Morningstar declares Pendal shareholders winners from Perpetual transaction

Mike Taylor

Managing Editor/Publisher, Financial Newswire

5 December 2022

Major research and ratings house, Morningstar has declared that Pendal shareholders will be the major winners from Pendal’s acquisition by Perpetual at the same time as pointing to a lowering of its fair value estimate for Perpetual.

In an analyst note, Morningstar said it was lowering its fair value estimate for Perpetual from $38 to $35.50 per share noting that it also assumed additional los of flow totalling 9% of the combined funds under management “alongside our unchanged assumption that only half of the targeted cost synergies of $60 million will be achieved”.

“We estimate Pendal shareholders will get more value from the deal which we estimate values Pendal at $6.70 per share. This is higher than if Pendal remain independent, with a standalone fair value of $6.45 per share,” the Morningstar report said.

“We don’t expect the acquisition of Pendal by Perpetual to be accretive, either in EPS or intrinsic value terms, to Perpetual shareholders. But we also don’t think the value erosion will be as drastic as Perpetual’s current share price implies,” the Morningstar analysis said. “We expect underlying EPS to trough in fiscal 2024 before recovering to $2.57 in fiscal 2027, largely unchanged from fiscal 2022’s $2.58.”

The Morningstar analysis said there was potential for FUM loss from closing identical strategies, and that synergies might be offset by cost inflation or reinvestment.

“However, efforts like maintaining autonomy, segregating distribution (to minimise cannibalisation among its own boutiques) and potentially higher remuneration will likely succeed in retaining staff and preventing large redemptions,” it said.

“Various key managers, including Pendal’s head of equities Crispin Murray, are supportive of the deal, and Perpetual stated client consents are in line with expectations. We model incremental redemptions (from the merger) totalling $17 billion over fiscal 2023-2024. This is 9% of current combined FUM, or about half of the group’s cash and fixed income FUM, where we see higher risks of strategy duplication and fund closures.”

The Morningstar analysis also said that should Perpetual keep trading below its -sum-of-the-parts, it was possible for shareholders to agitate for an asset sale to remove the discount, noting media reports that Perpetual had previously received a $1.3 billion bid for Perpetual Corporate Trust which it said was 92% of its current market capitalisation of $1.4 billion.

Alternatively, applying fellow ESG peer’s—Australian Ethical’s—market capitalisation/FUM multiple (0.08 times) solely to Perpetual’s ESG-oriented FUM ($15 billion) already yields a valuation of $1.2 billion,” it said.