Funds Management Companies

[Stranger_Danger]

I have a few WIG, and whilst it has been a double so far, they have a lot of work to do.

Still a much too bloated and expensive structure. Pinnacle is where the value is.

[steve fleming]

PFG is another financial planner that is potentially very cheap if they can get their act together. The interim result had one-offs of around $750k which they did not elaborate on. Excluding that they could be trading at a bit over 5x normalised NPAT but you would need to see the FY result to see how they are really tracking.

http://www.morningstar.com.au/funds/...icro-caps/5992

Recently, Microequities held a one-day event that included presentations from its "rising stars" - the companies the fund has made investments in.



1. Prime Financial Group

Prime Financial Group (PFG) is a wealth management firm. The company accesses its clients through its relationships with accounting firms. The business has partnerships with 30 accounting firms. It owns equity in nine accounting firms.

While the major banks control 80 per cent of the wealth management market, Prime Financial Group is looking to secure opportunities among people wanting independent advice.


Prime Financial Group chief executive Simon Madder says only one in five Australians receive advice, and with the pool of superannuation growing, this should provide more opportunities for businesses like Prime Financial Group.

"While the banks may be big and sturdy, our business is positioned to provide more customised services to people looking to build their wealth," Madder says.

Prime Financial Group also plans to increase its alliances with more accounting firms, particularly as many of these firms are moving to address their succession plans.

Currently, 70 per cent of Prime Financial Group's revenue is derived from Victoria. Madder hopes to secure more revenue from other parts of Australia through joint ventures with accounting firms.

While many financial planners have panned the government's Future of Financial Advice reforms, Madder sees the reforms as an opportunity for the business.

"These reforms have increased the transparency of fees charged to clients for financial advice. The reforms will make people more conscious of costs. This means more opportunity for us given our fees are relatively cheap compared to those of major financial planning firms," he says.

However, the relatively cheap fees charged by Prime Financial Group have put margins under pressure.

Madder says the business is currently managing its margins by focusing on costs. The business is looking at increasing fees to better reflect the services it provides, given its current fees of around 1 per cent are "probably too cheap".

Madder says the company has no plans to partner with financial planning businesses because of "competing philosophies". He says accounting firms offer a higher growth strategy for the business, given the bulk of their clients are self-managed super fund trustees.

[mark100]

3 small cap financials that reported good results and appear poised for EPS growth in the year ahead…

PFG – EPS were flat at 1.7cps but on an underlying basis EPS was more like 1.9cps as the company claims $0.75m pre-tax of one-off restructuring costs were incurred in the first half. Based on the on-going savings this restructure has created a ‘proforma’ EPS is probably around 2.1cps.

For a company trading at 12c, cum a 0.5cps dividend there is value here, particularly when the business model is leveraged to improving FUM and investor sentiment. I think its probably trading at a multiple of around 5.5x FY14

The main negative is the dismal return on equity at less than 10% but that is due to overpriced bull market acquisitions sitting as goodwill on the balance sheet. You could write half of it off tomorrow and ROE would double with no impact on cash profit. I am surprised they haven’t written some off.

The other negative is net debt of $5.9m however that figure is reducing and appears to me to be entirely manageable.


FPS - EPS were up 48% to 10.1cps although FY12 was a year of higher costs due to legislation changes, restructuring etc so the percentage increase looks larger than it may have been on a true underlying comparison. DPS were 7c.

Trading at $1.00, the market cap is $31m and there is $9m net cash in the bank. ROE was 18% but adjusting for the excess cash ROE is well over 20%.

In the accounts they provided a sensitivity analysis showing an increase in NPAT of $1.57m for every 10% increase in FUMA. Against FY13 NPAT of $3,27m, that is significant leverage.

On my numbers FPS is trading well under 10x potential FY14 earnings, and that’s with 30% of its market cap sitting in cash.



AEF – Underlying EPS were 164cps of which over two thirds was earned in the second half as markets improved and cost costing initiatives kicked in.

The difference in reported earnings and underlying primarily relates to a negative revaluation of their property in Canberra, which is being held for sale.

Market Cap is $24m with no debt, almost $4m in cash with a $2m property up for sale. The proceeds of the property may be returned to shareholders.

FY14 EPS could easily come in at better than 230cps (that is simply from annualising H2 13 EPS). So at $24.00 the shares are potentially trading at less than 11x FY14.


All these stocks have had a rough few years and have been forced to cut costs and restructure etc due to the poor markets and in the case of FPS and PFG deal with legislative changes. In my view that should make them well positioned to benefit form the next market upswing. Also, with the change in government I see less risk of legislative changes adding to costs in the future.

Another interesting play is AFV. It’s not yet profitable but FUM now stands at $650m and the market cap is less than $5m, less than 1% of FUM.

[baller18]

Which one out of the 3 would be best to invest in mark? Thanks

[Joshuatree]

CAF int too but needs to sort legacy issues out.

[steve fleming]

Nice summary Mark.

Re PFG and FPS, are you concerned about the limited FUM growth (and outflows) experienced during FY13? (particuarly PFG: outflow of $37.4m in second half of FY13)

What do you see as the major catalysts for a re-rate of these stocks?

FPS also have an aggressive on market buy back happening, as well as paying a 7% ff div.

[mark100]

Which one out of the 3 would be best to invest in mark? Thanks

Baller18, they are all worthy of investment in my view, some higher risk/return than others.

FPS is probably the lowest risk. The MD owns 30% of the company and even in the last bull market they did not waste cash on over priced acquisitions. Hence their balance sheet remains in perfect condition. Despite this lower risk, they are still very leveraged to a pick up in the markets and investor confidence. I note over the past 2 years the MD has continually purchased shares from time to time. He has never sold.

PFG is the highest risk business in my view simply because of the debt on the balance sheet and high level of goodwill from the bull market spending splurge. But in saying that PFG is potentially very cheap trading at around 5x potential FY14 earnings so offers the greatest upside

AEF is probably more like FPS in terms of lower risk with a pristine balance sheet and net cash. But the shares are extremely illiquid (even more than FPS) which some may think makes it high risk! It’s also trading at the highest PE of the 3. The serial acquirer, IFL owns 19% of AEF so don’t rule out a takeover at some stage (the same applies to all these companies).

CAF int too but needs to sort legacy issues out.

Joshuatree, I do follow CAF but as you say the legacy issues keep dragging on. The 7 year statue of limitations will be up soon which should put an end to it. However even before CAF purchased PIS, in the days when it was called Alliance Finance, it was a dog stock so I really would need to see some runs on the board here before jumping in here!

Nice summary Mark.

Re PFG and FPS, are you concerned about the limited FUM growth (and outflows) experienced during FY13? (particuarly PFG: outflow of $37.4m in second half of FY13)

What do you see as the major catalysts for a re-rate of these stocks?

FPS also have an aggressive on market buy back happening, as well as paying a 7% ff div.

Steve fleming,

I think the poor FUM growth (mainly driven by outflows) is simply a factor of poor investor confidence in Australia. Despite the market being up 17% for FY13 confidence was still fragile, not helped by probably the worst government in a generation.

I note the higher than normal outflow for PFG in H2 13 but it was balanced by inflows and overall for FY13 I thought PFG’s inflows were quite good considering the market. If the market can stabilise above 5,000 I think a lot of these outflows will reverse. Combining that with positive market performance money managers should do well.

When I look at FPS, PFG and AEF compared with say BTT, TRG and KAM I note:

FPS – FY13 FUM growth of 7%, no breakdown of inflows and outflows.

PFG – FY13 FUM growth of 10% of which there were net inflows of $32m and market performance was $65m

AEF – FY13 FUM growth of 13% of which net inflows were $1m and market performance was $80m

TRG – FY13 FUM growth of 4.6%. I don’t have 1st quarter figures but for the final 3 quarters net outflows were $2.76B and market performance was $2.41B. Despite this poor performance the stock has more than doubled!

BTT – FY13 FUM growth of 21% but it was only 8% for the Australian business. Growth of 58% occurred for the UK business. As demonstrated by the likes of MFG and PTM overseas equities have been in favour while Australia underperformed.

KAM – FY13 FUM fell 3% despite their funds returning 25-30% for the year! And like TRG the stock has still doubled.

So when comparing FPS, PFG and AEF to other aussie based financials they actually have performed quite well yet are trading at quite a discount.

[Joshuatree]

Invaluable inside out knowledge there Mark; thanks for sharing.

[baller18]

Thanks heaps mark!

[mark100]

FUM only increased by 2.9% in the second half, and the minimal gains in the first half were from asset valuations not fund inflows - so I think they are still currently experiencing a high level of fund outflows as the market has had a stonking run this half year, and to only gain 2.9% on the back of that is pretty poor. Consequently I took FPS off my watchlist this week.

Hi KW, The XJO only increased by 2.4% from 31 Dec to 30 June 2013, hardly stonking! So a 2.9% gain is not that bad. Part of the problem for the financial planners is that many investors have been invested in lower risk cash based products in recent years hence the full value of stock market gains may not come through in the short term. In theory increased investor confidence will see them switch to higher weighted equity products that will also attract a higher margin.

Since 30 June the market is up 10% which is why I expect the performance of these stocks to pick up in the future. From 2005 to 2007 FPS run from 50c to $3 and EPS quadrupled, so it is leveraged to the market! Anyway if I am proved wrong and it fails to move up I will move on...