James Gerrish
CIO, Market Matters
Right now, ASX listed investment fund Perpetual (ASX:PPT) looms as a classic case of re-evaluating a stock on the basis that the sum of its parts might be greater than the whole.
It’s an idea Perpetual itself canvassed and outlined to shareholders on Dec 6, noting its “growth strategy had provided Perpetual with three quality businesses of scale”.
Further evaluation showed “additional value” could be unlocked (for shareholders, of course) by separating Perpetual’s Corporate Trust and Management businesses, and “creating a more focussed Asset Management business”.
Major shareholder Washington H. Soul Pattinson (ASX:SOL) liked the idea so much it wanted to buy the company.
PPT’s next announcement to the ASX was a note to say WHSP had proposed buying 100% of issued ordinary shares in PPT – “conditional upon a demerger of Perpetual’s Asset Management business”.
The Soul Patts offer values Perpetual at $27 a share (circa +28.5% premium) to PPT’s November 13 closing price of $21. Tellingly, Perpetual has decided that offer to be “not in the best interests of its shareholders”.
We’ll see how that one plays out, but for now, what’s going on here is a Sum of the Parts (SOTP) valuation approach.
That’s prompted Market Matters CIO James Gerrish to run his ruler over a few of these SOPT spotlit ASX fund managers, to see if “further value is lurking in the sector”.
First in the high beams is Magellan Financial Group (ASX:MFG – $8.93, MC $1.62bn): Two months ago, MFG appeared to bounce off a calamitous 10-year low of $6.24 to trade Thursday at $8.92. This time three years ago, it was pushing $60.
Last week it dealt with an issue that was hanging over its head, agreeing to buy back 650m of the 1,060m options (MGFO) at 10c each.
“The original granting of these options is an example of financial over-engineering that had unintended consequences,” Gerrish notes. “However, markets hate uncertainty, and this is one piece of the distracting hassle that’s been dealt with by MFG.”
Gerrish says a new CEO is next on the agenda for MFG’s turnaround story. Whoever it is will inherit “a very solid balance sheet, underpinned by ~$1bn of assets that could be used for some form of capital management”.
“We are looking for MFG to test the $10-11 area into 2024 … our positions are now showing paper profits after struggling badly in October, but although it would be easy to ‘grab them’, we see another 15-20% upside.”
Regal Partners (ASX:RPL – $2.51, MC $640m): A smaller Sydney-based fund manager with an aggressive tilt towards growth and FUM now sitting at ~$10bn.
“While we view the stock as reasonably expensive relative to their FUM, recent growth builds scale and diversification with a distinct skew towards alternative strategies,” Gerrish says. “Phil King heads up the group and he is a deal maker, our view being that Phil is looking to get big, then get out.”
With the “potential to evolve strongly”, Gerrish notes a forecasted 4% yield over the next 12 months for RPL – tempting, but “not the reason to own RPL”.
“We are long RPL in our Emerging Companies Portfolio, initially targeting the $3-3.50 area.”
And of course, there’s Perpetual (ASX:PPT – $25.71, MC $2.9bn):
While PPT remains ~$1.50 below SOL’s initial salvo, Gerrish believes “the game is afoot”. “With SOL owning 9.9% of PPT, it’s likely to have a major say in what comes next – if they’re prepared to pay $27, they must believe it’s worth well over $30.”
“We should also remember the PPT board rejected the $33 bid from the Regal/BPEA EQT consortium only ~12 months ago.
“We can see PPT trading above $30 before it retests $20, but the risk/reward isn’t overly compelling after last week’s move.”
With that in mind, Gerrish likes PPT “below $25”.
Guy Le Page
Director, RM Corporate Finance
Location, location, location. Guy Le Page reckons “the paucity of competent operators and the lack of available capital to fund new gold plants in the region Kalgoorlie/Coolgardie districts” puts $97m gold explorer Beacon Minerals (ASX:BCN) in a good place for expansion, with “many attractive open pit opportunities within trucking distance” of its 100% owned Jaurdi mine.
It’s recently snapped up the Lady Ida gold project to extend Jaurdi’s life from three to 11 years, returned a “solid EBITDA” of $21.3 million for the 2023 financial year and has $4.4 million in cash and 4,500 ounces of bullion on hand.
And for some Christmas gravy, it’s just won some East Timor concessions that are prospective for copper.
“BCN represents if anything a good income stream from their existing Jaurdi plant based on their recent operating history with good prospects of increasing the resource base from their recent acquisitions,” Le Page says.
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.
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