Praemium Limited

Company Overview: Praemium Limited (ASX: PPS) is one of the leading contributors of scalable managed accounts technology, portfolio administration and CRM & financial advice software for the wealth management industry. It considers performance on a geographic basis and has identified two reportable segments, being Australia and International. Praemium Group has a distinctive proposition and has introduced several developments during 2019 to offer API links, trade matching that goes above and beyond on the crucial regulatory requirement.


PPS Details

Record Annual Gross Inflows and Major Platform Upgrade: Praemium Limited (ASX: PPS) is one of the leading providers of scalable managed accounts technology, portfolio administration, and CRM & financial advice software for the wealth management industry. As on 2 June 2020, the market capitalization of the company stood at ~$153.24 million. The company is administering over 500,000 investor accounts covering more than $140 billion in funds globally and has a market opportunity for $860 billion to tap for managed accounts solutions. During FY19, PPS executed several major new agreements, demonstrating a diversified and robust business. This resulted in a 5% increase in revenue and other income to $45.14 million. Over the past three years, the company reported a CAGR of 15.88% in total revenue, reflecting the persistence of the company in a long period, meeting the needs of its clients in a highly competitive market. During FY19, the company witnessed a reduction of 2% in expenses, resulting in an increase of 29% in underlying earnings before interest, tax, depreciation, and amortization (EBITDA) to $11.4 million. The major rebranding and upgrade expanded the company’s range of single assets, and hence created a comprehensive Individual Managed Accounts (IMA) service, which significantly increased Praemium’s Australian addressable market.

During FY19, PPS reported record annual gross inflows of $3 billion across Australia and International markets and platform total Funds under Administration (FUA) of $9.5 billion as at June 2019, increasing further by 145% to $20.3 billion in 1H20. During 1H20, PPS reported an increase of 12% in net revenue to $23.8 million and a record underlying EBITDA of $7 million. This was mainly due to process automation to maintain scalability, especially for new and lower-margin products. During the half-year, the company reported the 12^th consecutive half of profit increase and a growth of 122% in reported NPAT to $1.4 million. This resulted in an increase of 120% in EPS. PPS delivered a number of strategic growth initiatives and its Australian business continued the positive momentum with higher client retention.

PPS continued to deliver on its strategic initiatives with its next-gen integrated Managed Accounts platform and has bolted its capability with superior technology and a huge addressable market. Praemium is building upon the great strides and is evolving very quickly into a special business. The company has taken giant steps towards more mainstream acceptance and is taking up brand awareness activities to continue to raise its profile in the UK and Australia. 


1H20 Financial and Operational Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Praemium Limited.


Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Increased Profitability and Returns to Shareholders: During 1H20, EBITDA margin witnessed an improvement over the previous year and stood at 20.8%, up from 13.6% in 1H19, indicating increased profitability. In the same time span, net margin of the company went up to 6.1% from 2.9% in 1H19. This indicates that the company is managing its costs well and is capable of converting its revenue into profits. During 1H20, return on equity of the company witnessed an increase over the previous year and stood at 5.6%, up from 3.1% in 1H19. This indicates that the company is well managing the capital of its shareholders and is capable of generating profits internally. In the same time span, current ratio of the company was in line with the previous year and stood at 1.69x. PPS also reported a healthy balance sheet with asset/equity ratio of 1.70x and debt/equity ratio of 0.18x.  


Key Margins (Source: Refinitiv, Thomson Reuters)

Strong Balance Sheet and Resilient Digital Capability: The company has recently provided an update for the quarter ended March 2020 wherein it received high praise from industry pundits, including 2^nd place on debut for the lang cat’s UK platform scorecard, a maximum possible 5-star Defaqto rating for the UK platform and is also included in the inaugural S&P/ASX All Technology Index. During the quarter, global FUA witnessed a significant increase of 101% on the previous year to $19.4 billion. Despite the unprecedented time due to the COVID-19 crisis, the company continued to operate normally and maintained the same high levels of service clients. The VMA administration service has continued its strong growth, adding another $1 billion in assets under administration in the March quarter. Along with an excellent integrated managed accounts platform, the company believes to have the next-generation solution supported by a strong digital capability.

While market volatility creates significant challenges for the financial industry, revenues and profitability of the company continue to be largely resilient as PPS has responded quickly to manage its cost base and to preserve its global team. It has a highly diversified business and a strong balance sheet with no debt and solid cash flows. 


Growth in FUA (Source: Company Reports)

Impact of Covid-19: The current market volatility and challenges from the outbreak of the virus have resulted in global panic. This has also impacted the FUA levels of PPS. However, revenue of the company is highly diversified with nearly half coming from non-FUA sources, including subscription-based VMA, VMAAS, WealthCraft and Plum Software products. Despite the volatile market, PPS has retained its revenues and profitability, reflecting its financial strength and dynamic digital solutions.

Future Expectations and Growth Opportunities: Diversification of the business and significant broadening of the company’s addressable market resulted in solid progress for the company across several growth-focused initiatives, which is rapidly approaching profitability and should be a growing contributor in the coming years. Praemium has the financial strength and capabilities to continue to operate at the high standards its clients expect. The upgradation to a fully integrated managed accounts platform, including a new digital portal for advisers, lifted the company’ position, wherein, it could compete with its full-service peers and has drawn great feedback from clients and prospects. The company is optimistic about the predictive capability of Insights (first AI app of PPS) and its potential to grow and expand.

The company expects Australian specialist platforms to grow from 5% to 12% in 5 years and anticipates improving adviser efficiencies from VMAAS. It is focused on improving the efficiency and effectiveness of its advice process and on assisting advisers to reduce client attrition. PPS will continue to invest in products with enhancements to be delivered in FY20. It has strong cash reserves to further invest in earnings enhancing initiatives, including organic and strategic opportunities, as well as manage any future foreign currency impacts on overseas operations of the company. 


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: PPS is well poised and has shown persistence over a long period in developing a service in a competitive environment. The company has achieved solid progress across a number of growth-focused initiatives and is rapidly approaching profitability. As per ASX, the stock of PPS is trading close to the average of its 52-week trading range of $0.190 - $0.690, proffering a decent opportunity for investors to enter the market. The stock of PPS has given a return of 2.74% in the past three months and a return of 13.64% in the last one month. We have valued the stock using the price to cash flow multiple based relative valuation approach and have arrived at a target price offering an upside of lower double-digit (in percentage terms). For the said purpose, we have considered OneVue Holdings Ltd (ASX: OVH), Hub24 Ltd (ASX: HUB), Class Ltd (ASX: CL1), etc. as peers. Considering the current trading levels, attractive returns in the past one month, financial resilience amidst the pandemic, and positive long-term outlook, we recommend a ‘Buy’ rating on the stock at the current market price of $0.395, up by 5.333% on 2 June 2020. 

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

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