Big Drop Today, page-21

Hi Bosswhat,

From recent Lincoln Indicators analysis (in part):


" The group has 53% of its funds under management (FUM) in its European business, JOHCM, yet it contributes 70% of base management fees and has more funds subject to performance fees. Pendal Australia (47%$ of FUM) was traditionally composed of its low margin legacy Westpac business but has refocused on targeting institutional mandates which has resulted in higher base fee margins. The company is active in establishing new strategies with profits not paid out in dividends reinvested into seed capital (GR3). However, fixed costs, which are approximately 40% of total costs, are likely to increase by 18-20%, driven by higher compliance & rebranding expenses.

In recent months, the share price (GR5) has been in a bearish trend (SDMAX) attributed to outflows from its higher margin JO Hambro business (JOHCM) in Europe and its lower margin legacy Westpac business, coupled with a downgrade from a recent broker report. As a result, highly sensitive investors may wish to remove their exposure to the stock, although we remain comfortable with the company's ability to grow FUM via its existing diversified strategies that exhibit strong long-term performance and ample capacity to grow. Operating margins, currently stable at 45%, have the potential to expand as higher margin business flows through (GR3). PDL has increased its presence in the US market where significant inflows continue to occur.

Pleasingly the CEO, Emilio Gonzalez, who holds a significant stake in the business, has been in place since 2010 (GR7). PDL has announced that the CEO its JOHCM division in Europe, Ken Lambden, will be leaving the company immediately after two years in charge. The group is undertaking a global search for a new leader with group CEO, Emilio Gonzalez, taking the role of acting CEO of JOHCM in the interim.

Despite the positive investment thesis, the company faces a number of active risks. The sensitivity of performance fees and fund inflows to equity market cycles and fund performance are high while active management fees are also structurally under pressure from the growing demand for ETFs. The loss of any key investment personnel may result in the loss of investment mandates and earnings will also be subject to exchange rate volatility, especially from a change in USD, GBP or EUR. The company also operates in highly regulated markets across the world and is subject to potential adverse changes and rising compliance costs. The company has recently changed its name from BTT to Pendal Group and there is potential for reputational damage, while the company may also continue to experience outflows from its declining relationship with Westpac."

I'm happy to hold as valuation from this and other analysts sits in escess of $11.00 - despite the bumpy ride we're having.

Regards,