Financial services business Perpetual Limited (ASX: PPT) has announced an underlying net profit of $130.5 million on operating revenues of $497.1 million for the financial year ending June 30, 2015. The underlying profit and operating revenue are up 25% and 13% over the prior year.
The group has three operating divisions that are involved in asset management, private advice and trustee services. The flagship asset management division is the main earnings driver and delivers substantially more than half of total group earnings.
Moderate year
Back in 2012 after years of underperformance the group embarked on a radical cost-cutting strategy euphemistically titled Transformation 2015, it was designed to slash costs and improve productivity.
The cost cutting has seen net profit climb 66% since financial year (FY) 2012 and the share price has tracked the profit gains, but cost cutting is often just a temporary fix, especially if it fails to resolve underlying problems. For example much of the IT support was outsourced to produce cost savings, however, it's questionable whether this is a smart long-term approach.
Although the real challenge now for Perpetual is to find top-line growth by growing funds under management (FUM) in the asset management space, while the advisory and trustee divisions will need to boost revenues by growing funds under administration.
Perpetual disappointment
The group saw just $300 million in net fund inflows over FY15 to finish the year with total FUM of $30.2 billion, while in the final quarter institutional outflows totalled $1.7 billion.
This should be a wake-up call for investors as institutional clients and their consultants conclude the soft outlook for Australian equities mean global opportunities are preferable.
In Perpetual's defense it states it has seen net inflows of $449 million so far this financial year, but that is hardly an amount to set investors' pulses racing and minor compared to the disastrous final quarter of FY15.
It's no secret that institutional and even retail money is increasingly heading into global equities and Perpetual has setup a Global Share fund in an attempt to grow into the international equities space.
However, its Global Share Fund only has three years' past performance, which is unlikely to impress consultants and institutions who generally like to look to a five-year past performance track record or more.
Perpetual also has strong competition in attracting institutional clients or retail money into this space and I would not be overly-optimistic on its prospects.
Outlook
Some brokers reportedly remain positive on the business which is hard to believe given the weak FUM growth and fact that the stock is down around 30% over the prior 10-year period. Moreover the group remains heavily leveraged to Australian equities that have a moderate outlook.
In my opinion the long-term investment case is weak, with the cost cutting gains behind it and a past year that suggests little has changed regarding its inability to deliver decent FUM growth. This business's strength is in picking stocks, not as a stock, which is why it remains one to avoid in my opinion.
I would prefer a founder led, fast growing, well run fund manager already sitting in the middle of the international equities sweet spot like Magellan Financial Group Ltd (ASX: MFG).
