Today, I'm going to introduce you to the crème de la crème! While I refuse to invest a single cent in the big traditional banks such as CS or UBS, there are other extremely interesting financial stocks. Partners Group is definitely one of them.
Anemic interest rates and growing risks in the bond and real estate markets are prompting international institutional investors (state funds, pension funds, insurance companies, etc.) to look for ALTERNATIVE INVESTMENTS.
This trend is benefiting private equity (private equity or private debt), for example in areas such as infrastructure or unlisted real estate.
Partners Group, number 3 behind the American firms KKR and Blackstone, is riding this wave brilliantly, investing mainly in unlisted companies. In most cases, these are relatively illiquid investments, which doesn't pose any major problems given that institutional clients' money is usually tied up for ten years or so.
The business model of a company like Partners Group is diametrically opposed to that of traditional banks. Highly lucrative returns are achieved by being highly selective in the investment selection process.
Margins are very high, and Partners Group earns a lot of money through commissions and recurring profit-sharing. Partners Group also worked with Capvis to orchestrate VAT's IPO, the most successful Swiss IPO in recent years.
This extraordinary profitability is particularly evident in ROE (in blue) and net profit margin, with extremely high and stable values (change from 2009 to 2016):
Growth in earnings (in red) and dividends is very strong, and their trends are more or less parallel (period from 2009 to 2016):
The dividend payout ratio is rather high, but remains relatively stable and reasonable (change from 2009 to 2016):
Of course, such success has not gone unnoticed, and Partners Group's valuation is high, but perfectly justified in view of its fundamentals and excellent prospects. The company offers great stability and excellent visibility, not least thanks to recurring management fees.
A large influx of money should continue to arrive, due in particular to the ever-increasing interest in private debt and the lack of alternatives as long as interest rates on public debt remain low.
At the time of writing, the share is trading at 610 fr. with a 2016 PER of 29 and an estimated 2017 PER of 27. On the basis of growth and stunning fundamentals, I consider the current valuation correct and a share price of 800 to 850 fr. realistic within 12 to 24 months.
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Thank you dividinde for this nice analysis. I'm not a big fan of private equity because it's a bit too sought-after by institutional investors at the moment. That certainly explains the growth and the price of this stock. For value investors, it's too expensive. For the growth-oriented investor, it may be a factor.
Thank you Jérôme for your feedback. I'd be interested to hear your opinion on another financial company: Compagnie Financière Tradition (CFT).
Unlike Partners Group, zero growth but interesting from a value point of view.
Are you a buyer on CFT?
I have nothing but good things to say about it. It's a stock I've been following for some time. Good market and good fundamentals. And growth as a wild card. If there's only one thing to say, it's that it's a shame that the large inflow of cash isn't translating into asset growth. But that's just nitpicking:)
Very nice title. We totally agree on this company.
Yes, CFT has some fine qualities, above all a very healthy and solid balance sheet. What worries me is the erosion of sales over the last few half-years and, above all, the dividend which, although currently very high, remains rather unpredictable (cf. in particular 2011 and 2012).
That's why I'm going to try in the near future to treat myself to a slice around 85 fr. but with a smaller position size than usual.
It's true that sales are dropping nicely, but that's not stopping them from making profits and cash in particular. Always useful when you need to pay dividends 😉
Nice discovery, thank you for this article.
Dividinde, I don't understand why you think the dividend is high... For me, it's rather low (barely 2.35%)... For long-term dividend investing, I think it's currently a bad investment. On the other hand, for a capital gains investment, it could be interesting.
In the comments, we talked about CFT's dividend, which is high (>5%). Partners' dividend is indeed low, but it's its payout ratio that's high.
Thanks for the clarification 😉
No worries! I'd just like to remind you that you shouldn't let yourself be too blinded by CURRENT yields, with the risk of forgetting all the potential associated with dividend GROWTH.
CFT currently yields 5.1%, but I wouldn't be surprised if yields stagnate over the next few years...
In contrast, Partners has a current yield of 2.4% but could have an on-cost yield of 5% in 5 to 7 years!
For example, I bought Partners a few years ago and the yield at the time was around 2.5%. My current yield relative to my purchase price (YOC) is now around 4.5% and should continue to rise each year.
Hello Dividinde, are you still in possession of your Partners shares? The company has little debt, and continues to have an attractive ROE. What's your view of the company 2 years on?
Hi AGU. Yes, I'm still a co-owner of this wonderful company and I'm still bullish. Partners is extremely profitable, the dividend continues to grow and the valuation is correct given the quality of the company (PER 2020 estimated at 23).
Thank you dividinde for these clarifications. I'm going to take advantage of the turbulence that AirTrump is causing these days to acquire a slice and keep it nice and warm.
Nice dividend! Great results!
I've long been impressed by the intrinsic qualities of Partners Group, which has, in my analysis, excellent fundamentals. At this point, it's quite rare for a Blue Chip (this stock is part of the SMI).
5 years ago (June 16, 2017), the share price was CHF 606. Just before the Covid19 crash on February 21, 2020, the share price was CHF 956; this crash brought it down to CHF 582 on March 20, 2020. Since then, the share price has more or less continued to fall (subject to a few spurts), reaching CHF 906 at the time of writing, with this Monday's session (which is not yet over), last Friday's session and the end of last Thursday's session alone taking the share price down by a good 10% (much more than the major indices, which have also fallen sharply).
So what's next for Partners Group?
I can't see a decline of this magnitude for a stock of Partners Group's quality.
Any idea what's going on? Is there any particular reason -which escapes me- for this stock to fall so much?
Hi Laurent
Dividinde hasn't been back here for a while, so I'll take the liberty of giving my opinion:
- slight discrepancies between earnings and cash flow, particularly in 2018 and 2021... for me, this is always a point of vigilance.
- artificially cheap stock in terms of PER, because of the very good 2021 result. However, if we look at the average P/E, which is 25, it's a different matter.
- expensive in relation to book value (8x), even if the intangible value of such a company also weighs heavily
- very expensive relative to sales (9x), which is a sell signal
- very expensive in relation to current and average free cash flow (over 30x for both)
- the dividend yield looks attractive (over 3%) but is poorly covered in relation to average earnings and to current and average FCF
- cash reserves are enormous (current ratio of 4.3): while this is interesting from an asset point of view, and opens up possibilities for the future, it's also a waste to let all this currency sit idle.
- profitability are very attractive. This is clearly a growth stock, bordering on a franchise. This is certainly a good point, but growth stocks are currently in a bad way, notably because of inflation and the forthcoming rise in interest rates. PGHN has very little debt, so shouldn't suffer too much, but when the market takes off, it takes everything in its path.
- we come to the other point: momentum. PGHN is suffering from the general mood, and is even more penalized than the market, with its beta of 1.45 and volatility of 31%. Let the storm pass.
In conclusion, I agree with you that the fundamentals are excellent (except for the divergence between FCF and earnings, and the excess liquidity), but the stock is too expensive and the momentum is bad.
I think it's urgent to wait 🙂
Thanks for your insight.
With its liquid assets, and if it doesn't know what else to do with them (although there must be some good investment opportunities in the company's field of activity right now), Partners Group could massively buy back and then destroy its own shares, to the delight of its shareholders, given the right circumstances! An excellent cake to share with fewer people...
Yes, that would be a good idea!
I dug a little deeper.
1) Apparently, Partners Group is not in the habit of buying back shares in order to destroy them and thus reduce share capital (and thus increase share value). This company only seems to buy back its own shares as part of its stock option plans for employees.
This means that cash will not be used for share buybacks to reduce share capital.
Too bad, in my opinion.
2) Partners Group favors organic growth over mergers and acquisitions.
As a result, cash will not a priori be invested in acquisitions.
So be it. But beyond the company's overall strategy, it's also undoubtedly a question of opportunity.
3) With regard to the discrepancy between free cash flow and profit, this seems to be explained mainly by short-term loan positions which have increased in 2021. Although this reduces cash flow in the cash flow statement, it is nothing more than short-term working capital requirements. Analysts (and Partners Group) consider these positions as cash and cash equivalents. Adjusted for this effect, the company's net income and free cash flow are ultimately very similar.
Hi Laurent and thanks for these explanations.
Now I'm also thinking about another point that also explains this drop in PGHN's share price. I quote what Dividine wrote in 2017:
The current rise in interest rates is changing this. Even if rates are still far from attractive, at least in Switzerland, the market is, as ever, acting in anticipation: the paradigm has changed, and in future we'll have to rely on bonds once again.
Conversely, private equity is at the peak of its cycle, not to say in the process of bursting its bubble. This may give us another image of this excess liquidity: the company (still) has a pile of cash from those boom years of easy money and a huge flow of cash from institutional investors, but it no longer knows where to invest it because the market is saturated (and will be increasingly so as a result of the credit crunch).