Praemium (PPS.ASX)

Fat Prophets

Friday 31st July 2015

Sharechat Hot Stock – Praemium (PPS.ASX)

A slower 4Q15, but momentum remains positive

What’s new?

After two consecutive quarters of record gross inflows, Praemium ended FY15 on a more modest note. While Praemium’s gross inflows for 4Q15 were materially below 3Q15, they were 15.3 percent higher than 4Q14. As a result, Praemium reported that its funds on platform (FOP), as at 30 June 2015, increased by 3 percent quarter-on-quarter and 48 percent year-on-year. We expect continued momentum in FOP and operating leverage to deliver a maiden profit in FY16.

While Praemium’s new white-label service went live in June 2015 following the launch of Infocus Wealth Management’s Managed Account solution for its advisers and their clients, it is not known how much this contributed to gross inflows during 4Q15. At any rate, Praemium’s white-label initiative appears well positioned to add to gross inflows over the next several years, with management having indicated that a further three customers are now in the implementation phase.

Outlook

While Praemium has had its fair share of challenges since being established in 2001 (and listed on the ASX since 2006) and is yet to report a statutory net profit, we expect the latter to happen in FY16. This is based on (i) management’s guidance for “an underlying profit” in FY15, and (ii) the company’s operating momentum over the last several years, with the combination of record inflows and operating leverage having delivered incremental improvements in earnings and cash flow.

Price

From a technical perspective, Praemium’s share price momentum has stalled following the high of $0.44 that was reached back in April. However, with a consolidation phase underway, downside remains limited to $0.29. With the 14-day RSI still neutral at just over 50, there is ample scope for the uptrend to begin re-emerging over the coming weeks.

Worth buying?

As evidenced by Praemium recent market updates, the company continues to make inroads in its quest to achieve sustainable profits for its shareholders from FY15. While management has reiterated guidance for an “underlying profit” in FY15, we expect the operating leverage that is already becoming evident to drive earnings materially higher in FY16 and beyond. By virtue of having no debt and a growing cash balance, Praemium has been able to invest for future growth.

With Praemium trading on 31.8 times FY16 earnings and paying no dividend, it would seem reasonable to conclude that the company’s shares approximate fair value. However, based on our view that Praemium’s sustainable medium-term earnings are likely to be materially higher than the market’s current estimate, we believe that the shares continue to offer a reasonable investment at current prices.

James Lennon is an Analyst at Fat Prophets share market research. To receive a recent Fat Prophets Report, call 0800 438 328 or Click here.

Disclosure: Praemium is held within the Fat Prophets Concentrated Australian Share and Small/Mid-Cap Models. The Praemium platform is also used by Fat Prophets Wealth Management.

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