Powering into 2018
Investor sentiment towards Praemium (ASX:PPS) has lifted further since our last review, with the shares pushing on to fresh multi-year highs. The company chalked up regular milestones during 2017, with the final quarter sounding off on a similar note. Last week the company revealed that quarterly gross inflows came in at $764 million, the highest on record. This has seen funds under administration (FUA) hit $7.4 billion, for a gain of 11% during the quarter, and some 37% higher than 12 months earlier.
Both hemispheres contributed to the performance, with the Australian business seeing gross inflows of $548 million, and the international side achieving some $216 million, the highest on record. Over the full year gross inflows were up 54% to $2.55 billion while the half year to December 2017 saw another milestone, with semi-annual inflows of $1.5 billion being a first.
Source: Company Announcement
The company itself has made a great fist of driving inflows, and global stock market strength has also played its part in lifting FUA higher
. Management noted that the key Australian and UK markets performed strongly during the quarter, with gains of 6.7% for the ASX200 and 4.2% for the FTSE100.
Source: Company Announcement
We have espoused for some time the degree of operating leverage to FUA growth which Praemium offers, and the latest figures provide yet another strong pointer
. We expect strong earnings gains in the years ahead with the SMA market in Australia set to grow rapidly, while the international business meanwhile is reaching a key tipping point as it relates to profitability. Strength in stock markets over time will only further accentuate this story.
As a reminder a ‘high’ fixed cost base (and relatively low level of variable costs) means that each dollar of FUA added has a marked impact on the bottom line.
Furthermore, 98% of revenue is recurring in nature. Therefore, as FUA rises earnings should do so exponentially.
As we have noted previously, in Australia, an unwavering commitment to technological innovation has put the company at the forefront of the SMA market. Recent technological progress has seen the creation of a paperless account opening process.
Momentum in the business is only set to build in our view, with the Australian platform market expected to grow from $700 billion to $900 billion by 2020 (according to Morgan Stanley). The SMA segment is a smaller part of the pie, but is likely to grow quicker, with 35% compound annual growth over the period, rising from $18 billion to $60 billion. In a fragmented market and with a burgeoning reputation, Praemium is well placed to pick up more than its fair share.
The company continues to innovate, which should ensure its offering remains at the cutting edge.
After a successful pilot in December, Praemium has launched international securities for the Australian SMA platform, Management reports several prospective clients are already looking to use the service, with superior reporting capabilities and cost effectiveness making the new international model portfolios highly completive.
The story internationally is also very positive. A breakeven situation is expected this year, so a tipping point could also be close at hand to mirror what has occurred in Australia.
The company’s in house investment management proposition of model portfolios and multi asset funds grew to £477 million as at 31 December 2017, represents an increase of 47% over the past 12 months. The Smartfund range of multi asset funds has reached £281 million in FUA, a 77% increase in the past 12 months in local currency.
Source: Company Announcement
As we have noted previously, management have made some savvy acquisitions in the UK in our view, which have broadened the company’s offering, and other ‘growth’ opportunities are being canvassed for the pensions business. Indeed, CEO Michael Ohanessian said last week that “..pending further investments in the UK pensions market, we believe that 2018 could be a pivotal year for the International business.”
Turning to the charts, on the daily view, overhead resistance is situated at the January intra-month high of $0.82 as shown by the horizontal red line. However, it should be noted that the rapid increase in share price has resulted in the RSI venturing into overbought territory (exhaustion of short-term upward momentum). Hence, should the bears emerge over the near-term, a temporary pullback in price could follow down to structural support indicated at the $0.70 region (horizontal dashed-blue line). Positively, should this occur, we would view this short-term pause as corrective. From a medium-term momentum perspective, this remains in favour of the bulls, as backed by the bullish moving average crossover present since August 2017 where 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. This led to a resumption of the broader uptrend throughout 2016 and to-date. Furthermore, dynamic support was respected at the long-term uptrend line (upward sloping green line), following the short-term correction evident between November 2016 to July 2017. In-turn, a stern upward trajectory in price has ensued. 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. Therefore, should upward momentum continue to strengthen over the medium-term, then this price range would likely be the focal zone moving forward.
Summary
Investor sentiment towards Praemium (ASX:PPS) has lifted further since our last review, with the shares pushing on to record highs. The company chalked up regular milestones during 2017, with the final quarter sounding off on a similar note. Last week the company revealed that quarterly gross inflows came in at $764 million, the highest on record. This has seen funds under administration (FUA) hit $7.4 billion, for a gain of 11% during the quarter, and some 37% higher than 12 months earlier.
We have espoused for some time the degree of operating leverage to FUA growth which Praemium offers, and the market is appreciating this. We expect strong earnings gains in the years ahead with the SMA market in Australia set to grow rapidly, while the international business meanwhile is reaching a key tipping point as it relates to profitability. Strength in stock markets over time will only further accentuate this story.
We are comfortable maintaining a buy rating for Members without exposure, and who are prepared to take a medium-term view.
Members are reminded that the company’s shares are thinly traded, so patience should be exercised when buying.
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.
