Why Praemium is set to go from strength to strength
Key statistics: ASX: PPS
Closing share price: $0.30
52-week high: $0.815
52-week low: $0.320
Most recent dividend: -
Annual dividend yield: -
The trend is your friend
Shares in Praemium have continued to push higher in recent months, with the financial services platform provider passing yet another milestone in funds under administration (FUA).
This has boosted sentiment further following a robust full-year performance and strong first quarter update. Investors have also responded positively to Praemium's launch into portfolio administration, with the company signing up a financial planning group as its first client in late November.
Record-breaking fund inflows and milestones have been a regular feature for Praemium and this trend has continued in recent months. In mid-November the company announced that FUA had surpassed $7 billion, with the Aussie business pegged at $4.53 billion, while the international unit has seen its figure swell to £1.45 billion (or around $2.49 billion).
The addition of $1 billion in FUA in less than six months is owed to both new and existing client growth. At the company's AGM a week later management reported that FUA had reached $7.1 billion.
A strong start by financial markets to calendar 2018 will likely have seen these numbers swell even further.
Source: Company presentation
The trend is not always your friend but certainly it is as far as Praemium goes.
A key part of the investment case for the financial service platform provider is the high degree of operating leverage that is inherent. A "high" fixed-cost base (and relatively low level of variable costs) means that each dollar of FUA added has a marked impact on the bottom line.
Furthermore, 98% of revenue is recurring in nature. Therefore, as FUA rises earnings should do so exponentially.
Praemium clearly has meaningful scale now, with over 800 clients covering more than $100 billion in assets. The company has over nine offices globally, with over 200 staff, but expenditure growth to support geographical expansion will in our view pale in comparison to the bottom-line drivers.
In Australia, an unwavering commitment to technological innovation has put the company at the forefront of the separately managed account (SMA) market. Revenues have grown 44% over the past year on the back of a 28% gain in relevant FUA.
And momentum here is only set to build in our view with the Australian platform market expected to grow from $700 billion to $900 billion by 2020, according to Morgan Stanley.
The SMA segment is a smaller part of the pie but is likely to grow quicker, with 35% compound annual growth over the period, rising from $18 billion to $60 billion. In a fragmented market, and with a burgeoning reputation, Praemium is well placed to pick up more than its fair share.
There is also a very positive story internationally with the business there approaching an inflexion point, according to management. Revenues have also been growing strongly over the past three years, and with a breakeven situation expected next year, a tipping point could also be close at hand to mirror what has occurred in Australia.
Management has made some savvy acquisitions in the UK in our view, broadening the company's offering. Other growth opportunities are being canvassed for the pensions business.
Praemium has also added a further revenue angle in Australia, with a move into portfolio administration. This new service allows financial planning groups to outsource the administration of their client portfolios to Praemium. The company announced six weeks ago that Perth-based financial planning and investment manager Merchant Group had been signed up as the first client to the service.
Disclosure: Interests associated with Fat Prophets declare a holding in Praemium.
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