Reporting Season Wrap: Praemium – the emerging opportunity

By Rory Hunter

Fintech platform Praemium (ASX:PPS) released their FY23 full year result during August, which we highlight as the pick of opportunities from reporting season.

Praemium is a leader in the provision of technology platforms for managed accounts, investment administration and financial planning.

PPS announced revenue growth of 17% for the year while costs accelerated at a slower pace of 15%. Importantly, the result encompassed a handful of one-off cost increases including outsourced administration and wage increases. While we still expect these costs to increase marginally in FY24, we see the growth being more subdued. The company has highlighted that they expect wage growth to fall back towards 4% in FY24. Following this, we expect FY24 cost growth to fall in the early teens.

At the revenue line, we note that PPS, as with peers Netwealth (ASX:NWL) and Hub24 (ASX:HUB), appears to be entering a period of potentially significant tailwinds. The cash admin fee on SMA lifted to 130bps in FY23, supported by RBA interest rate hikes.

While interest rates are expected to remain at “peak rates” for several months, financial markets are now starting to look towards rate cuts with inflation continuing to cool and broader economic conditions starting to soften. This will drive positive market sentiment ahead of RBA eventually starting to cut rates, as markets act as discounting mechanisms, which will drive platform net flows and funds under administration higher.

It is for these reasons that we see the potential for PPS to generate substantial operating leverage in FY24 via a continuation of strong revenue growth and a deceleration of operating cost growth. As a function of this, we think consensus expectations of $27m EBITDA for FY24 are sitting too low.

Importantly, EBITDA margins will continue expand from 31.5% in FY23 which will also drive the market prescribed valuation multiple higher. PPS is currently trading on 11 times FY24 consensus EV/EBITDA, relative to HUB at 21 times and NWL at 27 times. With EBITDA growing at more than 20%, margins expanding, and potential for upward revisions to consensus expectations, we see scope for a re-rate in the PPS share price.

In our view, PPS’s valuation multiple should, at the very least, align with 16 times FY24 EBITDA, bridging the gap with HUB’s 21 times valuation. This adjustment is backed by continued margin expansion and market recognition that weak net flows over the past 12 months have been cyclically driven and not structural. We see a base case of $30m EBITDA for FY24 and think consensus estimates will follow.

This derives a target enterprise value (EV) of $480m, and, aided by the ongoing share buyback, a share price target of $1.09, 55% upside to the share price at the time of writing.

 

Rory Hunter is Portfolio Manager for the SGH Emerging Companies Fund and the SGH Medical Technology Fund.

For more information on these investment strategies, please contact our Distribution team on bdm@sghiscock.com.au.

 

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