Fat Prophets Hot Stock: Praemium (PPS)

Saturday 25th March 2017

Punch and Counter-Punch

by James Lennon

What’s new?

The gloves have been taken off in the boardroom of Praemium with the company announcing in February that Michael Ohanessian had been removed as CEO and Managing Director. The reason cited was that a “CEO with a different skill set would better serve the company’s leadership needs for the next phase of its growth.”

This significant change at the top level, which was backed up by only a vague justification, was made even more curious given that it came only eight days after a strong half year result. Praemium reported a 16 percent increase in revenue to $17 million and a 39 percent increase in EBITDA (earnings before interest tax, depreciation and amortisation) to $2.5 million.

Mr Ohanessian has been at the Praemium’s helm since August 2012 and during his tenure the company’s performance has been stellar. Revenues have grown from $13 million in FY12 to over $30 million in FY16, and the company has made the all-important transition into profitability.

As such, this announcement was confusing for investors and raised fears that something more ominous might be lurking in the background. The classic market behaviour of shooting first and asking questions later saw the shares sold off down to a low of 34 cents. Interestingly, executive chairman & Board member Greg Camm seized this opportunity to acquire 100,000 shares on the market at 35 cents.

Financial services veteran Robert De Luca has since been appointed interim CEO, commencing in the position on 6 March 2017, while the Board conducts a search for a permanent CEO which is expected to take a few months.

In our view, the developments bear the hallmarks of a simple Boardroom stoush, with directors and Mr Ohanessian clearly not having seen eye-to-eye. This hasn’t gone down well with investors with Fund Manager Australian Ethical CIO David Macri maintaining that Mr Ohanessian's termination was without grounds.

The plot thickened when on 15 March 2017 Praemium notified the market that Mr Ohanessian had given notice requesting the company hold a general meeting under s249D of the Corporations Act to vote on resolutions to remove the existing directors Andre Carstens, Peter Mahler, Robert Edgley and Greg Camm. They would be replaced by Barry Lewin, Stuart Robertson and Daniel Lipshut.

This request was co-signed by significant shareholders Australian Ethical and Paradice Investment Management. The timing of the sacking of Mr Ohanessian was particularly unfortunate for Paradice, with the company increasing its stake in Praemium to 7.5 percent the day before the Board announced the change of senior leadership.

Outlook

Praemium is currently seeking advice in relation to this notice, so in the meantime shareholders will have to sit tight and await the company response. Investors have responded positively to this announcement with the share price recovering to 40 cents, as it appears to highlight that the incident was a result of a Boardroom dispute, as opposed to any failure of Mr Ohanessian to comply with the law or his duties as a director.

Despite these developments we still favour Praemium, but it certainly injects an additional element of risk and uncertainty into a company that is already operating at the higher end of the risk spectrum. The request for the shareholders meeting may not be approved however, depending on what legal argument the existing board’s lawyers come back with.

If the meeting proceeds, shareholders will require more information on the potential new directors to be able to vote on the resolutions. If the director changes are approved, a significant amount of collective knowledge regarding Praemium’s operations will walk out the door and installing a whole new Board will give rise to ‘transitional’ risks.

On the flip side, we have great respect for Mr Ohanessian and for what he has achieved during his tenure as CEO. Should the new directors be approved there is potential for Mr Ohanessian to come back into the fold. This would help to mitigate the risk of wholesale changes at the Board level. Alternatively, if the status quo is maintained, the Board will have to put some wood on the table in terms of installing a permanent CEO that can “better serve” the company than Mr Ohanessian.

Price

Praemium is currently trading on a FY17 earnings multiple of 38.1 times, with this forecast to decline to 21.1 times in FY18. These fundamentals appear consistent with the stock’s favourable technical set up, with dynamic support having been tested at the long-term uptrend line following the recent correction in the share price. A close (on a monthly-basis) above this trend line would increase the probability of a medium-term advance towards resistance situated between $0.50 and $0.53.

Worth buying?

While the surprise departure of the CEO and upcoming EGM has rattled investors, at the end of the day we still like the quality of the company’s offering and the leverage inherent in its business. However, this is not to say that recent developments have not added an additional layer of ‘complexity’ to the investment case, with the Boardroom stoush potentially signalling a major fork in the road in terms of Praemium’s future strategic direction.

James Lennon is a senior analyst at investment research and funds management house Fat Prophets.

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