Perpetual Limited: A path to $30

Profeta Investments has recently been acquiring shares in Perpetual Limited. We have an intimate knowledge of the business, with our Chief Investment Officer, Garry Laurence being part of the investment team at Perpetual from 2008-2020. 

We have invested in Perpetual Ltd because we know that the value of its businesses is greater than the value that the share market is currently attributing to the business. But we also acknowledge that the reason the shares are trading where they are is due to the recent failures of the board and management.

We think that Perpetual should keep its crown jewel, the Corporate Trust business, which KKR and numerous other parties have been trying to acquire since 2010. Rather than sell the highest quality business that should trade at a PE multiple of over 20x, Perpetual should sell or spin out some of its asset management businesses that would trade on lower multiples and not generate a large tax bill.

The current share price is assuming that Perpetual sells the Corporate Trust business and pays tax of $500 million, equivalent to $4.50 per share. By reducing the weight of lower quality businesses in Perpetual’s group of assets, this will allow the market to re-rate the entire company up to a Trustee company multiple, as it used to trade.

Now is the opportune time to sell or spin out the global asset management business

Firstly, the Australian dollar has fallen to 20-year lows, and we expect it to bottom in 2025. Reducing the company’s exposure to US dollar assets at this point makes sense, not doing the exact opposite by selling the majority of Australian dollar assets, which the sale of the Trust business does.

Secondly, by selling these offshore businesses, Perpetual can re-weight its earnings back to Australian earnings and increase the level of franking credits. Perpetual used to pay fully franked dividends, like the Australian banks and its shares used to trade at much higher earnings multiple. 

Its last dividend was only 50% franked due to the higher weighting to offshore earnings. This means that Perpetual shares are much less attractive to Australian investors especially retail investors. 

Perpetual has seen its PE multiple fall from 20x to 10x due to a combination of these factors during a time when the Australian banks have seen their earnings multiples substantially increase with the Commonwealth Bank of Australia going from 10x to 25x over this same period. 

Australian investors would flock back to Perpetual if most of its earnings were weighted back to a growing, stable earnings stream, not linked to volatile equity markets, which the Corporate Trust provides.

Corporate Trust – the Crown Jewel

Perpetual was established as a trustee company in 1886 and is one of Australia’s longest running companies. It is a company rich in history with one of its founders being Sir Edmund Barton, Australia’s first prime minister. 

The trustee business was successfully grown, predominantly organically, over the past 139 years and this created a tremendous amount of value for shareholders. 

I worked at Perpetual in the investment team for nearly 13 years, covering Australian and global equities and then being the Portfolio manager for the Perpetual Global share fund for ten years. During my final years I joined the senior leadership team and got more exposure to the Trust business and wealth management business. 

While I was there, the company predominantly grew organically, even under four different chief executives over that period. Geoff Lloyd, the Chief Executive Officer between 2012-2018, made one memorable acquisition in 2013, the Trust Company, which turned out to be a successful acquisition turning the Perpetual Trustee business into the clear leader in Australia.

Geoff Lloyd’s tenure followed a bid by KKR in 2010 for Perpetual, which valued the company at $38-$40 a share or $1.8 billion. That was double the current share price, 15 years ago. The board rejected this offer, but is now trying to sell the corporate trust business to KKR, which would be a nail in the coffin in a litany of bad deals since 2020.

Over the past 20 years, Perpetual’s corporate trust business has been growing at an impressive rate. Even during 2020, when markets were hit by covid, it managed to grow profits by 16%. 

Private equity groups and corporate raiders have been able to see the growing value of the Corporate trust business. This is why they keep bidding for Perpetual. However listed equity market investors have also been savvy to the equity value destruction by the board with its recent acquisition spree in asset management.

In 2023, Washington H Soul Pattinson (Soul Patts), bid for Perpetual, valuing the company at $3.5 billion, and $27 a share. The board rejected this offer. What was interesting about this offer is that Soul Pattinson was offering scrip in their listed vehicle in order to acquire the Perpetual Corporate Trust business and wealth management businesses, at a value of $1.885 billion. They wanted to spin out the funds management business to shareholders. 

Soul Patts remains the largest shareholder in Perpetual with 11.6% of the shares. The company has just as long a history as Perpetual does and is run by the Milner family, who are descendants of Lewy Pattinson, the founder of the business in 1886. The Milners are savvy long-term investors, who regularly attend Berkshire Hathaway’s annual meetings. They are sitting on the Perpetual register, trying to extract the value of Perpetual’s corporate trust business.

We agree with what the Milners were trying to achieve in 2023.  Perpetual could simply sell some of its asset management businesses or the entire asset management business and leave the corporate trust and wealth management business listed with the Perpetual brand for the current owners and shareholders of these assets.

Sum of the parts

Perpetual is arguably worth $30 a share and potentially more over time. This is why we have seen so many bids for the business over the past few years. However the only way to achieve this value is to sell the assets that will generate a tax loss, the asset management assets that were purchased.

Given that Barrow Hanley, TSW and Trillium are US based fund managers, they should be valued at multiples that US asset managers trade on. We think these assets should be sold to a US manager who can focus and manage them better than an Australian domiciled company.

 

The average EV/EBITDA multiple for these businesses is 8.9x. If we use this valuation and assume no tax leakage, because Perpetual could sell or spin out the tax loss assets in Perpetual Asset Management, we get to over $30 a share. This can be achieved without selling the entire Perpetual business and the brand and 139 years of history.