Pacific Current Group Limited

Company Overview: A multi-boutique asset management company, Pacific Current Group Limited (ASX: PAC) is involved in offering unique value to shareholders, investors, and partners. It mainly invests in and provides services to fund management companies. As at 25 February 2022, PAC had investments in ~16 boutique asset managers worldwide. The company started trading on ASX in September 1987.

PAC Details

PAC Rides on Acquisition Synergies & Restructuring Activities: PAC has held a substantial interest in GQG Partners, LLC since April 2016. On 29 October 2021, an IPO was successfully achieved, resulting in the incorporation of an entity called GQG Partners Inc (“GQG Inc”). The listing of GQG on the ASX marked a key milestone in PAC’s portfolio during 1HFY22, which generated PAC significant cash proceeds. Notably, the company had acquired a 35% stake in a private equity real estate firm called Banner Oak Capital Partners and made an initial investment of US$35.0 million through GQG’s IPO proceeds.

Spotlight on 1HFY22 Key Results:

• Financial Position: In 1HFY22, the company witnessed an increase of 21% on pcp basis in underlying revenues, mainly resulting from higher performance fees and commission revenues. Notably, the company's underlying NPAT for 1HFY22 stood at A$14.6 million, up 26% yearly. The company saw increased performance fees from Victory Park, owing to contributions from several Special Purpose Acquisition Companies (SPACs), which PAC sponsored.
• Impressive Funds Under Management (“FUM”): For the year ended 31 December 2021, the company recorded a growth of 16% in FUM to A$165 billion. Notably, FUM increased 11% (excluding the new investment in Banner Oak). The net increase in FUM can be attributed to the Banner Oak acquisition and encouraging net inflows and market performance from the asset managers, especially GQG Inc and Victory Park Capital Advisors, LLC.
• Liquidity Details: Net operating cash flow stood at $9.9 million, down from $12.89 million, owing to the deconsolidation of Seizert Capital Partners, LLC, which resulted in a decrease in receipts from customers during the period. It ended the period with a decent balance sheet with a cash position of ~ $29.21 million as of 31 December 2021, up from $28.29 million as of 30 June 2021.

Historical Performance (Source: Analysis by Kalkine Group)

Key Metrics: In 1HFY22, the company's gross margin stood at 91%, higher than the 2HFY21 figure of 89.5%. The debt-to-equity ratio in 1HFY22 came in at 0.00x, lower than the industry median figure of 0.64x.

Profitability Profile (Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form around 52.76% of the total shareholding, while the top four constitute the maximum holding. Perpetual Investment Management Limited and Paradice Investment Management Pty. Ltd. are holding a maximum stake in the company at 14.55% and 9.12%, respectively, as also highlighted in the chart below:

(Analysis by Kalkine Group)

Dividend Track Record:

The company declared a fully franked interim dividend of A$0.15 per share in 1HFY22, reflecting an increase of 50% on pcp basis. The company’s effort to consistently raises dividends each year, depicts a scenario of its decent liquidity position. At a CMP of A$7.62, the company’s annual dividend yield stood at ~5.5%.

Dividend History (Source: Analysis by kalkine Group)

Key Risks: PAC is exposed to various risks related to the global capital market as it operates a diversified global portfolio. The business operates in a highly regulated environment, which is frequently subject to numerous reviews and regular changes of law, regulations, and policies. The company is also exposed to the risk of adverse economic conditions triggered by the COVID-19 pandemic and foreign currency fluctuation risk.

Outlook: The company has raised its earlier targets of receiving A$3 billion to A$8 billion of gross new commitments (excluding GQG) to A$5 billion to A$8 billion by the end of FY23. In FY22, the company expects to receive nine months of earnings from GQG, and 12 months of earnings in FY23. PAC’s investment in Banner Oak will also contribute six months of earnings in FY22 and 12 months in FY23. The company’s pipeline of new investment opportunities is robust, and PAC believes it is likely to deploy capital into new, diversifying investments in FY22.

Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last one month, the stock has been corrected by ~3.4% and has a 52-week high and low levels of $8.21 - $5.25. The stock has been valued using the P/CF multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). The company can trade at a slight discount to its peers, considering risks related to the global capital market, regular changes of law and policies, forex headwinds, etc. For valuation purposes, peers like Pinnacle Investment Management Group Ltd (ASX: PNI), Perpetual Ltd (ASX: PPT), Platinum Asset Management Ltd (ASX: PTM), and others have been considered. Given the growing FUM and pipeline of investment opportunities, decent long-term outlook, synergies from acquisitions, current trading levels, upside indicated in valuation, and key risks associated with the business, we give a Speculative 'Buy' rating on the stock at the closing market price of $7.62, up by ~2.281% as of 31^st March 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

PAC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

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