A SUPER performance
Since our last coverage of OneVue Holdings (ASX:OVH) in January (FAT-AUS-855), the company has released a number of key updates highlighting management’s focus on strengthening core businesses and divesting non-core operations. The company has also reported interim results which confirm the underlying operational and financial momentum. Accordingly, we maintain our BUY rating, and remain attracted to OneVue given the company’s growth potential and high degree of operating leverage.
What’s New?
In late February, the company revealed it had inked a deal to acquire KPMG Australia’s Superannuation Member Administration business for an unconditional cash purchase consideration of $6.5 million. There are also further contingent payments of $5.5 million in FY 2019 and $5.5 million in FY 2020 depending on performance hurdles being met. The acquisition will be funded out of cash reserves and is expected to be immediately accretive.
The deal is a transformational one, and will effectively double Funds Under Administration (FUA) to circa $4 billion from the current $2.13 billion, and add over 40,000 members and 16 superannuation funds into the fold. This will catapult OneVue to 4th spot in the overall super member administration market. The transaction is expected to be completed sometime in April and is currently undergoing review from regulators.
Meanwhile, the group has also announced that it has completed the sale of its Responsible Entity (RE)/self-managed super fund (SMSF) business to EQT Holdings, which was announced last October. The deal involves EQT ponying up $3.5 million ($150,000 of which was paid last year) while a salient point is that EQT will outsource its managed funds administration to OneVue, a win-win for both. The company has also noted that the proceeds will be split between a Special Dividend and Redeployment of Capital to growth areas.
OneVue (ASX:OVH) also renewed a key contract in mid-February, successfully extending for 5 more years its agreement with its largest Platform Services Client, Madison Financial. The group has more than 100 financial advisors across Australia. The contract involves providing white-label interface and background administration, tax and compliance support services. Renewal of the contract will strengthen the group’s recurring revenue profile which is one of its key success factors.
Finally, and the key focus of today’s report is the group’s recent interim results:
1H18 Results Review
Starting from the top, the company continued its momentum with revenues for the first half (1H18) up 27.1% year-on-year to $23.46 million. A closer look at the performance shows the strength of a business with high quality recurring revenue with organic growth of over 17% while acquisitions such as 2016’s Diversa contributed $6.1 million (+64.9% yoy).
Source: 26 February 2018 Company Presentation
Going forward, we believe that the prospects for the company, and broadly the funds platform sector, remain highly positive considering the staggering $2.6 trillion size of Australia’s superannuation industry which, according to consulting group Deloitte, is expected to grow at a faster pace over the economy to $4 trillion by 2025. Market disruptors such as OneVue and its peers (including Praemium, HUB24) are expected to gain an increasing share of the market against the incumbent Big 4 Banks.
Source: OneVue Holdings (ASX:OVH) 26 February 2018 Company Presentation
Running through the salient developments across the company’s main business segments we start with the Funds Services unit. The company’s flagship business, which contributes of 48% of revenues, registered robust revenue growth of 33.9% year-on-year to $11.43 million, mainly driven by the accelerating growth in Managed Fund Administration (+45.9% yoy) and accretive Diversa revenues.
As we’ve noted in our FY17 results review (FAT-AUS-841) back in September, the completion of the 5-year contract with the National Australia Bank (NAB) will lead to steady growth in FUA as Fund Managers will transition to the platform. The previous agreement with UBS Asset Management has contributed to the transition of 25 funds and management notes that they will see further gains in the second half.
Accordingly, FUA in this segment has increased 8.2% year-on-year to $471.7 billion while volumes – items processed – increased by 72%.
Other notable developments include the signing up of 5 new fund managers and the addition of 117 funds during the period, taking the total number of funds now administered to 727 funds. This growth will likely maintain the group’s momentum going forward.
Super Member Admin FUA reached $2.1 billion, an increase of $402 million (+23% yoy) mainly due to existing client growth. The graphic below summarises the key metrics across the segments.
Source: OneVue Holdings (ASX:OVH) 26 February 2018 Company Presentation
Next up is the Platform Services business which achieved a record FUA of $4.69 billion (+24% yoy) for its retail superannuation platform leading to revenue growth of 8% year-on-year to $9.13 million. The segment reported an acceleration in net inflows (+353%) due to transitioning circa $300 million worth from existing and new Wealth Advisors.
Going forward, we expect continued momentum as the segment signed up 2 new white label accounts as well as the aforementioned client renewal with Madison Group.
Finally, the Super Trustee Services (STS) unit reported revenues surging 71.1% year-on-year to $3.48 million largely reflecting the extra quarter of contribution from the Diversa business following its acquisition in October 2016 with Funds Under Trusteeship at $10.3 billion, up $1.46 billion. The segment also reported 1 new managed account client going live in the period covered.
In sum, each segment reported continued growth given the high quality of recurring revenues which is comprised of FUA basis point fees, fees for items processed and member numbers. The recurring revenues still represent a sizable 90% of the total, slightly down (-100 bps) from FY2017 due to the slightly higher degree of acquisitions in the period. Going forward, we remain attracted to the business given its growth potential and high degree of operating leverage as evidenced by the graphic below.
Source: OneVue Holdings (ASX:OVH) 26 February 2018 Company Presentation
As can be seen in the graphic, this reflects the benefits of revenue growth, with scale, operating leverage and cost discipline adding to the margin uplift which, for the period covered, drove a 1,000-basis point increase in Underlying EBITDA margin to 15.4% as all segments lifted margins. This in turn pushed Underlying EBITDA to surge almost threefold to $3.61 million.
Breaking it down, the EBITDA growth of $2.7 million can be seen with the Fund Services contributing the most at $1.4 million (+179% yoy) as the top-line growth led to an uplift of 1,000 basis points in margins to 18.6%.
The other two (Platform and STS) also reported uplifts in their margins (+660 bps & +40bps, respectively) to 24.2% and 40%, respectively, while contributing to Underlying EBITDA at $728k and $664k, respectively.
Underlying EBIT has also improved, finally in the black up $2.2 million year-on-year to $1.3 million, reversing last year’s loss of $900k. All in all, the bottom line profit after tax was up by $5.4 million to $5.8 million, reflecting robust growth across all segments.
Summary
Following last year’s landmark performance, OneVue (ASX:OVH) has once again delivered another round of growth with all businesses contributing greatly to profitability, with solid gains in Funds Under Administration. In addition, the Diversa acquisition has proven to be earnings accretive and contributed significantly to the bottom line while the more recent acquisitions are expected to extend profitability in the second half.
On the valuation front, the shares currently trade at 29.6 times forecast FY18 earnings which is expected to fall to 19.9 times for FY19, and substantial operating leverage will drive robust, ‘sticky’, profitability growth over time in our view.
Accordingly, we recommend the shares as a High Risk Conviction Buy to Members without exposure.
Disclosure: OneVue Holdings (ASX:OVH) is held within the Fat Prophets Concentrated Share and Small/Mid-Cap models. The OneVue platform is used by Fat Prophets Wealth Management.
