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Diversified Financials
On the rebound?
We see numerous earnings headwinds remaining for the fund managers and
retain our Underweight sector call. However, if the typical 35% post-recession
market rebound occurs in FY10, we see 13-17% earnings upside for local players
and this, combined with PE expansion, could see share prices climb 50%+.
Table 1 : Key recommendations & forecasts
Reuters Year end Recom Price Target
price
Upside/
downside
EPS
1fcst
P/E
1fcst
BT Investment Mgt BTT.AX Sep 2009 Hold A$1.36 A$1.50 10.3% 0.11 12.8
Challenger Financial Svcs CGF.AX Jun 2009 Buy A$1.20 A$1.64 36.7% 0.35 3.4
Henderson Group HGG.AX Dec 2009 Hold A$1.63 A$1.62 -0.6% 0.06 26.1
Perpetual PPT.AX Jun 2009 Sell A$26.00 A$23.49 -9.6% 1.61 16.1
Platinum Asset Mgt PTM.AX Jun 2009 Sell A$3.28 A$2.40 -26.8% 0.19 17.2
Priced at close of business 17 March 2009.
1. Normalised EPS - pre non-recurring items and post preference dividends
Source: Company data, RBS forecasts
Key themes for fund managers – numerous headwinds remain
Fund managers are aggressively managing their cost bases, but managements are
essentially powerless to prevent profit erosion in the face of shrinking revenues. Regrettably
we see continued headwinds for these firms including: 1) further fund flow weakness;
2) investors’ continued preference for cash; 3) lower average FUM figures in 2H09; 4) a
growing aversion to alternative investments; 5) declining property valuations; and 6) widening
credit spreads.
Changes to forecasts – downgrades to FY09, some upgrades for FY10
Given our analysis of key headwinds facing the industry, combined with a current mark to
market, we have lowered our FY09 EPS forecasts for the local fund managers by 1-8%. For
FY10 we now forecast an equity market rebound of 15% (6% previously). As a result, our
FY10 EPS forecasts fall 11% for HGG and 7% for BTT, but rise by 4% for PPT and 2% for
PTM. Our valuations change by similar amounts.
Sensitivity analysis – earnings upside, but a larger impact from PE appreciation
Based on our forecasts, overall the valuations of the local fund managers would receive
similar amounts of upside (13-17%) from a 35% rebound in the market in FY10, with the
exception of CGF (3%). However, share price movements are likely to be considerably larger
as PEs expand into the market recovery, eg, if fund manager PEs return to about 18x from
their current 12x, this implies potential share price appreciation of 63-67% in FY10F.
Investment view – we retain our Underweight call on sector, but gradually reducing
We retain our Sell recommendations on PPT and PTM, on the belief that they remain
overvalued on 16x and 17x FY09F EPS, respectively. Our Hold recommendations on BTT
and HGG reflect their more modest valuations (13x and 12x). We have a Buy call on CGF as
we believe its business is stronger than its valuation implies. For investors searching for
additional beta, we suggest slowly reducing underweight positions on BTT, HGG and PTT.
Contents
On the rebound? 3
We believe a substantial market rebound is unlikely in FY09 given numerous
earnings headwinds, but if a recovery were to eventuate in FY10, we think fund
manager’s share prices could well appreciate by 50%-plus.
3
Key funds management themes 3
Changes to forecasts 4
Sensitivity analysis 5
Key themes and earnings headwinds 6
We believe the funds management sector will continue to face a number of
earnings headwinds in 2009, which are likely to affect margins, fund flows and
performance. In the absence of a market recovery, we believe earnings risks
remain to the downside.
6
Fund flows – weakness likely to continue 6
Shift to cash – potential reversal in 2009? 9
Weak investment performance 11
Alternative investments – loss of confidence 13
Declining property valuations – ongoing 15
Fixed income – yields widening, but defaults low 16
Changes to forecasts 19
We have conducted a mark to market for the fund managers, resulting in
downgrades for the next three years. Partly offsetting this, we factor in a 15%
recovery in equity markets in FY10F (from 6%). Overall, earnings remain highly
leveraged to market movements.
19
Wealth manager comps – still not cheap 20
Sensitivity analysis – through the cycle 21
We estimate a 35% rebound in the All Ords index in FY10 could provide a 13-17%
uplift to our fund manager valuations (excluding CGF). However, the global
economy still seems far from recovery, so we factor in only a 15% uplift in markets
as our base case for FY10F.
21
BT Investment Management 24
Challenger Financial Services 26
Henderson Group 28
Perpetual 30
Platinum Asset Management 32
Appendix 34
Global comparables 34
Valuation methodology and risks to target prices 35
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