Praemium (ASX:PPS) Presentation, FNN Online Investor Event, April 2021

Company Presentations

Praemium (ASX:PPS) CEO Michael Ohanessian talks about the company's record inflows following its acquisition of Powerwrap, 1H21 financials, strength of its platform and operating leverage as it scales its business in the UK.

Thank you Clive, and hello everybody. Thank you for having us today. Mate, if we can go to the first slide please, Clive.

That's our disclaimer. Thank you. So, a little bit of history for Praemium. We started in 2001, and we've been a SaaS business for probably the first 10 years of our life, because we've been around for 20 years. And really, the business got started largely because of Australia's culture. We are the country of stock pickers. We've always like to have a broker and buy stocks with a speculative, or safe, particularly for pensioners, if you want to have franking credits with a good dividend. One of the challenges though, Australia has some very complicated tax rules and very complicated securities, if you like, probably more so than any other country we're familiar with. And we made our mark very early on, because we've got a portfolio reporting system that works on whoever the broker is, wherever the money is, how complicated the stocks are, how complicated the corporate actions are. And we really grew strongly from that.

And for the first 10 years of our life, we were a Melbourne based company, software as a service. About 15 years ago we entered the UK market, we have a presence in Hong Kong, we have a presence in the Middle East, and so on. And so we are now a global company. In addition to our software as a service business, we also have a platform now. When we talk about platform, what we're talking about is software that's used by financial advisors, where they can put the client's investments all in one place and actually have those investments executed, managed, reported on all within one place. Now, remember our background of course is that we could report on assets, whether they were with stockbroker A, or stockbroker B, or whether it was with a term deposit with a bank, or directly held with a fund manager. We've got that capability as well, but we've become a platform. And platforms really make financial advisors a lot more efficient, because all of the assets are held in one place.

We are the only platform that operates both in Australia and in the UK, and we think we therefore have the largest addressable market. And that's a little bit about Praemium as an introduction. We also have a CRM system. We also have investment management system in the UK. So it's a multi-faceted business and we do think of ourselves as the platform of everything.

For those of you looking for a high growth company, we want to share a little bit about our financial results for the December half. I think this slide sort of pictures really captures the kind of growth opportunities we have. You'll see a number of elements here. You'll see our business in Australia, which is the biggest part of our business. And you'll also see our international business as well, where we operate in the UK. And we also serve as financial advisors in offshore markets as well. Now, what you can see for our December half for 2020, a 21% increase in net revenue, 9% increase in gross margin, and a 5% increase in EBITDA. Our net profit after tax increased by 113% over the last comparable period, and we had a 98% cent increase in earnings per share. Our EBITDA margin is 23%, which we think is very strong for a high growth company. And you can see over the last several years, half on half we've improved our profitability, our EBITDA half on half in absolute terms, or I think now 13 quarters. And so we're very proud of the growth that we're achieving as a firm. This is a high growth market. And remember, in Australia with compulsory superannuation, not as strong in, in the UK, but certainly there is a superannuation system there as well. You can see that this is an industry that will continue to grow. And companies like Praemium, with a very strong technology are very well-placed going forward as provider to the wealth market.

If we can now go to the next slide please, Clive. To really sort of show you what the growth is and where growth comes from for Praemium. One of the ways we get paid is we take a small percentage of the assets that sit on the software platform, where we have custody of the client's money. And you can see there on the left-hand side, when you look at our net inflows, you can see the big increase we've had. Obviously, if you look at that fourth column there that's, COVID. COVID obviously caused those of us in Melbourne to be locked down and unable to go visit our clients, but it particularly effected our UK business. The pandemic there was very, very painful and really, they didn't come out of it until about December last year. But you can see that column there that's very high, which is this December half. In that period, for about half that period from September 2020 onwards, Praemium acquired a fellow company called Powerwrap.

I'm going to come back to Powerwrap in a moment. But Powerwrap brought $10 billion of investible assets to us, as well as more inflows. And what's great about that acquisition is that we have always been a technology supplier to Powerwrap, and that's a 12 year relationship. And so, integrating that I think is going to be very powerful and very meaningful in terms of two firms with similar DNA coming together. On the right hand side, you can see a graph on our funds under administration. The blue area there is our Australian platform, and you can see the jump up we've had by acquiring Powerwrap in the December half. And you can see our UK business there in red. It's not highly visible there. We'll show you a little bit more of that a little bit later on. But, you can see there's some growth there.

And then we have something called VMAAS. Now, a bit of explanation here. Our original software as a service reporting on assets wherever they might be, we called VMA, virtual managed account, and the AS, as in admin service. Now up until a few years ago, our advice clients would use our software to administer their client portfolios. So for instance, we can tell the advisors what the valuations are, we can do all the tax and so on. But, to the extent that the advice firm has to go out and get all that information and reconcile with sources of truth, to make sure they understand the clients full wealth position, that's a high administrative burden for our clients.

And over the years, we've had requests for us to help our clients with that administration work. And like all things in life and all things through human history, the more specialised people become the better they become at what they're doing. And so you can see there with the purple, the VMAAS, there's a huge step up over the last three years since we've launched this service of us providing that admin service, in addition to our service as a service product where we don't have custody. And we think that that's a real game changer for Praemium.

Next slide please, Clive. Now let me tell you about the international business. It's a small part of our business. Unlike the Australian business, it's never made a profit. We've been there for about 10 years now. People are wondering why and how and when it will be profitable. I'm not going to get into the financials here. Suffice it to say that the losses have become quite small, and in the December half it was a very, very small loss. And what you can see here is if you look on the left-hand side, you can see that our assets under administration, FUA, has grown very, very strongly. Literally a couple of years ago it was $2 billion in assets, now it's $4 billion in assets. You can see the number of pension schemes. So in the same way we have superannuation here, in the UK they have, most people in the UK now use what's known as a SIPPP, which is self-invested personal pension plan.

And you can see the strong growth we're getting in our pension schemes as well. And also on the right-hand side, you can see a 28% increase in portfolios over this period, and a 52% increase in pension schemes. Now, over the last three or four years, as we've gone through a very strong growth in terms of pensions, in terms of investor accounts, in terms of FUA, our cost base has been relatively flat, because the thing about platforms is they have enormous operating leverage. And you can see that with some of our peers, you can say with Praemium as well. As we had more and more revenue, because a lot of the reporting and execution and rebalancing is automated now with technology, we get a lot of operating leverage.

And so, we now see a really bright future for this business. It's been a drag on our share price. We believe that it's very close now to break even, and then strongly profitable going forward. Arguably, it's been undervalued by the market, but we're going to be patient. We're going to get there soon. And we're very, very excited about our international business.

Next slide please, Clive. In terms of just a summary of where we are. If I just talk a little bit about our plans going forward. One of the great things about Praemium is because we were always a niche platform in the earlier days, which we call SMA, separately managed account, which is the most efficient way for advisors to invest client money. And when we think about SMA, think of it this way. You can invest your money with a fund manager, the fund manager might have a specific fund, it might be an equity fund, it might be a balanced fund, a multi-asset fund, which has got some cash, some fixed interest, and so on. Now, for those of you that are investing in managed funds, they're fine. They're very good collective efficient structures, but they're not very transparent. And in Australia in particular, not particularly tax effective, because you get the embedded capital gains tax, which is why Australians have always preferred to own direct equities.

Now, the great thing about an SMA, and we've been doing this for a long time, is that you can get the same experience from a fund manager, you can get their intellectual property and their stock picks. But rather than having this opaque structure where you have units in the fund, you actually beneficially own the underlying stocks. So as a investment manager, or a fund manager is choosing to pick that stock versus that stock, that's happening in real time. And you can see it in your portfolio. It's more cost effective, it's more tax effective, more transparent. Praemium is very, very strong at that. And we call that SMA.

In the UK, it's the exact opposite from a tax perspective. A model portfolio, discretionary managed fund is actually more tax effective, which is the exact opposite to Australia. And so, model managers in the UK are called DFMs, discretionary fund managers. The result is the same, it's just that the asset types are different. And one of the great advantages we have in the UK is because our technology was always built, and particularly strong for model portfolios in a discretionary basis, the investment managers there, or the DFMs, they love to bring their clients to Praemium because we make their life easier and we get a much better experience. So we actually get probably two thirds of our leads come from investment managers, not from advisors themselves directly.

We also service offshore markets. So, we're an unusual company in the sense that we've got advice clients in Australia, advice clients in the UK. And via Jersey as a regulatory body, if you like, we also serve expert advisors and expert market. So we've got clients in Hong Kong, Singapore, Japan, Dubai, South Africa, the Channel Islands and so on. And so we believe that of all of the players who play in this space, be they platforms based in the UK, or in Australia, we have the largest addressable market. We think it's at least $1.5 trillion, to give you some sense of the scale.

Now, one of the things I want to talk a little bit more about Praemium is that up until two years ago, Praemium was a niche SMA company, as a platform. Now, what that meant was that the whole Australian platform market of $800 to $900 billion, we were not servicing. We were servicing a very small niche part, being the SMA part, there was one 50th of the total market. Now two years ago when we did a major upgrade, we dramatically increased our available market. And we then added a sales team, we then started doing some marketing. And we are now seeing very strong growth coming through because of that investment.

I've talked a little bit about what's happening in Australia, if I could. We bought Powerwrap last year. Now, there's a whole lot of consolidation going on in our industry, both here and in the UK. It's very hard to integrate though, because platforms are effectively software, they're software systems. Yes, there's some custody and there's some trade execution and so on. But, mostly it's software. And you can imagine two different software suppliers trying to bring themselves together. It's very, very difficult. Powerwrap has always been on our software. And so this is one of those rare occasions where you can take two platforms, investment platforms, you can bring them together in a very deep and meaningful way. So we think this is the most synergistic, the most strategically important acquisition that's been done in this market. And we think that it really takes Premium to a new level.

I said before, we are very strong at reporting on assets that we don't have custody of, because they might be sitting with a stock broker, or a term deposit with a bank, or whatever it might be. But, when it comes to all of what we do, we can handle assets that are sitting with stockbrokers and other people. We can handle assets that need to be rebalanced in a model portfolio to replicate the fund management experience. We can serve retail clients, we can serve superannuation. We've got a superannuation scheme of about $2 billion. And also with Powerwrap, and that's the great advantage of Powerwrap, they're using our technology but they are specialists with a high net wealth market in Australia. And arguably, they are the only open architecture specialist firm that services high net wealth advisors and their high net wealth clients as an independent provider.

And so when we talk about Praemium today, we talk about Praemium being the platform of everything. And if you think about your own wealth, invariably you'll have money in a bank, you will have a term deposit. You'll have a couple of stock brokers, maybe you're buying overseas stocks, maybe you're investing in property, whatever it might be. Praemium is that one firm, that wherever the money is, we have a solution for you. We can deliver 100% tax reporting, we can provide great reporting as well in terms of performance, and so on.

And so that is our story. We're a high growth story. We're still very early on in our new strategy, remember, it's only been two years since we launched the fuller platform. And so far, so good.

 
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