Stepping up to the plate
Investor appetite for financial service platform provider Praemium (ASX:PPS) has risen strongly since our last review at the end of May, and buy recommendation at that point around 70 cents. This follows more mandate wins domestically as well as a further push offshore, and yet another positive quarterly update, with funds under administration soaring to a record $8.3 billion.
The market is now beginning to really appreciate the operating leverage which Praemium possesses, and which has underpinned our investment thesis. We remain positive on the medium-term outlook, but with the shares trading on around 40 times earnings and having had a stellar run, some caution is warranted in our view. We are therefore changing our investment rating from a buy to a hold.
Praemium (ASX:PPS) with remain firmly held in the Fat Prophets Portfolio.
Recent Developments
Much has happened in the six weeks or so since our last review, not least of which has been a 40% plus rally in the share price. Buoyant sentiment follows a number of positive releases, capped up by a robust trading update last Thursday.
In our last coverage we noted how the company had extended an agreement with JB Were 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. Only a matter of a few days later, Praemium announced a win with another big broker, this time Morgan Stanley.
Praemium (ASX:PPS) has agreed terms with Morgan Stanley Wealth Management Australia on an automated managed accounts investment solution. This will supplement the existing performance and tax reporting services that Praemium has been providing the wealth manager since 2005. The result is a ‘fully integrated platform offering for Morgan Stanley advisers and clients.’
A few weeks later Praemium announced that it has secured a 5-year contract with CMC Markets to provide the broker with Tax Tools, its advanced tax reporting solution. The mandates have continued to flow. And we see these business wins as a validation of the company’s commitment to innovation, and market leading reputation.
Another point of difference has been Praemium’s exposure offshore, with the UK business also making robust progress. Praemium’s wings have spread even further with management also announcing last month that they have launched the Smartfund range into the UAE after gaining the necessary regulatory approvals. One of the largest banks in the region, Mashreq Bank, is acting as the local promoter, and has a strong presence in countries such as Egypt, Qatar, Kuwait and Bahrain.
With such business wins and operational progress a feature of recent years, it is also no surprise that the quarterly updates from the company are generally robust. The announcement last week on the June quarter did not disappoint, with the company once again stepping up to the plate.
The company reported that June quarterly inflows were strong at $760 million, the third highest on record. This has also taken annual gross inflows to a record $3 billion, up 50% on the prior financial year. FUA has risen to $8.3 billion, up some 35% on a year ago. The market responded positively, sending the shares up 15% in the session.
Source: Praemium (ASX:PPS) Company Presentation
As has been a habit, inflows were strong, both at home and abroad. Australian gross inflows of $566 million were the third highest on record. International gross inflows of $194 million were the fourth highest on record.
FUA in Australia now totals $5.6 billion, with another mandate secured at the start of the new financial year. Broker and wealth management firm Hartleys has signed up to the company’s reporting and administration software for managing portfolios from July 2018. International FUA now totals $2.7 billion, and is up 20% over the past year, with the ‘platform’ being laid for further sustained growth.
Source: Praemium (ASX:PPS) Company Presentation
Turning to the technical outlook, and on the daily chart, prices have broken above the 50-day moving average (red line) of $0.82 as dynamic resistance. This is a positive event, which swings short-term momentum in favour of the bull-camp. Overhead resistance sighted at the January high of $0.89 (horizontal red line) has also been taken out. The overall picture is positive, 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), has led to a stern upward trajectory in the 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. A band of overhead resistance evident between $0.77 and $0.97 is now being challenged. This is made up of the 61.8% and 78.6% Fibonacci retracement levels respectively. A clear breach would open up the pre-GFC high of $1.21.
Summary
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. We see the recently launched International SMA as being a point of difference versus some peers and also underpinning further gains in Australia. The UK business has also been no slouch. 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.
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).
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 of course work the other way, and should be borne in mind, particularly if markets were to weaken at some point.
Investors are now beginning to really appreciate the operating leverage which Praemium possesses, and which has underpinned our investment thesis. We remain positive on the medium-term outlook, but with the shares trading on around 80 times FY19 earnings and having had a stellar run, some caution is warranted in our view. We are therefore changing our investment rating from a buy to a hold.
Praemium (ASX:PPS) will remain firmly held in the Fat Prophets Portfolio.
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. The shares are a top ten holding in the Fat Prophets Global Contrarian Fund (ASX: FPC).
