Top Gainer: Perpetual (PPT)

 Closing price  $26.49
 Change  +2.42
 % change  +10.1%

 

Perpetual (PPT)’s shares jumped to a 10-week high after the wealth manager and trustee announced a $70 million off-market share buy-back and an annual profit in line with expectations. The stock surged $2.42, or 10 per cent, to $26.49 – taking out the top gainer’s spot for Friday. PPT had previously been in the doldrums for months, with a regular spot in the top five shorted stocks on the ASX meaning there was plenty of downward pressure on the stock. After the takeover bid failed from private equity firm KKR in December PPT had fallen a whopping 43% in the eight months to early August.

The rally on Friday was triggered by Perpetual’s decision to return up to $70 million of surplus capital to shareholders through an off-market buy-back tender process, revealed as it delivered on its pre-announced 31 per cent fall in net profit to $62 million for the year to June 30, and underlying profit of $72.9 million, which was flat on the previous year.

“The result came in in line with guidance at the underlying level,” said Peter Esho, chief market analyst at City Index. But after consistently disappointing the market for two years, the share buy-back was a strong signal that Perpetual’s stock has bottomed, he added. “You’ve had the market fall, question marks over regulatory changes in superannuation, key questions about them losing key people, not getting their international operations right, (and) the private equity offer didn’t go through. (The buy-back) sends a signal that potentially the stock price has bottomed.”

Offering a broad range of investment, superannuation and retirement income products, PPT manages investment funds exceeding $27 billion and administers more than $209 billion of client funds. It invests in all major asset classes, including Australian and global shares, fixed income and property. Founded in Sydney in 1886, Perpetual was targeted by US private equity firm Kohlberg Kravis Roberts in October 2010, but takeover talks failed as Perpetual concluded the indicative bid of up to $1.75 billion didn’t reflect the company’s true value. “A brief flirtation with a private equity buyer saw Perpetual’s share price surge above $39,” Richard Morrow, a director of E.L & C. Baillieu Stockbroking says. “However, the courtship was brief and ended in tears, leaving the Perpetual share price in the doldrums below $30, with a market capitalisation of about $1.3 billion.” But, looking forward, Morrow sees good value here, particularly if global economies improve. “The company is a high margin business trading on a modest earnings multiple and is completely loveless with investors,” he says. “It pays high dividends and has strong cash flows.”

However Deutsche Bank’s Kieren Chidgey disagrees, believing that the outlook for Perpetual is weak given profit headwinds from its corporate trust business and heavy fund outflows from institutional investors. Funds under management reached $27.2 billion at June 30, but fell to $25.4 billion by July 31 as the share market rout took hold. “We’re seeing levels of sentiment that we haven’t seen since the early 1990s recession,” chief executive Chris Ryan said.

With a lagging share price, Perpetual it’s still possible that PPT could be a takeover target. Richard Batt from Shadforth Financial Group  notes that the company’s share price has tumbled since takeover discussions with private equity firm Kohlberg Kravis Roberts failed in December 2010, making it attractive for potential suitors once more. “Although operating conditions are difficult, the company offers a sound wealth management business,” he said. “At these levels, you can’t rule out the possibility that another suitor may make a bid for the company, providing potential upside for investors.”

Goldman Sachs agress that PPT is still a potential takeover target according to its modelling that takes into consideration current valuations and internal rates of return (IRR).

Takeover speculation aside, this stock is hardly a raging favourite amongst brokers – according to Reuters broker consensus data, no brokers have Buys on PPT, one has an Outperform and eight have Holds, with no Sells.

 

Chart: Share price over the year to 26/08/2011 versus ASX200 (XJO)

Stock code: PPT

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