Perpetual Limited (ASX: PPT) shares have lifted 9.83% today (at the time of writing) as the financial services provider delivers better than expected half year results.
Perpetual results
Perpetual reported $263.5 million in revenue for the half, an increase of $1.2 million over 1HFY19. Expenses increased 4% to $173.8 million. Net profit after tax (NPAT) was $51.6 million, down 14% on the prior corresponding period. Dividends were cut, with an interim dividend of $1.05 per share declared (fully franked), down 16% on 1HFY19. This represents a 95% payout ratio.
Sector performance
Perpetual Investments reported its funds under management declined to $26.3 billion in the first half, down from $27.2 billion in 2HFY19 and $27.7 billion in 1HFY19. Although markets rebounded positively with double digit growth over the 12 months to 31 December 2019, this was offset by outflows. More positively, Perpetual Investments reported $1.3 billion net flows into cash and fixed income in the second quarter, marking the first quarter of positive flows for 10 quarters.
Perpetual reports that market conditions are challenging for value managers, with valuations now exceeding previous market peaks. Perpetual's funds have historically outperformed when valuations normalise.
Perpetual Private, on the other hand, reported its 13th consecutive half of positive funds under advice flows. Funds under advice reached $15.2 billion at the end of the half, up from $14.8 billion in 2HFY19 and $13.7 billion in 1HFY19. Funds under management also grew, reaching $6.8 billion from $6.7 billion in 2HFY19 and $6.2 billion in 1 HFY19.
Demand from domestic and global investors fuelled growth for Managed Fund Services, with funds under management climbing to $274.1 billion up from $269.7 billion in 2HFY19 and $255.8 billion in 1HFY19. Debt Market Services also grew funds under management to $498.4 billion from $494.4 billion in 2HFY19 and $461.2 billion in 1HFY19.
Trillium acquisition
The acquisition of Trillium Asset Management gives Perpetual exposure to the rapidly growing socially responsible investment segment. Trillium reported positive net flows of more than US$250 million in 2019 and stands to benefit from both the growth in ESG investing and intergenerational wealth transfers. Perpetual reports that ESG and ethical funds under management is the fastest growing Australian asset sector.
Perpetual is acquiring 100% of Trillium's equity for upfront consideration of $36 million, which will be paid out of existing cash reserves. The transaction is expected to complete around 30 June 2020. Deferred consideration is structured as an earn out up to a maximum of $20 million, and is linked to revenue growth over 4 years. For maximum deferred consideration to be payable revenues will need to more than double by 30 June 2024.
Balance sheet
Perpetual ended the first half with cash of $261.7 million, down 6% from the prior corresponding period, but the company reports that its balance sheet provides strong foundations for future growth.
Its corporate debt amounted to $87 million, unchanged from the previous two halves, with the gearing ratio remaining at 11.6. Regulatory capital of $157.9 million was held.
