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#Bull Case
Added 2 weeks ago

Hi Everyone

For my first straw, I wanted to make the bull case for an investment that I have held for a few years, Pacific Current Group (ASX:PAC), price at time of straw is $5.45.  Hopefully this isn't too long for a straw and those that are interested take the time to read.

Believe PAC is now finally showing signs of great growth (Funds Under Management and NPAT greater than 20%) and at the current PE ratio of 12 times, is well under what it should be valued at, with forecast FY2020 PE ratio of 10.7.

As a business, Pacific Current owns a percentage of 15 US/European/Aussie Boutique Fund Managers.  There are a couple of these that are pending closure or better times, but they have effectively been written down to $0 value.  These Boutique Funds are a mix of public and private market strategies - real assets (farm; real-estate; commodity; agriculture; others), credit strategies, life settlements, global small cap and quality growth strategies.  

I purchased my PAC shares between March and November 2016 after the share price spectacularly imploded from $13.60 at its high in 2015 and then fell to a low of $3.50 in late 2016.  I had owned stocks in PAC's previous entity name Treasury Group in the mid-naughts, so new a bit about the Fund Manager Business Model, but not as much as I do now having held them for a few years.

While I didn't have the insight to wait until the low share price point, I did believe the pain felt by shareholders would pass - turning around/reverting to the mean from a price perspective.  The strategy to move to the US market to invest in Boutique Fund Management businesses would build a sustainable business model and would achieve higher growth over the long term, unfortunately this was poorly executed by the management team.  They should never have acquired Northern Lights business, they should have poached two of the managers that they liked from this business and invested in businesses they like (significantly cheaper approach - don't we all love hindsight).

This acquisition led to an implosion, which during a bull market is not easy to do.

PAC has finally begun to turnaround and I think the market has not realised this yet, leaving an opportunity to invest due to the higher growth levels achieved.  Over the last two years PAC's Funds Under Management (FUM) has been grown as follows:
>2018/06 – 2019/06 by 25.06% for the whole year
>2019/06 – 2020/06 so far by 24.22% for three quarters of the year (despite the COVID-19 drop)

This compares to the market darling of MFG as follows:
>2018/06 – 2019/06 by 24.7% (only just lower than PAC)
>2019/06 – 2020/06 so far by 13.53% (COVID-19 drop resulted in approximate 10% drop in FUM)

While there may be other factors, Fund Managers NPAT growth or decline typically correlates to FUM growth, why I presented the above.

With the growth in PAC's NPAT and FUM, believe the market will re-rate the stock sooner rather than later.  Last week the share price saw a spike due to being mentioned in LiveWire's best small cap's to invest in podcast/news article.  Dividend Yield is currently 6.5% fully franked, but the payout ratio is 55% earnings per share.  Typical Australian stocks payout 80% earnings, so there will be room for dividend growth - point made by Perpetual Investment Manager on LiveWire.

So what is the value?
I think the share price in the short term is valued at $7.40, based on a takeover offer made late last year - if you are considering buying I wouldn't pay more than $6 until the Annual results on 31 August or the FUM for June 2020 are released on 31 July.  Potential takeover offer pre-results will give you a 20% return, but believe if PAC stays a listed stock the PE ratio will increase due to its high growth. 

In the next three years the market will re-rate this stock as PAC management prove that they can sustain the high growth numbers.  Current comparable high growth Fund Manager is Magellan which currently has a PE ratio of 25.68 times earnings ($2.26 NPAT, divided by $58.04).

PAC's current earnings are $0.43 per share, PE ratio is 12.67 times earnings.
PAC's FY2020 earnings per share will be greater than 51c, PE ratio based on this is 10.69 times earnings.

The longer term price target range is based on current and forecast FY2020 earnings and a PE ratio of 20.  This means the share price range is between $8.60 and $10.20.

Further Information
In addition to the value target, boutiques purchased in the last 18 months provide confidence that the business high growth trajectory can continue.  Following are the growth achieved by some of the recently purchased boutiques:
>Carlisle – 69.71% Annual Growth, 21.98% growth in the last quarter
>Victory Park – 36.39% Annual Growth (slow start once joined the stable), but has picked up to 22.36% growth in the last quarter
>Pennybacker – grew FUM in the last quarter by 18.98%

The FUM of Magellan is on target to be approximately 15% for the whole year.  Recent PAC acquisitions have achieved this already in the last quarter and these are funds that have greater than $4 Billion in FUM.

The move to the US was a good long term move (in an unstrategic manner) and is starting to pay dividends in high growth being achieved and stability of business model.  This is higher growth than the ASX market darling.

Shares should be re-rated by market to between $8.60 and $10.20 once investors realise underlying growth prospects have returned.  Over the next two years this will change as high growth rates continue, if management do nothing.

If you have made it this far, thanks for taking the time to read.  Hopefully you invest and make some money.

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