426% Revenue Decline Will Undermine Future Performance

Key Takeaways

• Reliance on cost reductions for profitability is nearly exhausted, with future earnings growth needing less certain sources amid declining recurring revenues.
  
• Structural industry shifts toward passive investing and rising compliance costs threaten demand for active managers, increasing revenue and margin pressures.
  
• Strong capital management, cost efficiency, and proactive investment strategies position the company for resilient earnings, scalable growth, and long-term value creation.

Catalysts

Engages in multi-boutique asset management business worldwide.

• The company's recent asset sales have led to a sharp reduction in management fee revenue (down 57.6% YoY) and a decline in underlying net profit and earnings per share-despite a higher net asset value per share-indicating a shrinking recurring revenue base that is unlikely to be easily or quickly rebuilt, potentially suppressing future revenue and EPS growth.
  
• The business faces growing structural pressure from the long-term migration of institutional assets toward low-cost passive strategies (e.g., ETFs), which reduces demand for active boutique managers and increases fee and margin compression, likely further impacting both revenue and net margins over time.
  
• Profitability improvements have depended heavily on aggressive cost reductions-nearly 60% in corporate costs-but management explicitly notes these gains are largely complete, implying future margin expansion from cost saving is limited, and earnings growth will need to come from less predictable sources.
  
• Ongoing industry fee pressures and regulatory requirements are set to increase further, especially for active managers, raising compliance and operational costs that may outpace the company's ability to maintain net margins.
  
• The portfolio is more concentrated post-disposals, raising exposure to key person, performance, or market risks in remaining boutiques, and the company's challenges in consistently sourcing high-quality, accretive acquisitions heighten the risk of stagnating or declining future earnings.

Pacific Current Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pacific Current Group's revenue will decrease by 42.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 45.4% today to 72.0% in 3 years time.
• Analysts expect earnings to reach A$17.5 million (and earnings per share of A$0.58) by about September 2028, down from A$58.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.5x on those 2028 earnings, up from 5.6x today. This future PE is lower than the current PE for the AU Capital Markets industry at 21.6x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.97%, as per the Simply Wall St company report.

Pacific Current Group Future Earnings Per Share Growth

Risks

• The substantial share buyback, which reduced the share count by over 42%, alongside continued strong capital management (including plans to potentially repay debt and optimize capital structure), increases capital efficiency and could drive higher earnings per share and support long-term share price resilience.
  
• Ongoing cost-saving initiatives, highlighted by close to 60% reduction in corporate costs, have materially improved operating leverage and margin stability, creating a leaner and more efficient organization that protects net margins and profitability even during periods of lower revenue.
  
• The company maintains a strong balance sheet, with significant cash reserves (A$138 million) and a fair value net asset per share increase of over 15% year-on-year, providing financial flexibility to pursue new high-potential investments and return value to shareholders-both of which are positive for long-term earnings growth.
  
• Management's active approach to capital allocation, including a newly constituted Investment Advisory Committee and a willingness to pursue larger, accretive investments with high return potential, positions Pacific Current Group well to capitalize on global growth in institutional demand for alternatives, potentially boosting future revenue and net profit.
  
• The ongoing review and support of existing boutique partners, including the use of working capital loans or targeted capital injections, offers the prospect of reigniting revenue growth and AUM expansion as boutique investments mature, helping to offset shorter-term declines in management/performance fees and strengthening long-term earnings prospects.

Valuation

• The analysts have a consensus price target of A$11.3 for Pacific Current Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$24.3 million, earnings will come to A$17.5 million, and it would be trading on a PE ratio of 19.5x, assuming you use a discount rate of 8.0%.
• Given the current share price of A$10.88, the analyst price target of A$11.3 is 3.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.