The Pendal Group Ltd (ASX: PDL) share price could come under significant pressure tomorrow when the funds management group hands in its full-year profit results – if Credit Suisse is on the money.
Pendal's share price shed 0.3% in after lunch trade to $8.16 when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index clawed back losses to trade flat at the time of writing as the Worleyparsons Limited (ASX: WOR) share price, the Syrah Resources Ltd (ASX: SYR) share price and the Iluka Resources Limited (ASX: ILU) share price led the charge higher.
But don't wait for the results to sell Pendal, according to Credit Suisse who rates the stock "underperform" even as the broker is forecasting cash net profit to jump 16% year-on-year to $201.5 million for the year ended September 30, 2018.
The big uplift is driven by a jump in performance fees it will receive and new capital inflows that will increase funds under management (FUM).
Investment performance and FUM growth are the two single most important growth factors for any fund manager but Credit Suisse warns the good times won't roll on into FY19.
The investment performance for its key products is weakening, particularly at its international equities business J O Hambro Capital Management.
Costs are also expected to keep rising by more than 10% in the current financial year due to currency effects, reinvestment in the business and higher rent.
The cost increase comes on the back of management's warning that FY18's fixed cost growth would hit 18% to 20%.
"Our FY18E Cash EPS [earnings per share] estimate sits 2% above the IBES consensus… [but] our FY19E earnings are ~10% below consensus due to expectations of lower performance fees and higher fixed cost growth, which could be areas of negative surprise for consensus at this result," said the broker who has a price target of $7.10 on the stock.
"PDL is trading on 14.2x 12-month forward earnings, a ~30% premium to its UK peers, providing little valuation support."
A 10% variance in EPS is a big deal and that means shareholders should brace for a painful wave of downgrades if Credit Suisse is right.
That will probably keep the stock in the doghouse for a while even if its share price drops to an attractive valuation range.
It's a nail-biting time for brokers and shareholders tomorrow. Someone is going to end up with egg on their face.
