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Bell Potter: Perpetual Limited shares are a buy

Bell Potter has upgraded Australian funds management group Perpetual Limited (ASX: PPT) to “Buy” from “Hold”, saying the stock is oversold at current levels despite a disappointing March quarter FUM update. 

“We believe now is a good time to revisit the stock with over a 6% dividend yield on offer, and while there is negative sentiment on the stock from what we see as largely a one-off negative flow in the period and from a difficult period in the share market…,” the broker said in a research note. 

Bell Potter also noted that the benchmark S&P/ASX 200 index was already up around 2% so far in the June quarter which provided “an early encouraging sign, which if maintained, provides the catalyst for a potential positive rerating.” 

It added that Perpetual’s share price was already down more than 21% since the highs seen as recently as February, and that this decline more than captured its downward revisions to EPS estimates.   

Following the March quarter update, Bell Potter downgraded its underlying EPS estimates by -2.9%, -9.5%, and -8.7% for FY18, FY19 and FY20, respectively, due to lower share market and net-flow levels versus expectations. 

“The ASX200 was down -5% during the period, and there was a lost institutional mandate which we see as one-off,” it said.   

Due to the EPS revisions, the broker also lowered its target price to $47.50 per share from $52.10. 

Meanwhile, Ord Minnett also upgraded Perpetual to “Hold” from “Lighten”, saying the company has less downside risk to its share price relative to other listed fund managers.  

The broker noted that the stock’s current valuation metrics were supportive despite the underlying performance in many of Perpetual’s larger strategies remaining below historical track records, and near-term challenges including market volatility, FUM outflows, and the fact that Perpetual had yet to announce a replacement for its outgoing CEO. 

“The stock has now derated significantly and is trading on a forward P/E multiple of less than 14x rebased earnings and is delivering a fully franked dividend yield of more than 6%”, it said in a research note.  

“Given these valuation metrics, we upgrade our recommendation to Hold as we see less downside risk to the current share price relative to other listed fund managers.”  

The broker also lowered its target price to $45 from $49.50 in line with its valuation. 

The recommendation upgrades follow Perpetual recording net outflows of $1.3 billion for the March quarter and FY18 year-to-date net outflows to $2.2 billion. 

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Motley Fool contributor Gabriella Hold has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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