Buying into the Growth Phase
The outlook for Australia’s pension industry continues to look bright with the overall asset base set to grow to circa $9.5 trillion by 2035. We have backed a number of companies leverage to this thematic, and are positive on the growth prospects for vertically integrated player, Fiducian (ASX:FID). With an impressive product and service offering, along with a prudent business strategy, we are initiating coverage with a BUY recommendation on the stock.
Introduction and Investment Conclusion
Fiducian Financial Services (ASX:FID) is a vertically integrated financial services company that provides holistic service to clients ranging from fund administration, financial planning, IT solutions to accounting support services.
Source: Fiducian (ASX:FID) Company Website
Long-time Members would know that we have been bullish on the Financial Services sector and in particular the Wealth Management segment. This area of the market covers numerous players across the entire supply chain from Independent Financial Planner with their CFP credentials attending retail clients to old school big Banks and Insurers to business-to-business players that provide back office services to the other players.
This segment has been a strong beneficiary of the rising wealth pot in Australia and thanks to the “superannuation guarantee” where employers are mandated to make contributions into a “super” (retirement account) for workers that qualify.
This has enabled Australia to achieve the rank of 3rd largest pension system in the world with over A$2.6 trillion in assets as of the latest tally from The Association of Superannuation Funds of Australia. Furthermore, despite its size, it’s expected to double by 2025 and up to a staggering $9.5 trillion by 2035 on the back of favourable demographics, longevity and market dynamics (capital markets and otherwise).
Source: Deloitte Actuaries & Consultants Superannuation Report
Considering such a positive outlook and thematic, the question would be why cover Fiducian now? And considering that the company listed back in the year 2000. Simply put, then the company, though operating an attractive business, did not yield the best risk-to-reward ratio while it also operated in a small cap space amidst larger rivals with better investment prospects such as IOOF Holdings (ASX.IFL), Magellan Financial Group (ASX.MFG), amongst others (and which we recommended several years ago).
We also want to point out that the company had to undergo some unpalatable restructuring circa 2014-2015 as regulators required a completed divorce of Superannuation services from other operations to protect against conflicts of interests. This led to Fiducian (ASX:FID) incurring sizable one-off restructuring expenses of circa $431,000 (~10% of NPAT) and were a distraction for management.
The business has come a long way since then. We now see an opportunity as the company enters a new stage in its business cycle – growth stage – and believe it is prudent time to initiate a position.
We have also been holding off on Fiducian on account of its size. The company has a business model that has a high degree of operating leverage where it must scale up to ensure reasonable profits. This is perfectly encapsulated in the image below:
Source: Fiducian (ASX:FID) 31 May 2018 Investor Presentation
As can be seen in the graphic above, the company’s FUMAA (Funds Under Management, Administration & Advice) must reach a certain point for it to realise accelerating profit growth. We do note that the company has long been profitable as it operates in a high margin business, but our key point here is that it is now entering an “accelerated returns phase” and is set to benefit from the Pension Industry growth as noted above.
Next, another reason we like that the company is that it occupies a sweet spot in the supply chain as it is one of the most vertically integrated operations servicing consumers with its Financial Planning business, while also acting as a Master Fund for clients that want to focus exclusively on marketing and servicing consumers without the hassles of Fund Management.
Though we do admit that many of our picks in the sector have some overlap with Fiducian (ASX:FID), the fact remains that this is only player in the group that has this combination of businesses while also providing a niche service that the others don’t offer: Accounting Process and Support services that also includes acting as Tax Agency. We believe this vertically integrated model allows ease of cross-selling to support the scale that the business needs to accelerate to the next stage.
Fiducian (ASX:FID) has also used the profits it has been generating overtime to grow its FUMAA base with acquisitions of other small Financial Planning companies. The most recent one being located in the South East corridor of Queensland which has FUA (Funds Under Advice) of $35 million, for a cost of $330,000. Going forward, we expect to see more of these deals as the year unfolds basing on the management’s comment that they intend to increase efforts to grow the financial planning business through strategic acquisitions.
We also like that these acquisitions have all been in cash and below $1 million, indicating that it hasn’t overextended itself, an attractive trait as the company sees increasing scale.
Accordingly, and with a modest valuation multiple of 16 times FY18 prospective earnings, we are initiating coverage on Fiducian (ASX:FID) and recommend the stock as a BUY to members at current levels. Please also note that shares are small cap in nature and patience should be exercised in setting up a position.
On the chart above see that the share price has recently rotated north, and risen above several Fibonacci levels (red set of retracements). This does open the prospect of a corrective pullback, but with a reasonable layer of support existing at the 76.4% Fib level of $4.25. Clearance of both the 200 and 50 day moving averages would strengthen the outlook and bring the March high of $5.32 into focus.
With the salient points out of the way, we take a brief look at the company’s history, recent financials and try to paint a picture of its journey to present.
Company Overview
Fiducian was established back in June 1996 by current Managing Director, Indy Singh, as an independent financial services and funds management company. The company then launched its Superannuation service in 1997 as well as its Portfolio Administration Services to other Financial Planners.
Then in 1999, the company planted the seeds of its Fintech division with the launch of an Asset Allocation Modelling software which was then followed by a Portfolio review software. In 2000, Fiducian (ASX:FID) was listed on the ASX under the ticker FPS (Fiducian Portfolio Services) with the aim of building up the Financial Planning division and revamping older offerings.
The company has since come a long way and grown many of its various business as well as adding new business models: Fund Platforms and Accounting Resources and Business Advisory to name a few.
As we noted above, the company undertook restructuring in the years 2014-2015 under the Future of Financial Advice regulatory changes that required the separation of the entire group from its Superannuation services. This change the business structure from:
Source: Fiducian (ASX:FID) 05 December 2014 Company Filing
To the new structure below:
Source: Fiducian (ASX:FID) 05 December 2014 Company Filing
The restructure of the group was finalised in February 2015 and Fiducian Group Limited (ASX:FID) became the ASX-listed holding company for the Group under the new ticker FID. Fiducian Portfolio Services, the previous ASX-listed holding company, became a subsidiary of Fiducian Group as shown in the graphic above.
Now, the business has grown from its initial reincarnation as FPS with a market cap of $32.88 million (on listing) to $150.07 million as of the latest count and now offers: (i) funds management and investment services, including wrap platforms and client portfolio administration (ii) wealth management and financial planning services (iii) information technology solutions for financial planners and their clients, and (iv) accounting and accountancy resourcing for full vertical integration.
On that note, the graphic below summarises various divisions it operates:
Source: Fiducian (ASX:FID) 31 May 2018 Investor Presentation
Below we briefly discuss each segment note that FUMAA figures are as at 30 April 2018:
Funds Management
The Funds Management business manages a total of 15 Funds with over $2.29 billion in FUM (Funds Under Management) which allows clients to allocate investible funds across various styles and strategies. As of the latest count (1H18), this division has generated $6.086 million in revenues (+24.3% yoy) and is set to grow as FUMAA rises. This is part of the company’s Investment Services.
Platform Administration
Another component of the Investment Services, the Platform Administration unit, provides portfolio WRAP administration to financial planners as well as Managed Discretionary accounts for investors to have direct access to a small number of shares. This segment has accumulated FUA of $1.85 billion and generated $8.347 million in revenues (+14.5% yoy) – we believe this segment can grow at a faster pace as the company continues its acquisition of smaller Financial Planning practices as well as signing up more distributors.
Combined with Funds Management, these two segments provide the largest (~64.6%) share of the revenue pie.
Financial Planning
Next is the Wealth Management and Financial Planning division which provides Financial advice as well as having licenses to deal in financial products. We believe this segment’s value stems from its ability to act as its main distribution point for its funds and other services and has growth potential considering the company has steadily invested in acquiring practices over the years. The graphic below shows the extensive reach of the Financial Planning division:
Source: Fiducian (ASX:FID) 31 May 2018 Investor Presentation
Aside from its reach, we also like a subtle diversifying effect it has on the company’s revenue line considering that the Financial Planning practices can generate fees from the provision of advice which is fairly stable as opposed to FUM based sources which decline when the markets turn south.
We also like the lower cost structure of this segment considering that out of its portfolio of 38 practices, 7 of which are salaried with the rest working on purely commission thereby having a much lower overhead. That said, this division generated a sizable 34.4% of revenues at $7.695 million (+4.1% yoy).
Business Services
The Business Services segment provides all the back office support necessary for its Financial Planner clients from bookkeeping, accounts preparation and self-managed superannuation fund administration. We believe this segment’s potential is improving considering the recent mandate it received to allow it to grow the Self-Managed Superannuation Fund administration business and book more Financial Planner Clients down the line.
As of the latest count, this segment has generated $219,000 in revenues for the 1H18.
Information Technology
Finally, the IT segment, though currently doesn’t generate revenues, provides a different value to the company as it focusses on developing software and other various tools to increase efficiency in the Financial Planning operations, as well deliver cost savings in other operational areas.
The latest update from the segment is that it’s progressing well with its new financial planning software, FORCe, which links platform administration and reporting systems.
Latest Numbers – 1H18
Combined, revenues for the first half of the fiscal year (1H18) amounted to $22.35 million, up a solid 12.3% year-on-year on the back of robust Fund Inflows (FUMAA: +22% yoy) which have reached the $6.27 billion in the period. With management continuing to push initiatives to acquire more Financial Planning practices, we expect growth to go in line with that.
Source: Fiducian (ASX:FID) 31 May 2018 Company Filing
Margins on the other hand took a hit, down 200 basis points to 73% as clients paid lower product fees and as a result of a shift in product mix. On the other hand, overhead expenses were well managed, rising at a much slower pace (compared to sales) up only 1.1% year-on-year to $9.989 million with majority of the increase (~72.1%) coming from Other Expenses (+7.3% yoy). We believe a significant portion of the increase is likely the result of the company’s investments in its IT.
Source: Fiducian (ASX:FID) 31 May 2018 Investor Presentation
All in all, the company ended the interim period on a strong note with Statutory NPAT up 26.3% year-on-year to $4.336 million. Earning per share rose at a similar pace (+26.1% yoy) to A13.87 cents.
Going forward, management has provided some commentary that they expect to deliver double digit earnings growth by year’s end in light of the strong fundamentals of the global economy. In order to achieve the growth targets, management has also provided some colour on their strategy for the remainder of the year and is focussed on acquiring more financial planning practices and funnelling more client funds to the platform business.
Turning to the monthly chart, the share price has traced out a clear uptrend since early 2016. A pullback from the November 2017 high at $5.59 has played out, but support at this year’s low of $3.92 has been respected. A monthly close above the 32.8% Fib retracement at $4.55 would further strengthen the technical picture.
Summary and Valuation
Fiducian (ASX:FID) is a vertically integrated financial services player that provides investment services, financial planning services, information technology solutions, and accounting/accountancy resourcing to its customers. We like that the business has a high operating leverage model with a reasonable cost structure and set to benefit from the growing potential of the Australian Pension Industry.
On the valuation front, we find that the company is modestly valued, trading at 16.3 times FY18 forecast earnings versus the sector median’s 13.6 times. We believe this is reasonable given the growth on offer. The company also gives an attractive dividend yield of 4.6% which is higher than sector media of 3.27%.
Accordingly, we are initiating coverage on Fiducian (ASX:FID) and recommend the stock as a BUY to members at current levels. Please also note that shares are small cap in nature and patience should be exercised in setting up a position.
Disclosure: Fiducian (ASX:FID) is held in the Fat Prophets Small/Mid-cap managed account portfolio.
