Praemium

Friday 18th March 2016

Fat Prophets’ Hot Stock: Praemium (PPS)

Positive funds flow fuels growth

What’s new?

Praemium released its interim results last month, with the key features being a 35 percent increase in revenue, a 93 percent increase in operating earnings and a maiden 1H16 profit. As has been the case in previous reporting periods, the key driver of Praemium’s 1H16 results was the 41 percent increase in Funds under Administration (FUA) to $4.5 billion. The Australian business exhibited a high rate of growth in the first half, while there was further improvement at the UK operation, where revenue grew strongly relative to expenses.

Outlook

While management has not provided any explicit earnings guidance for 2H16 or beyond, its general commentary on the outlook for the company remains upbeat. Of course, this is not entirely surprising given the progress that Praemium has made over the last several years in leveraging its early mover advantage in what are relatively large and growing markets. The fact that Praemium’s recent earnings trajectory has been achieved despite an ongoing investment in R&D and continued losses in the UK is also encouraging.

Price

Praemium’s shares are currently trading at 26.2 times FY16 earnings, with this forecast to fall to 17.4 times FY17 earnings. While Praemium is not currently paying a dividend, the company’s revenue run rate, high fixed cost base, and current net cash position indicate to us that capital returns are likely to be a near-term prospect. Praemium’s favourable fundamentals also appear to be aligned with the stock’s technical set up, with the latter currently suggesting that medium-term momentum remains to the upside.

Worth buying?

While Praemium has a chequered history, the company’s recent track record has been consistently positive, with this due largely to its success in growing FUA. By virtue of being an early mover in large and growing markets with sufficient capital to invest in product development and operating efficiencies, Praemium is now starting to deliver on shareholder expectations. Given the quality of the underlying thematic in both Australia and the UK, we expect this trend to continue for the foreseeable future.

James Lennon is a senior analyst at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, 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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