Flows Environment Shows Mixed Results in September Quarter, Impacting Praemium Scheme

Praemium (ASX: PPS), the investment platform provider, continues to encounter difficulties in a fluctuating market environment, deviating from the positive trend observed in the previous three quarters. The company's Powerwrap product, which caters to ultra-high net worth clients, experienced a net outflow of $51 million primarily due to a client transition that occurred in August. This highlighted the vulnerability of the scheme to volatile flows. Nevertheless, Praemium maintains an optimistic outlook regarding the potential of the Powerwrap scheme for advisors serving affluent individuals. The negative market movements of $123 million, similar to the previous year, offset the net platform inflows for the September quarter. This accounted for approximately -0.6% of the value of Platform FUA as of June 30, 2023. Despite these challenges, Praemium achieved a significant milestone by securing a Portfolio Administration Services agreement with Mercer Investments, which is expected to have a positive impact going forward. Praemium also prioritised the enhancement of its platform functionality, which included implementing email notifications for term deposit maturities and ensuring easy access to Target Market Determination documents. Looking ahead, Praemium needs to navigate the mixed results strategically, and capitalise on the performance of the SMA scheme, whilst addressing uncertainties surrounding the Powerwrap scheme in order to ensure further growth. However, despite the company's efforts and recent positive results, the company's share price remains below 70 cents. Year-to-date, Praemium shares have experienced a decline of approximately 30%.

Based on the recent financial performance and market conditions, we have evaluated Praemium's growth and share price trends. While the company has shown positive growth in various areas, there are concerns regarding negative market movement and potential impacts of market volatility. Therefore, members should adopt a cautious approach and limiting exposure to PPS shares for now. The company's total funds under administration (FUA) have increased by 8% compared to the same period last year, reaching $44.6 billion. The platform's funds have also grown by 12% to $22.3 billion. Praemium's Separately Managed Accounts (SMA) experienced a significant surge of 17%, reaching $9.8 billion. The Powerwrap segment reported an 8% increase to $12.5 billion. However, Praemium faced challenges in its non-custodial Portfolio Administration and Reporting Service, which grew by a more modest 4% to $22.3 billion. Despite the positive growth and net inflows, Praemium faced negative market movement totaling $123 million, similar to the negative movement observed in the same period last year. This raises concerns about the company's stability in the face of market volatility. Reviewing the company's valuation metrics, Praemium's EV/EBITDA ratios have ranged from 11.7x to 41.8x over the past five years, currently at the lower end of 11.7x in 2023. It is expected to continue declining to 5.1x in the next five-year period. The P/E ratio is also declining from 18.3x to 11.5x by 2028. Based on these projections, we estimate a market capitalisation capped at $491.5 million for Praemium in the next five-year period, suggesting a fair value of around 50 cents to 52 cents. Considering these factors, we believe it is prudent to limit exposure or sell PPS shares for now.