Why the Praemium share price is down 21% this week

The Praemium share price has fallen sharply following the loss of a significant contract.

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The share price of investment platform provider Praemium Ltd (ASX: PPS) has fallen 21% to 44 cents this week following Monday's announcement that the private wealth arm of Australia and New Zealand Banking Group (ASX: ANZ) has chosen a new platform provider.

ANZ Private generated $4 million in revenue for calendar year 2018 which represents 8% of Praemium's overall revenue. The business transition is expected to commence from the new financial year with Praemium's rival, Netwealth Group Ltd (ASX: NWL), winning the contract as competition in the investment platform space intensifies.

Whilst the loss of a major client is disappointing for Praemium the loss has been softened by the amount of new business it has won, which in aggregate will have a positive material impact in the new financial year by exceeding the amount of revenue lost from the ANZ Private contract.

The major new agreements signed by Praemium include the renewal of its contract with Asgard Capital Management from November 2019 for up to 6 years with a minimum contract value of $3 million per year.

Smaller agreements from Morgan Stanley Wealth Management Australia and Shaw and Partners worth approximately $1 million per annum have also been agreed to.

Foolish takeaway 

Praemium's share price is down 31% in 2019 despite the rise in global equity markets. The share price fell to a low of 41 cents on Wednesday, a level not seen since 2017 before recovering slightly. This week's announcement has added to the negativity surrounding Praemium after it reported a softer than expected result at its half-yearly in February.

For the first-half of FY19, Praemium reported revenue growth of 7% to $22.9 million boosted by a 30% increase in global clients in calendar year 2018. Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) rose 21% to $5.1 million. The Australian part of the business is highly profitable with 42% EBITDA margins that managed to offset the $1 million operating loss from the international arm of Praemium.

Praemium is currently trading for less than 4 times estimated FY19 revenue which is a significant discount to some of its peers and historical levels. Whilst the company is growing at a slower rate than its rivals a lot of bearishness is already priced into the stock and this sell-off may turn out to be an overreaction.

Motley Fool contributor Tim Katavic has no financial interest in any company mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Praemium Limited. The Motley Fool Australia owns shares of Netwealth. The Motley Fool Australia has recommended Praemium Limited. 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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