Key Points: 

  • Perpetual has officially complete its acquisition of Pendal
  • The combined entity has a fair value estimate of AUD 35.50 per share
  • Morningstar sees strong momentum in Perpetual's investments business


Shaun Ler: If we look at the current share price, it is still considerably below our fair value estimate. I think this just suggests that the market is actually not confident on the merger's benefits. Investors are not sure if there will be any synergies. There could be potential for fund losses from funds cannibalizing each other, closing identical strategies, or the potential for portfolio managers to leave. I think people are also not sure on whether or not there will be cost synergies, because any cost savings might be offset by cost inflation or investments in their business.

Now, our view is that this merger, it will not be value accretive to Perpetual shareholders, but it's also not as value destructive as the share price would imply as we believe Perpetual can do a few things to help boost value. Number one, it's talked about segmenting the distribution to minimize cannibalization. It's also talked about several staff retention measures, such as maintaining investment autonomy and not imposing house view. We are also expecting some higher remuneration over there. Ripping out costs from centralizing some operations, and also the combination of Trillium and Regnan creates a very powerful ESG business.

Now, if you take a step back and look at Perpetual as a whole, fundamentally, we see strong momentum in its investments business. Performance track record is improving, and I think this helps to boost the potential for fund inflows and more importantly, investors can also look at Perpetual Private and Perpetual Corporate Trust, both businesses have narrow moat ratings. They face less competition. Both have delivered, I would say, more stable profit growth than their investment business over the last five years.

Now, lastly, we also believe that Perpetual is currently – as we believe, Perpetual is undervalued, it is trading below sum-of-the-parts. Now, when this kind of situation happens where you get the conglomerate discount, it is possible for shareholders to actually take for or for management to consider corporate actions. In other words, there are bits and pieces of Perpetual's businesses that are trading below what they would usually trade under more normal market conditions, and if the share price still does not fire, then we see a potential for corporate action to realise this discount for shareholders.