After dumping former chief executive Chris Ryan two years ago in February 2012, Perpetual Limited (ASX: PPT) took a radical road to recovery. In the driver's seat was new chief executive Geoff Lloyd and one of his first moves was to hire go-to corporate cost smasher Bain & Company to help implement a radical transformation program. It aimed to generate $50 million in annualised pre-tax savings and fix a business structure incompatible with the realities of the post-GFC world.
Given FY 2012's disastrous year of net fund outflows of $4.1 billion from a base of around $26 billion, Lloyd had little choice other than to embark on a radical transformation plan. It took the market a while to appreciate the true nature of the plan, but when it did, shares caught an updraught to more than double in value from the lows of February 2012.
FY 2013 also saw problematic net fund outflows of $1.8 billion, however Q1 2014 marked a turning point as the first positive quarter of fund flows in several years, to suggest long-term profit growth was sustainable after the effects of the cost-cutting had been realised.
Lloyd today announced the fruits of his transformative endeavours, with Perpetual posting an underlying profit of $48.1 million for the six months ending December 2013, up 37% on the prior corresponding period, while the interim dividend was up an encouraging 60% on the corresponding period.
Rising equity markets supported the group's funds under management growth of 20% to $30.4 billion for the same period, while revenues rose 16% to $203.51 million.
The Group is split into three businesses, with Perpetual Investments the star performer, delivering over three-quarters of total profit before tax for the half-year period. Perpetual Investments' funds management performance has been good and now is the time for the revamped sales and distribution teams to try and capitalise on this.
Profit at the private client advisory business was disappointingly flat, while further changes seem on the horizon for Perpetual's Trustee business after the acquisition of The Trust Company. Perpetual won that deal after a heated battle with Equity Trustees Ltd (ASX: EQT) and IOOF Holdings Limited (ASX: IFL).
Selling at $50.46 Perpetual is trading on a forward price-earnings ratio around 20 based on analyst consensus earnings-per-share forecasts for FY 2014. To justify this would require some faith in the business receiving the continued support of appreciating equity markets and continuing to improve its net fund flows.
Foolish takeaway
The effects of the group's cost cutting extravaganza are now fully priced into its market value, with the primary long and short-term challenges being organic growth and efficient integration of The Trust Company. The business has been on a good run and not yet reached the end of its transformative road, however it appears more than fully valued for now.
