Sharpening Focus
Fund Administration outsourcing specialist, OneVue Holdings (ASX:OVH) has made good on management promises to transform the business into a more focussed one that specialises in fund administration and allied services, while divesting businesses that create less shareholder value. Today, we provide some commentary on the latest updates as we maintain our positive view on the company.
Recap and What’s New
In our last update in late March (FAT-AUS-867) we covered the company’s interim results which proved to be an important milestone, with OneVue gaining further momentum and making gains in the market, disrupting incumbents. A glance at the graphic below highlights the key metrics where the company is gaining success:
Source: OneVue Holdings (ASX:OVH) 07 June 2018 Company Presentation
In the company’s latest set of results, EBITDA growth was up over 200%, reflecting the surge in revenues and a much larger contribution from the Fund Services business which saw a substantial 179% year-on-year increase in turnover. The Diversa acquisition last 2016 has also proven to be accretive, contributing $6.1 million in revenues (+65% yoy). Note that the company has a high degree of operating leverage which means that as sales grow, earnings can grow at a much faster pace.
In light of such strong results, no surprise that the company’s shares are performing well, putting in a gain of more than 15% year to date. This compares favourably to the 3.5% decline in the S&P/ASX Emerging Companies index of which OVH is a constituent.
Today, the focus of our report will be on the company’s latest trading updates from the divestment of its Responsible Entity (RE) business to some new acquisitions. We also provide some commentary on the company’s operational progress to date.
March Quarterly Updates
Moving on to the company’s latest quarterly update. Management has made good on their promises of transforming the business towards a razor-sharp focus entirely on what they deem to be the core strength, while divesting businesses that don’t align with the overall strategic vision. The following are seen as the company’s core areas of strengths: (i) fund services and super administration, (ii) platform services and (iii) superannuation trustee services.
In late April the company provided its quarterly update summarising all the corporate movements to date as shown in the graphic below:
Source: OneVue Holdings (ASX:OVH) 24 April 2018 Company Filing
As can be seen in the graphic above, the company has undertaken significant restructuring initiatives over a short span of time and has created a much cleaner structure for the company to focus on its core competencies.
Looking at some of the transactions and starting with the divestment of the RE Business. In our previous coverage back in March, we did note that the company has sealed the deal with EQT Holdings, the holding company for Equity Trustees, to sell the business for $3.5 million, A major plus for the deal is that it frees up capital while also retaining the revenues since EQT will continue to outsource the Fund Administration side, while EQT will focus exclusively on the RE side. The deal was completed in early April.
The same month, the company also announced its exit from the self-managed super fund (SMSF) business,selling it to SuperConcepts for an undisclosed figure. The exit, in our view, is a prudent move considering that the SMSF business is highly complex with layers of cybersecurity risk.
Considering the smaller scale of the company’s SMSF operation, we believe that a larger investment in technology and people would be required in order to compete with rivals the size of AMP which already have scale in the area.
We believe the exit is highly prudent as we see mounting risks in the wake of recent cyber security scandals that giants like Facebook can’t even protect against. For a much smaller company with more sensitive data, a massive data breach like that would result in damages the company wouldn’t be able to recover from.
Turning now to recent acquisitions. In our previous coverage, we reviewed the acquisition of KPMG’s $2.13 billion Funds Under Administration (FUA) Superannuation Member Administration business, for $6.5 million in cash. This deal was consummated 16 April.
We did note then that if this was pushed through, it would be immediately accretive as it would more than double super member administration revenues and catapult the company to be the 4th largest super administration business in Australia pushing FUA to over $4.1 billion. This will also bring in over 40,000 customers and add 16 superannuation funds to the fold and possibly absorb a staff of 47. Other terms of the deal include contingent payments of $5.5 million in FY19 and FY20 depending on performance hurdles.
Finally, we end the M&A talks with the most unusual acquisition yet. On 17 April, the company announced the acquisition of No More Practice, an online portal focussed on providing CPD-accredited (continuing professional development) video-based learning to over 20,000 financial advisers and accountants.
The website also provides end-used content called The Investment Series, a reality TV show focussing on real life retail investors working closely with their financial advisers. This has captured circa 12,000 direct consumer subscribers.
Image Credit: No More Practice Education Website
The terms of the deal include a cash sale of $1.1 million with a contingent cash payment of up to $1.0 million by September 2018 if revenues increased in the 6 months post-acquisition. It also includes a further 3 annual contingent payments of up to a total $2.9 million provided revenues grow year-on-year in the FY19, FY20, and FY21. FY17 revenues from the company are around $1.8 million with an implied EBIT valuation multiple of circa 5x.
This then begs the question, if OneVue is looking to focus on its core competencies, why then go out of its way to acquire an online education business?
We believe that the acquisition has a two-fold purpose. The first of which is that it creates a positive platform to generate goodwill from OneVue’s existing customer base as it supports fund managers in market education efforts to both advisers and investors, effectively a PR-machine if you will.
Second, aside being an acquisition that supports marketing efforts, the deal is expected to be EPS accretive as it already generates a healthy amount of revenues and EBIT from its CPD-related activities. At the bottom-line, we see this acquisition as a marketing that pays for itself, a good deal in our view.
All in all, we reiterate that we are pleased with restructuring initiatives to date, as it will allow the company to focus on core competencies, and take advantage of ongoing trends in the industry. This is as many large players are looking to exit wealth businesses which could deliver further administration outsourcing opportunities for OneVue.
Business Updates
Looking at operational updates OneVue (ASX:OVH) looks to be progressing positively. The Fund Services, unit has, as at the end of the March quarter, reported a record figure of items processed, with a gain of 60.6% year-on-year to 90,646. During the quarter 31 funds were added, with Funds Administered now totalling 758 and bringing FUA to $471.6 billion.
Superannuation member administration FUA for the quarter reached $2.28 billion up 26.1% or $472 million, year-on-year. Member numbers also rose 4.1% year-on-year to 93,755. One new fund was added in the quarter taking the number administered to 23.
Source: OneVue Holdings (ASX:OVH) 07 June 2018 Company Presentation
The Platform Services business also reported continued momentum with net inflows for the quarter of $112 million, up 9% year-on-year, taking net inflows for the last 12 months to a record of $878 million up 156% on pcp. Overall FUA surged to a record $4.12 billion up 5.4% year-on-year despite the closure of the external Investment Management business (~$567m) and the decline in equity markets (ASX All Ords index down 4.9% for the quarter).
Finally, the Superannuation Trustee Services reported a decent showing with organic growth from existing and new clients. Funds Under Trusteeship for the quarter, grew $193 million to $10.5 billion.
All in all, based on the latest financial metrics released, the company’s core business is looking healthy.
Outlook
Going forward, it seems OneVue (ASX:OVH) is well on track to continue another record year of growth, and carrying this into FY19 as well. This is reflected in the management’s outlook update below:
Source: OneVue Holdings (ASX:OVH) 07 June 2018 Company Presentation
Key Takeaways here is that the company is delivering organic growth across all its businesses while the M&A activity is proving to be prudent with acquisitions generating value.
Turning to the charts, and prices continue to hover just below resistance at 80 cents. A breach above here would be positive and open the door to a challenge of this year’s high at 89.5 cents. Medium-term momentum remains in favour of the bulls, as backed by the bullish moving average crossover present since September 2017. This is when the 50-day moving average (red line) crosses above the 200-day moving average (green line).
Regarding the monthly chart, we note that since reaching a high of 90 cents in December 2015, OneVue Holdings’ (ASX:OVH) share price saw some downward pressure until the first-quarter of 2017. Positively, the company’s share price has reclaimed previous resistance at 73 cents being the 61.8% Fibonacci retracement. Resistance at 80 cents, being the 78.6% Fibonacci retracement, is now being tested. A breach would be a positive event, and add to the overall bullish picture.
Summary
Management has made good on their promise to transform the business to a more focussed one that specialises in fund administration and its allied services. In line with this shift, the company has exercised some restructuring activity that has proven to be highly prudent in our view, raising revenues, earnings and even avoiding some unnecessary trouble. So far, we are pleased with this and maintain our positive view on the company.
On the valuation front, the shares currently trade at 38.4x forecast FY19 earnings which is expected to fall to 21.5x for FY20. Substantial operating leverage will drive robust, ‘sticky’, profitability growth over time in our view.
Accordingly, we recommend the shares as a Buy for 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.
