FUA on the up
Shares in investment platform provider, Praemium (ASX:PPS) have ebbed and flowed since our last review, and in line with the gyrations in the stock market. The shares did not escape the February sell-off, but have staged a firm recovery since the April lows. The company’s strong operational performance certainly continues to justify investor faith, with funds under administration (FUA) recently surpassing the $7.8 billion mark.
Robust inflows and rising FUA have been a hallmark of Praemium in recent years, and the company’s first quarter update did not disappoint. Inflows were up 39% on the previous period to $671 million, the third highest on record. Funds under administration rose 5.2% on the December quarter to $7.8 billion. This is impressive, particularly given this has been achieved in the face of the correction that has unfolded since early February. Management notes that the ASX200 and FTSE100 were down 5.0% and 8.2% respectively over the period.
Source: Company Presentation
We have been optimistic about the company’s prospects for several years, and by the domestic and offshore angles present. In Australia, Praemium has maintained a competitive advantage through a commitment to innovation, and product development. Inflows ‘at home’ have been strong, with these rising on a gross basis to $484 million during the March quarter, the third highest on record. The company has continued to expand the breadth of SMA models, with 69 added in the quarter. We see the recently launched International SMA as being a point of difference versus some peers and also underpinning further gains in Australia.
Source: Company Presentation
The UK business has also been no slouch, with gross inflows during the quarter of $187 million (£105 million) being the fourth highest on record. International FUA was £1.449 billion at the end of the quarter, and has risen 18% over the past 12 months. With some astute acquisitions, Praemium has made strategic progress in the UK, and also in our view the unit is likely on the cusp of profitability. Management reports that the uptake of their SIPP (self-invested personal pension) offering has been strong, with £16 million in FUA at 31 March.
Praemium’s commitment to technology, and strong reputation for excellence, has clearly helped it win mandates at home and abroad. It has also ensured strong customer retention, which is important in a highly fragmented market (it is difficult for customers to walk away but not impossible). Yesterday the company confirmed that JB Were had extended is agreement for Praemium to provide reporting solutions for their wealth management client portfolios for a further two years. The contract is a meaningful one, with an annual value in excess of $1 million.
The company has also certainly moved on from last year’s boardroom stoush, and two weeks ago formally welcomed CEO Michael Ohanessian back to the board as Managing Director. We have great respect for Mr Ohanessian who has guided the company astutely over the past seven years. We expect him to remain a key driver of value, and his interests are certainly aligned with shareholders. A recent filing showed he held 15.1 million ordinary shares.
We have previously made the point that Praemium (ASX:PPS) is well placed to benefit following the fallout from the Royal Commission. This has also been noted by the company which sees a growing shift to ‘independence’.
Turning to the technical outlook, and on the daily chart, prices have recently broken above the 50-day moving average (red line) of $0.68 as dynamic resistance. This is a positive event, which swings short-term momentum back in favour of the bull-camp. If our analysis is correct, then an eventual retest of overhead resistance sighted at the January high of $0.89 (horizontal red line) would potentially be on the horizon. Furthermore, from a medium-term momentum perspective, this remains in favour of the longer term buyers, as backed by the 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).
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), together these have led to a stern upward trajectory in the share price until January. Despite the recent set back in share price, long-term momentum remains favoured to the upside, as evident from the series of higher lows (i.e. troughs) and higher highs (i.e. peaks), which are characteristics of a dominant broader term uptrend in play. Above, a band of overhead resistance is evident between $0.77 and $0.97. This is made up of the 61.8% and 78.6% Fibonacci retracement levels respectively.
Summary
Shares in investment platform provider, Praemium have ebbed and flowed since our last review, and in line with the gyrations in the stock market. The shares did not escape the February sell-off, but have staged a firm recovery since the April lows. The company’s strong operational performance certainly continues to justify investor faith, with funds under administration recently surpassing the $7.8 billion mark
Praemium (ASX:PPS), like the other platform plays, boasts strong operating leverage, with low marginal costs meaning gains in FUA have a pronounced impact on earnings. This can work the other way, but if we are right that markets are set to push higher over the course of the year, the previous highs in the stock price should be surpassed.
On a valuation front, the shares are currently trading on a FY18 earnings multiple of 61 times, falling to 33 times in FY19. These are admittedly lofty metrics but 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.
Accordingly, we maintain our high risk BUY rating for Members without exposure, and who are prepared to take a medium to longer term view.
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 (ASX:PPS) platform is also used by Fat Prophets Wealth Management.
