Capital Influx And Cost Savings Will Secure Future Flexibility

Key Takeaways

• The sale of the Wealth Management business will provide capital to reduce debt, enhancing financial flexibility and potentially improving net margins and earnings.
  
• Strategic focus on cost savings, new asset management strategies, and international growth is expected to diversify revenues and positively impact earnings.
  
• Investor confidence may be shaken by instability from terminated agreements, while ongoing asset outflows and financial pressures could hinder revenue growth and earnings stability.

Catalysts

A publicly owned investment manager.

• The sale of Perpetual's Wealth Management business is expected to provide a significant influx of capital, which will be used to reduce debt, targeting gross debt of $750 million to $770 million by mid-2025, enhancing financial flexibility, which could improve net margins and overall earnings.
  
• Perpetual has announced an increase in its Simplification Program, aiming for $70 million to $80 million in annualized cost savings by the end of 2027, which should reduce the cost base and improve net margins and earnings over time.
  
• The new strategy for Asset Management, including stabilizing J O Hambro and executing a refreshed distribution approach, aims to unlock growth and improve net flows, which could positively impact revenues and profit margins.
  
• Investment in international distribution and new products, such as ETFs and expansion into high-growth regions like the U.S., Europe, and Asia, are expected to diversify and grow revenue streams, impacting overall earnings positively.
  
• The focus on Corporate Trust's sustained growth and leveraging its strong client relationships and digital solutions is expected to maintain a robust revenue pipeline, contributing to steady earnings growth.

Perpetual Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Perpetual's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -35.9% today to 9.3% in 3 years time.
• Analysts expect earnings to reach A$134.4 million (and earnings per share of A$1.02) by about April 2028, up from A$-494.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$194 million in earnings, and the most bearish expecting A$92.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.0x on those 2028 earnings, up from -3.6x today. This future PE is greater than the current PE for the AU Capital Markets industry at 14.2x.
• Analysts expect the number of shares outstanding to grow by 1.69% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.24%, as per the Simply Wall St company report.

Perpetual Future Earnings Per Share Growth

Risks

• The termination of the agreement with KKR and the resulting uncertainty may create instability, which could negatively affect investor confidence and deter potential future partnerships or mergers, impacting long-term revenue and earnings growth.
  
• Despite reported growth in Asset Management, the business faces significant net outflows, especially in key strategies such as J O Hambro's global and international equities and Barrow Hanley's U.S. equities. Persistent outflows could hurt overall assets under management and future revenue potential.
  
• The company's strategic focus on cost reduction through the Simplification Program reflects underlying financial pressures. If not managed carefully, these cuts could impact the quality of services, particularly in distribution, potentially affecting revenue and net margins.
  
• The Asset Management segment plans to stabilize J O Hambro, where underperformance in several key strategies is leading to further outflows. This continued underperformance could lead to diminished returns and reduced earnings.
  
• The gearing ratio slightly exceeds internal targets, and the plan to reduce debt depends heavily on the successful sale of the Wealth Management business. Delays or challenges in the sale process could result in sustained high interest payments, impacting net margins and earnings stability.

Valuation

• The analysts have a consensus price target of A$19.024 for Perpetual based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$22.8, and the most bearish reporting a price target of just A$15.44.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.4 billion, earnings will come to A$134.4 million, and it would be trading on a PE ratio of 21.0x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of A$15.73, the analyst price target of A$19.02 is 17.3% higher.
  
• 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.