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Date : 20/05/2021

Pendal Group

ASX :

PDL

Market Cap : $2.48 Billion

Dividend Per Share : $0.17

Dividend Yield : 5.20 %

Buy

52 Week Range : $5.34 - $7.80

Share Price : $7.50

Pendal's acquisition of TSW is fueling growth for the firm. We recommend investors to "Buy" as it offers a good balance between growth and dividends.

Company Analysis

Pendal Group Ltd. (ASX: PDL), formerly BT Investment Management Ltd., is engaged in the provision of investment management services. The Company operates through two segments: investment management business in Australia (BTIM Australia) and investment management business outside of Australia (BTIM UK). The Company operates in the fund management markets worldwide, including the United States, the United Kingdom, Asia, Europe, and Australia. The Company offers investment services in Australian equities, global equities, property, ethical, income and fixed interest and diversified strategies. Its Australian equities include a range of funds, such as BT Core Australian Share Fund, BT Focus Australian Share Fund, BT Microcap Opportunities Fund, BT Smaller Companies Fund and BT Mid Caps Fund. J O Hambro Capital Management (JOHCM), which operates as a boutique investment management business with offices in London, Singapore, New York, and Boston specializing in the active management of equities.

Pendal operates diversified investment funds with exposure in the broad market and presence in almost every location around the globe, with a total of $101 billion in “fund under management” (FUM). FUM grew by 18% year-over-year as per the first half of FY21. Pendal had also demonstrated its skills in selecting assets which brought to the company additional performance fees up $40.5 million for the period. Pendal by far outperformed the benchmark across 83% of its FUM.

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Source: Pendal Group

The investment discipline exhibited by Pendal combined with the recent series of equity raising support the company’s long-term development, which we believe will accelerate Pendal’s growth opportunities and deliver scale and diversification needed to strengthen the diversity of the company’s long-term profits.

Equity Raise

Pendal has successfully completed a $190 million fully underwritten institutional placement of approximately 27.9 million new fully paid ordinary shares to institutional investors which represent about 8.6% of the current issued capital. The new shares have been issued at $6.80 per share. The capital placement is intended to fund the acquisition of 100% of Thompson, Siegel & Walmsley LLC (TSW), which Pendal will acquire for $413 million. We believe that Pendal’s strategic takeover of TSW is a wise approach and that the acquisition will accelerate the company’s growth opportunities in the U.S. market by offering further diversification and distribution channels which will ultimately boost Pendal’s future earnings. It is estimated that through the acquisition of TSW, Pendal may witness an increase of 30% of its consolidated FUM to more than $132 billion with US client FUM expanding by 112% to $57.8 billion.

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Source: Tradingview.com

Solid Dividends

Over the last five year, Pendal continuously proves to be reliable in its dividend distribution policy. Before the COVID-19 crisis, the company consistently distributed an annual dividend above 45 cents per share. However, due to the economic challenge and the market volatility during the second half of FY20, Pendal has been forced to adapt its dividend distribution to the circumstance and decreased its distribution by 17.8% compared to FY19. On a positive note, the company has declared an interim dividend of 17 cents per share for the second half of FY21 which is an increase of 13% from 15 cents per share in HY20. Furthermore, Pendal maintains a stable operating income that supports the company’s long-term dividend distribution policy.

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Acquisition Expands USA Market Share

Pendal started its venture into international investing back in 2011 with the acquisition of London-based equity manager J O Hambro Capital Management (JOHCM). Recently, Pendal raised $190 million through a share purchase plan which will contribute to the acquisition of Thompson Siegel & Walmsley (TSW) expected to be completed by September this year. The recent takeover of TSW in the U.S. is a strategic move that we are convinced will support the company’s long-term growth. Hence, the U.S. is the largest capital market in the world, and via this acquisition, Pendal will double its American footprint to $US 44.7 billion in assets under management, making it the largest contributing country. Furthermore, TSW will complement JOHCM which is largely a growth investor while TSW is more focused in value investing, thus, in the long-term provides balance and diversification in the overall business.

FY21 Outlook

Pendal strategic growth plan is supported by its multi-year investment programme, which is through three distinct approaches:

  • Global Distribution
  • Product Diversification
  • Global Operating Platform

The company intends to expand its footprint in key growth markets in the U.S. and Europe. The expansion to the U.S. started with the latest effort from the acquisition of TSW which will bring the United States as the largest allocation of the overall company’s assets. Pendal focuses as well on diversifying its product offering and building out its responsible investment capabilities (ESG/RI) which is a crucial step toward future growth. On top of that, the company is creating a more efficient and scalable global operating platform. Pendal demonstrates good progress on its long-term growth plan. Moreover, the company exhibited resilience, particularly during this period of uncertainty of market volatility proved by its robust half-year 2021 results with NPAT up 64% year-over-year to $89.9 million. Despite some redemption during the peak of the COVID-19 market sell-off in March and April 2020, Pendal’s fund under management grew by 10% since September 2020 to $101.7 billion.

Pendal has successfully expanded its global presence in the past decade, particularly in the U.S. and U.K. We are persuaded that Pendal will continue to deliver strong business momentum, combined with increasingly positive investor sentiment and the upcoming economic rebound. We are confident in Pendal’s trajectory and growth potential.

Investment Thesis

For the six months ended March 31, 2021, Pendal revenues increased by 32% to $294.9 million. Net income increased by 64% to $89.9 million. Revenues reflect Pendal’s US segment increased by 33% to $112.3 million, Pendal EUKA segment increased by 12% to $95.8 million. Net income benefited from Pendal US segment income increased by 39% to $26.3 million.

Pendal has successfully completed a $190 million fully underwritten institutional placement of approximately 27.9 million new fully paid ordinary shares to institutional. The new shares have been issued at $6.80 per share. The capital placement is intended to fund the acquisition of Thompson, Siegel & Walmsley LLC (TSW), which Pendal will acquire for $413 million. The acquisition price of TSW of $413 million represents 7.6x the annualised H1 FY21 EBITDA with expected double-digit EPS accretive in the first full year post-completion.

Strong Half Year Performance

Pendal reported a substantial increase in its NPAT for the 1HFY21 with $89.9 million compared to $54.8 million in the previous corresponding period, up by 64%. Revenue and performance fees contributed to it, with $277 million and $41.1 million, respectively. Revenue went up by 14% year-over-year. Pendal’s solid result was due to a significant uplift in performance fees, higher global equity markets, and discernible turnaround inflows across most channels in the second quarter of FY21. Furthermore, the company remarkably improved its investment performance with 83% of Pendal’s FUM outperforming their benchmarks over the last 12 months, and 85% outperforming benchmarks over the last five-year period.

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Consistent Revenue Growth

Pendal’s revenue is rock-solid with a reported Net Profit margin of 28% TTM that contributes to long-term lucrative dividends. The company is currently offering a 5.21% dividends yield. The group has demonstrated over the last five years, consistency in its dividend distribution policy and pays out an average of 80% of its earnings out as dividends. Pendal has shown its ability to deliver even through exceptional market volatility during this period of uncertainty. The company is consistent with its ability to generate revenues and that we are convinced it is going to accelerate with the advent of the recent capital raising and the ongoing takeover of TSW. Pendal’s revenue derives from the company’s management fees and performance fees. The key principle to sustain an increase in the company’s revenue is via three distinct factors, (1) asset value and growth, (2) funds under management and (3) distribution channels. Pendal has proved its investment skills with its recent performance, outperforming the benchmark over 83% of its total FUM. Moreover, despite the global trend of redemption during the second half of FY20, Pendal managed to maintain a positive inflow of capital which brought the FUM to $101.7 million as of the end of March 2021 compared to $92.4 million at the end of September 2020. With the recent announcement and the ongoing takeover of TSW, Pendal will be able to expand its footprint to the largest capital market in the world. The U.S. region will be Pendal’s largest asset under management. TSW will not only bring to the company exposure to the American market but will also complement Pendal’s infrastructure and extend the group’s distribution network, which ultimately will contribute to FUM growth and inflows and therefore revenue growth.

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Pendal lays a bridge between a value and growth. The company is an exceptional dividend stock that provides a consistent 5.21% dividend yield. Besides, the shares are traded at a reasonable multiple with an estimated 16.2 times for FY21 which is slightly lower than the 17.2 times of its industry peers. We are persuaded that the multiples are conservative particularly with the anticipated expansion of the company. Our forecast suggests that Pendal’s revenue is expected to grow by 7.45% CAGR from FY21E to FY23E which will support annual dividend growth of 8.44% CAGR over the next 3-year.

Valuation Multiples
Multiples FY21E FY22E FY23E
EV/Total Revenue 4.26x 3.71x 3.41x
EV/EBITDA 11.3x 9.21x 8.37x
P/E 16.2x 14.1x 12.4x

Technical Analysis

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Trend

Before the first COVID-19 outbreak, PDL developed a double top pattern that ended with the March/April 2020 sell-off which pulled Pendal’s share price all the way to $3.0, down -67%. The double top pattern formed a key resistance level which sits around the $9.5 per share which now acts as the current near-term resistance. PDL has since then recovered impressively throughout FY20 and during the first half of FY21 climbing up back near $8 per share, up 154%. PDL exhibits a bullish market structure on the weekly chart which gives us confidence in an upside continuation toward the key resistance level at $9.5 per share.

Key price levels

PDL’s current price equilibrium might be technically around the $6.47 and 6.8 per share which coincides with the price range of $6 and $7 per share represented by the 50% and 38.2% Fibonacci retracement level from the COVID-19 sell-off swing low. Moreover, the $6.47 is our estimated fair value based on our Dividend Discount Model and $6.8 is the price at which new shares have been recently issued for the $190 million equity raising.

Volume and momentum

Volume increases since the last 200-day with the 20-day volume average up by 16.9%. The price action remains bullish in the near term, evolving in a range between $8.0 and $7.0 per share.

Trade consideration

  • Market participants might be interested to enter at a key support level: $7.0 per share.
  • Primary target price above $A 9.5 per share
  • Secondary target price at $A 11.5 per share
  • Consider reducing exposure below $6.0 per share
  • It is recommended exiting the trade below $5.5 per share

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Recommendation

The recent takeover of TSW in the U.S. is a strategic move that we are persuaded will support the company’s long-term growth. The USA is the largest capital market in the world, and via this acquisition, Pendal will double its American footprint to $US 44.7 billion in assets under management, making it the largest contributing country. Furthermore, TSW will complement JOHCM which is largely a growth investor while TSW is more focused in value investing. Thus, in the long-term, it provides a balance and diversification to the overall business. We recommend long-term investors to “Buy” as Pendal offers a great balance between growth and dividends.

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