Hot Stock- Praemium (PPS.ASX)

Monday 22nd August 2016

The power of leverage

What’s new?

Fund administration platform provider Praemium recently released its full year result to 30 June, posting a 72 percent increase in EBITDA to $3.77 million on revenues of $30.2 million. The company continues to aggressively invest in the business, as it accumulates Funds Under Administration (FUA) which was up 25 percent year-on-year to $4.775 billion across all divisions. Improvements in operating leverage continues to underpin growth in profitability, and helped to generate a maiden profit with NPAT for the period hitting $800k, up from a $2.1 million loss in FY15.

This operating leverage and scalability of the business model is one of the key features we find particularly attractive about Praemium. Once the platform is in place, the business is able to double or triple in size without having to ‘build another factory’ like a company might have to in the manufacturing sector. The company also maintains a robust balance sheet, with no debt and $10.4 million in cash available on 30 June, which gives the company greater flexibility and financial strength to reinvest in the business to stimulate growth.

In addition, the quality of Praemium’s offering continues to be validated, with the company being voted the ‘International Platform of the year’ in London earlier this year. As well, Praemium was selected by JBWere to provide platform services for their private wealth clients in Australia and New Zealand after conducting a lengthy assessment of options available to them.

Outlook

Changes in technology and increased regulation of the financial sector are both supportive of customer demand for greater transparency in their portfolios. In our view, it is Separately Managed Accounts (SMA’s) greater transparency and compatibility with the SMSF market that is behind their growing popularity. Also helping their case is the fact that they offer beneficial ownership of the underlying assets and cost efficiencies such as lower brokerage costs which is helping to increase demand.

A report conducted by Morgan Stanley predicts that the Australian SMA market will expand by 35 percent annually to reach $60 billion by 2020, at which time SMAs could capture 75 percent of industry net inflows. This represents tremendous growth in a short time frame and as a leader in SMA, Praemium is well positioned to benefit from this trend.

Looking ahead, the focus of the business is to continue to grow FUA by accelerating the on-boarding of new SMA clients and expanding distribution channels, with product innovation (and associated expenditures) being key in this regard. As was the case in FY16, there is sufficient evidence to suggest that Praemium will continue to deliver operating leverage, particularly as it drives its UK business towards an earnings inflection point.

Price

Praemium’s shares are currently trading on a FY16 PE of 35.2 times, with this forecast to decline to 20.8 times in FY17. While dividends will feature in the years ahead if earnings trend as expected, it is worth noting that Praemium’s technical set up is supplementary to its fundamentals. In particular, we note that the recent break and close above the 78.6% Fibonacci retracement of $0.41 has triggered the next upside target of $0.50 being the 127.2% Fibonacci extension, with this backed up by a bullish moving average crossover (50-day moving average crosses above the 200-day moving average).

Worth buying?

We expect a strong uplift in profitability in the coming years, driven by improvements in operating leverage as the company grows in scale.

James Lennon is a senior analyst at investment research and funds management house Fat Prophets. Click here to receive a recent Fat Prophets Report

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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