Up the pecking order
Shares in financial service platform, Praemium (ASX:PPS) have continued their upward run in the last month, gaining another 10% in the process. There has been little in the way of news, although sentiment towards the stock has been given another lift by the stock’s inclusion in the ASX300 index, effective 24th September 2018.
We continue to be optimistic on the company’s prospects, with a high degree of operating leverage set to provide a substantial boost to earnings in the years ahead.
We do however caution that the shares have had a very strong run since the April lows, and that it is essential that new investors adopt a medium to long term timeframe, and ride out the broader market volatility. We are comfortable maintaining a buy on Praemium for Members without exposure on this basis.
Turning to the technical outlook, and on the daily chart, prices have broken above the 50-day moving average (red line) of $0.97 as dynamic resistance. This is a positive event, which has swung short-term momentum in further favour of the bull-camp. A move above resistance at the July high of $1.07 has added to the positivity.
The overall picture remains robust, as backed by a bullish moving average crossover present since August 2017. This occurs, when the 50-day moving average (red line) crosses above the 200-day moving average (green line). However, after such an advance, some consolidation would not surprise.
With reference to the monthly chart, structural support was respected at the $0.27 region (horizontal blue line) in late 2015, and coupled with dynamic support being respected at the long-term uptrend line (upward sloping green line), has led to a stern upward trajectory in the share price (and away from the green trend line). Â The 61.8% Fibonacci retracement at $0.77 has been breached, as has that at the 78.6% Fibonacci retracement at $0.97. The all-time high of $1.22 has now become a very realistic target from a technical perspective.
Appetite for Praemium (ASX:PPS) stock should also be boosted following the quarterly rebalancing of S&P/ASX Indices. As of yesterday, the company has been included in the ASX300 which will elevate its profile and put the stock on the radar of mid-large cap ‘index trackers’.
And with good reason, for Praemium continues to represent a robust growth story in our view. This was evident in the full year 2018 numbers (see our last coverage for more detail) which showed turnover rising 22% year-on-year to $43.2 million. All product lines reported growth, but continued strength in the Separately Managed Accounts (SMA) platform was the standout – revenues here leapt 41% year-on-year to $24.3 million on strong funds inflow and higher margins from the in-house investment management unit.
Source: Company Presentation
At the bottom line consolidated NPAT (net profit after tax) for FY18 more than doubled (+123.4% yoy) to $1.41 million. Robust cash conversion was also a feature. Net operating cash-flows rose 251.8% to $5.4 million.
The bottom line performance highlights an endearing quality of Praemium (ASX:PPS), and that is strong operating leverage. This as the variable costs of adding funds under administration (within the existing product range) is low and tends to drop mostly through to the bottom line.
This was evident as the company reported annual inflows for FY18 which reached a record $3 billion and were up 50% year-on-year with Domestic Inflows rose 69% year-on-year to $2.2 billion and International Inflows were up 13% to $0.8 billion.
Source: Company Presentation
With such strong Inflows FUA has risen to $8.3 billion, up some 35% on a year ago. Split up on a regional basis, FUA in Australia now totals $5.6 billion while International FUA now totals $2.7 billion and is up 20% over the past year.
Going forward, the outlook for the platform looks positive and set for further sustained growth with the Domestic business continuing to win mandates. Management expect continued growth in SMA’s with more institutional and advisor accounts adopting this platform technology.
On the international front, the outlook for inflows also look positive as the company completed regulatory initiatives, such as MiFID II and GDPR regulations to capture relevant European and other compliant international players. The company has also secured authority to operate in Dubai to build up a beachhead in the Middle East. EBITDA in international operations is getting closer to breakeven with management expecting profitability the UK operation to get there during FY19.
At the balance sheet, Praemium remains debt free with a net asset position of $20.3 million and with a cash hoard of $12.1 million (+34.9% yoy) as at 30 June 2018.
Summary
Shares in financial service platform, Praemium (ASX:PPS) have continued their upward run in the last month, gaining another 10% in the process. There has been little in the way of news, although sentiment towards the stock has been given another lift by the stock’s inclusion in the ASX300 index, effective 24th September 2018.
On a valuation front, the shares are currently trading on a FY20 earnings multiple of 56 times, falling to 39 times in FY21. While very full metrics, the company’s scale is growing at a rapid clip and a high degree of operating leverage has the potential to deliver substantial shareholder gains over the medium to longer term.
We do however caution that the shares have had a very strong run since the April lows, and that it is essential that new investors adopt a medium to long term (minimum 12 months) timeframe, and ride out broader market volatility (the shares would likely see downward pressure if the market were to correct near term). We are comfortable maintaining a buy on Praemium (ASX:PPS) for Members without exposure on this basis.
Members are reminded that the company’s shares are thinly traded, so patience should be exercised when building a position.
Disclosure: Praemium (ASX:PPS) is held within the Fat Prophets Concentrated Australian Share and Small/Mid-Cap Models. The Praemium platform is also used by Fat Prophets Wealth Management.
