, not one of the seven stockbrokers monitored daily on the FNArena database, considers the stock is fully valued and downgrades to Market Weight from Overweight, with a $5.70 target, as conditions remain volatile. The database has three Buy ratings with a consensus target of $6.20 that suggests 11.2% upside to the last share price. This compares with $5.22 ahead of the update.
See also, Diversity Bodes Well For Pinnacle on July 7, 2020.