The era of the financialisation of Western economies has come to a grinding halt, replaced by an era of de-leveraging, dis-leveraging or whatever term one wants to coin. The shrinking of the finance sector is partly ameliorated in Australia because of the $1.3 trillion super pool and inflow of funds from the levy, but there is nevertheless a new era of restraint emerging. That is the lesson from Perpetual’s round of cost cutting, widely accepted by analysts as a thoroughly good thing, as cost cutting nearly always is. But it has not stopped the share price coming off; the market seems to have a different view.
Perpetual is really a play on the Australian stock market. If the market goes up, fees go up, as do net inflows to managed funds. In the longer term that inflow of super money should make it a good business to be in, but in the shorter term the bear market makes it something of a double negative. There is also the risk that the cost cutting may damage the brand, especially if there is a loss of key fund management staff. Deutsche Bank has a hold and a price target of $25.40, which is not a bad return on the weaker price:
With PPT’s cost base having doubled between FY04 and FY11 relative to a 50% rise in revenues, the need for significant cost cuts has long been apparent. Nevertheless, the size of PPT’s “Transformation 2015” initiative surprised with $50m of pre-tax cost savings by FY15 equal to 18% of costs and 27% of heads ex PLMS. While FY13 underlying costs will be broadly unchanged, longer-term benefits are material with $30m in extra savings relative to our previous $20m estimate implying a 20% uplift in FY14/FY15 UNPAT all other things equal.
Macquarie is also neutral, waiting to see if management can deliver on the cuts:
Neutral. Management has taken important steps to address the cost base across the business. While clearly a positive, investor scepticism will likely remain until targets are delivered. PPT is trading on a large PER premium to the market and just a 4.2% FY13E dividend yield despite a 90% payout ratio.
And RBS has a Hold:
While recent key changes by management have been positive, the stock still faces an extremely difficult operating environment, which we believe necessitates the discount. Further, with significant one-offs now running through PPT’s accounts, we find it increasingly difficult to assess the underlying performance of the business. Finally, at about 16x our FY13F normalised earnings, we do not view the stock as cheap given a complex investment case and the overhang of continuing difficult markets and outflows.
The earnings multiple may be a bit high but the analysts’ view is that return on equity should be over 20%, which is acceptable. The company handled the leveraged era well, the question is can it handle the deleveraging era competently?
