Equity research initiation report on BTT - global funds manager.

1. Stock Focus
Bt Investment Management (BTT)
1
BIGGER, BETTER, BOLDER BT
.
$3.45
$4.43 $5.42
$6.41
Positive Neutral Negative
Share Price
RECOMMENDATION: POSITIVE
WHAT SURPRISED?
• Record 1H13 performance fees of $33.5m, ~8x prior period’s $4.3m.
• Record closing FUM balance of $50.4bn, up +8% on 2H12
• Base management fees increased +14%, driving $34.2m 1H13
cash earnings to beat our forecasts by +11%.
WHAT CHANGED?
• EPS upgrades - FY13F +20%, FY14F +18%, FY15F +15%
• Blended valuation increased to $4.90 per share (was $3.77).
WHAT NOW?
We maintain our High Conviction Positive recommendation. The
risk/reward balance is firmly in investors’ favour (Table 2).
BTT’s 14.4x FY14F PE warrants a re-rating given:
• margins and FUM outlook compare favourably to PPT (16.7x) and PTM
(18.8x) (Table 3); and
• its Bigger, Better and Bolder business post-integration of Hambro (JOH).
BTT’s expanded business is now globally diversified by asset class,
product, geography and distribution channel (Tables 4-5). Business
quality is improved with increased market leverage, margin expansion,
performance fee potential, new products and growth options. Bolder
growth initiatives have commenced such as developing new distribution
channels, new strategies and organic offshore expansion.
We expect:
• Improved margins driven by increased higher-margin JOH FUM and
continued run-off of lower-margin WBC Legacy retail FUM (Tables 5-6).
• Strong FUM growth driven by:
(i) JOH funds outperformance;
(ii) new investor channels for JOH products, particularly through WBC;
(iii) increasing total UK system retail FUM;
(iv) JOH’s historical outperformance relative to UK system (Chart 4);
(v) Turnaround in Australian FUM flows (Charts 5-6); and
(vi) “Great Rotation” out of fixed income into equities (Chart 7).
Trading Data
Last Price $3.66
12 month range $1.69 - $3.66
Market Cap $1,004m
Free Float $267m (27%)
Avg. Daily Volume 0.1m
Avg. Daily Value $0.4m
12 month return (historical) 77.7%
Return on invested capital is expected to
increase as performance fees combine
with positive net funds flow. WBC’ cross-
sell of JOH products will be a key driver.
Margins are expanding as new FUM flows
into higher margin JOH products and
legacy lower margin WBC retail products
run-off.
Earnings Forecasts
Yr to September 10A 11A 12A 13E 14E 15E
EBITDA ($m) 47.5 45.4 61.4 106.0 104.1 126.5
Rep NPAT ($m) 29.4 30.5 41.5 73.2 74.5 90.8
Adj NPAT ($m) 21.8 16.9 21.4 73.2 74.5 90.8
EPS (¢) 19.7 20.7 14.5 25.3 25.4 30.9
EPS Gth (%) 10.8 4.8 (29.7) 74.0 0.5 21.9
PER (x) 18.6 17.7 25.2 14.5 14.4 11.8
PEG Ratio (x) (1.3) 1.7 0.8 1.4 0.8
DPS (¢) 28.0 16.0 12.5 21.2 21.6 26.3
Yield (%) 7.7 4.4 3.4 5.8 5.9 7.2
Franking (%) 100% 100% 100% 100% 50% 50%
ROE (%) 11% 6% 8% 14% 14% 16%
EV/EBITDA (x) 20.0 15.8 17.0 8.9 8.8 6.9
Net Debt/EBITDA (x) (1.2) (6.2) 0.7 (0.5) (0.9) (1.0)
Int. Cover (x) (61.5) (290.7) 22.0 80.6 (29.0) (26.7)
Valuation (blended) $4.90
George Gabriel, CFA
ggabriel@evansandpartners.com.au
May 2, 2013
+61 3 9631 9853

2. 2
VALUATION
We believe listed equity markets have mis-priced BTT because they failed to recognise:
• the structural shift in BTT’s business mix which is driving increases in its base management fee margin and
performance fee outlook;
• the high value of WBC’s proprietary distribution channel combined with the potential cross-sell of JOH products;
• flexibility to pursue new growth options; and
• a cyclical turning in FUM re-allocation from cash and fixed interest into various investment products.
We increase our blended valuation to $4.90 per share (Table 1). The risk/reward balance is firmly in investors’
favour, given our discounted cash flow valuation scenarios of:
• Bull case valuation of $5.73 per share.
• Base case valuation of $4.93 per share.
• Bear case valuation of $3.63 per share.
BTT warrants a ~20% premium to the ASX200 Industrials, consistent with the higher multiples of PPT
and PTM, because BTT compares favourably to these peers on key metrics:
• PPT’s 35% EBIT/revenue margins is similar to BTT’s 33%; and
• PTM’s FUM growth outlook and product mix are not superior to BTT.
TABLE 1: BTT VALUATION SCENARIOS
Methodology Key Inputs Value ($ps)
Discounted Cash Flow 12.2% WACC $4.93
FY14F PER 16x 20% Premium to Industrials $4.87
Average $4.90
Source: Evans & Partners Research estimates
TABLE 2: BLENDED VALUATION
CHART 1: BTT FORWARD PER (x) CHART 2: BTT PER RELATIVE TO ASX 200
5x
10x
15x
20x
25x
Dec-07 Aug-08 Apr-09 Dec-09 Aug-10 Apr-11 Dec-11 Aug-12 Apr-13
BTT: FORWARD PER (x)
PER Avg
+1 Stdev -1 Stdev
-40%
-20%
0%
20%
40%
60%
Dec-07 Aug-08 Apr-09 Dec-09 Aug-10 Apr-11 Dec-11 Aug-12 Apr-13
BTT: PER REL TO ASX 200 (%)
PER Avg
+1 Stdev -1 Stdev
Source: FactSet

3. 3
TABLE 3: WEALTH MANAGEMENT SECTOR METRICS
MFG PTM PPT BTT* IFL AMP EQT SFW TRG HGG WHG
Average
(ex
outliers)
FY13F revenue 61 222 366 257 359 13,454 47 139 21 454 410
FY14F revenue 94 265 393 259 392 16298 51 155 22 490 422
FY13F operating costs 22 49 258 157 224 12,362 33 96 9 314 377
FY14F operating costs 28 58 255 161 235 15068 35 107 9 333 389
% Prem/(Disc) to Sector Avg 81.4% 33.9% 18.6% 2.8% 16.9% 6.9% 2.0% -5.0% -10.9% -12.7% -18.0%
FY14F PE 25.5x 18.8x 16.6x 14.4x 16.4x 15.0x 14.3x 13.3x 12.5x 12.3x 11.5x 14.0x
FY12 EBIT 16 170 93 60 120 981 11 35 6 121 37
FY13F EBIT ($m) 39 173 108 100 135 1092 14 43 12 140 27
FY14F EBIT ($m) 66 207 138 98 157 1230 16 48 13 157 33
FY14F EBIT/revenue (%) 70% 78% 35% 38% 40% 8% 31% 31% 58% 32% 8%
Mkt Cap ($m) 1,140 2,891 1,700 1,003 2,070 15,989 162 499 147 1,812 225
Net Debt ($m) -46 -186 -196 -55 -29 7,765 -13 -20 -11 -175 44
Enterprise Value ($m) 1,094 2,705 1,504 948 2,041 23,754 149 479 136 1,637 269
FY14F EV/EBIT 16.6x 13.1x 10.9x 9.7x 13.0x 19.3x 9.5x 9.9x 10.6x 10.4x 8.2x 11.8x
Source: * EAP Research Estimates; Bloomberg; FactSet
Outliers Mid-cap financial services stocks
FUNDS FLOWS
We expect continued strong FUM inflows driven by:
• JOH’s strong underlying funds performance. We expect JOH to remain the key driver of BTT Group FUM growth
(Chart 3). JOH has enjoyed 19 consecutive quarters of positive net flows.
• Increased cross-selling of JOH products through new investor channels.
• New product launches. Product development is focusing on higher margin opportunities such as:
o BT Equity Income Series;
o BT Global Emerging Markets Opportunities Fund (JOH fund launched in Australia); and
o BT Pure Alpha Fixed Income Fund (targeting the pooled institutional market).
• Offshore expansion.
• Ongoing recovery in UK system retail FUM growth. BTT has historically outperformed UK system retail FUM
growth (Chart 4).
• A turnaround in FUM inflows in the UK and Australia, recently evidenced by:
o increases in Australian household equity investment (Chart 5);
o total Australian FUM flows (Chart 6); and
o the “Great Rotation” out of fixed income back into equities in the UK (Chart 7). BTT’s guidance is that
UK funds flow trends typically lead the Australian experience, which augurs well for Australian equities
FUM.
Funds inflows have driven:
• Expansion of base management fee margins, as FUM flows into higher-margin JOH products (Tables 5-6); and
• Diversification away from Australian equities (from 33% FUM in 1H10 to 22%) and cash (down from 19% to
13%) with increased exposure to international (from 6% to 34%) and fixed income (5% to 7%) (Table 4).
CHART 3: BTT TOTAL GROUP FUM (A$bn) CHART 4: BTT UK FUM FLOW RELATIVE TO UK
SYSTEM
0
5
10
15
20
25
30
35
40
45
50
55
2Q09 1Q10 4Q10 3Q11 2Q12 1Q13
JOHCM OEIC Funds
JOHCM Seg Mandates
Westpac/BTFG
Institutional & Wholesale
0%
5%
10%
15%
20%
25%
30%
Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12
UK System
Hambro

4. 4
CHART 5: HOUSEHOLD EQUITY OWNERSHIP (%) CHART 6: AUSTRALIAN INDUSTRY FUM FLOWS (%)
CHART 7:”THE GREAT ROTATION” TABLE 4: FUM BY ASSET CLASS
FUM by asset class (A$bn) % 1H10 1H10 1H13 % 1H13
Australian equities 33.1% 12.0 10.9 21.6%
International equities 6.1% 2.2 17 33.7%
Cash 19.3% 7.0 6.6 13.1%
Fixed income 5.0% 1.8 3.5 6.9%
Property 3.0% 1.1 1.4 2.8%
Diversifieds 30.9% 11.2 10.9 21.6%
Other 2.8% 1.0 0.1 0.2%
Total 100% 36.3 50.4 100%
Source: BTT
MARGIN OUTLOOK
Base margins increased from 34bp in 1H11 to 40bp in 1H13. We expect base margin fee to further increase to 41-
42bp driven by a business mix shift comprising:
• higher 0.66% margin JOH product FUM (Table 6);
• run-off of lower margin 0.31% WBC Legacy retail FUM; and
• increased lower-margin fixed income product growth.
We believe our cross-cycle performance fee assumption is reasonable because it is below JOH’s existing 1H13
performance fee ratio. We assume that cross-cycle performance fees will average 0.05% of total FUM (comprising
~$18m for JOH and ~$8m for Australia), compared to 1H13’s 0.07% (Table 5).

5. 5
TABLE 5: FEE TRENDS AND DRIVERS
BTT Performance Fees (A$M) 1H11 2H11 1H12 2H12 1H13 % 1H13
FUM ($bn)
BTIM Institutional 14.2 12.8 13.7 13.6 14.0 28%
BTIM Wholesale 4.4 3.7 3.9 3.9 4.2 8%
Westpac - Legacy Retail 10.5 9.6 9.7 9.3 9.5 19%
Westpac - Other 7.0 6.6 7.1 7.6 8.2 16%
JOHCM Institutional 0.0 4.2 4.9 5.2 6.0 12%
JOHCM Wholesale 0.0 5.7 6.5 7.0 8.5 17%
Total FUM ($bn) 36.1 42.6 45.8 46.6 50.4 100%
Group Base Fee Margin/Total FUM 0.34% 0.34% 0.39% 0.40% 0.40%
Base Fees 60.1 57.8 85.3 90.0 97.7 74%
Performance Fees 0.1 6.1 4.3 7.9 33.5 26%
Total Fees 60.2 63.9 89.6 97.9 131.2 100%
Perf fees/total FUM (ann'd) 0.00% 0.03% 0.02% 0.03% 0.14%
Performance Fees/Total FUM 0.00% 0.02% 0.01% 0.02% 0.07%
Source: Company Reports; EAP
TABLE 6: BASE MARGIN AND FUM BY CHANNEL
Base Margin and FUM by
channel
Margin
(%)
Mar 13 JOH
(A$bn)
Mar 13 BTIM
(A$bn) % Total
Institutional - BTIM 0.23% 14.0 28%
Institutional - JOH 0.59% 6.0 12%
Wholesale - BTIM 0.72% 4.2 8%
Wholesale - JOH 0.66% 8.5 17%
Legacy Retail - WBC 0.31% 9.5 19%
Other - WBC 0.29% 8.2 16%
Total 0.40% 14.5 35.9 100%
Source: Company Reports, EAP
TABLE 7: BASE MANAGEMENT FEE BY CHANNEL
Base management fee ($m) % 1H10 1H10 1H13 % 1H13
Institutional 30.9% 18.4 32.3 33.1%
Wholesale 24.4% 14.5 39.7 40.6%
Westpac - Other 14.8% 8.8 11.3 11.6%
Westpac - Legacy 29.9% 17.8 14.4 14.7%
Total 100% 59.5 97.7 100%
Source: BTT