This ASX 200 share looks like a bargain buy to me

This stock looks like a recovery candidate.

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The Pinnacle Investment Management Group Ltd (ASX: PNI) share price has suffered plenty of pain. The S&P/ASX 200 Index (ASX: XJO) share is down 15% from 1 August 2023 and around 50% from November 2021.

Pinnacle said that it has a "growing a diverse family of world-class investment management firms (affiliates)". It also said that it has equity interests in its affiliates, with "seed funding, global institutional and retail distribution, and industrial grade middle office and infrastructure services."

It said that it provides affiliates with "superior non-investment services, we enable them to focus on delivering investment excellence to their clients."

What's going on with the ASX 200 share?

Pinnacle's earnings growth has slowed right up – in FY23 it saw net profit after tax (NPAT) improve by just $0.1 million to $76.5 million. Its share of affiliate NPAT fell 11% to $67.4 million.

During 2022, the ASX 200 share suffered from both the decline in share prices, which hurt funds under management (FUM), and the net flows of investor money.

Investors also seem to be less optimistic about fund managers, with the share prices of GQG Partners Inc (ASX: GQG), Australian Ethical Investment Ltd (ASX: AEF), Pengana Capital Group Ltd (ASX: PCG) and Perpetual Ltd (ASX: PPT) all struggling in recent times.

Profit hasn't fallen hard, instead, it's the Pinnacle price/earnings (P/E) ratio that has significantly reduced.

Why I think the Pinnacle share price is an opportunity

There were positive signs at the end of FY23. While net inflows for the whole 2023 financial year were $1.5 billion, there were positive net flows of $3.1 billion in the six months to 30 June 2023. So it was the second half where things really turned around.

It ended FY23 with an aggregate affiliate FUM of $91.9 billion, up $8.7 billion from 31 December 2022, or up $8.2 billion from 30 June 2022.

If the fund managers are able to deliver positive investment returns, then FUM can keep climbing if overall net inflows are positive. Pinnacle said that there has been continued affiliate medium-term outperformance, with 81% of 5-year affiliate strategies having outperformed as at 30 June 2023.

The ASX 200 share still provides investors with solid cash payouts. The FY23 final dividend was 20.4 cents per share, bringing the full-year dividend to 36 cents per share, up 3%. The trailing grossed-up dividend yield is 5.7%, which is a solid cash return.

Investor confidence could take a bit of time to return, but I believe that in a year or two, more investors will be allocating money to Pinnacle's fund managers again, and there's a good chance that the share market may be looking more positive.

Commsec estimates suggest that earnings per share (EPS) can grow each year in FY24 and FY25. It's projected to make 49.9 cents of EPS, which would put the Pinnacle share price at 18x FY25's estimated earnings.

With inflows returning, net profit rising and a growing dividend, I think it's a long-term opportunity.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Australian Ethical Investment and Pinnacle Investment Management Group. The Motley Fool Australia has positions in and has recommended Pinnacle Investment Management Group. The Motley Fool Australia has recommended Australian Ethical Investment. 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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