Benefits of Scale
2018 was a great year for OneVue (ASX:OVH), seeing record growth and successful accretive acquisitions. We also see the positive outcomes of management focussing on the more lucrative and faster growing services that are delivering increasing scale and operating leverage. Overall, we are pleased with the momentum and we maintain our BUY rating on OneVue.
What’s New?
Previously in July (FAT-AUS-887), we provided coverage of the company’s continued effort to specialise in a more lucrative niche in the fund administration business while divesting businesses that aren’t aligned with the long-term vision for the company and shareholder interests. We also noted an unusual acquisition, No More Practice (NMP), an online education portal.
That aside, we also flagged concerns of a looming price war in the sector when a much larger rival, BT Financial Group, which is the wealth management arm of Westpac Banking Corporation (ASX.WBC), announced a “price cut,” resulting in the shares of HUB24, Fiducian, and Praemium to face some pressure from fears of disruption.
However, we noted then that such concerns were likely overstated as the headline price cuts were in part a marketing gig. The real beneficiaries of the pricing adjustment (a more accurate term) were much larger investors with account sizes of over $100,000 and ultimately not representative of the average investor.
We noted that such a move would have a smaller impact than the market feared and consequently the concerns eventually ‘rationalised’ in this direction, with the shares bouncing back.
Since then, the most salient development for OneVue (ASX:OVH) was it gaining more traction with its Fund Administration and Platform businesses inking new deals with Mercer Wealth Management, Nextplan and a boutique fund manager, Allan Gray Australia. More deals in this arena will further add to the bottomline due to the high degree of operational leverage in the business which benefits from increasing scale. Following that and in late August the company also released its Fiscal 2018 results:
FY18 Results Review
Following on from the 1H18 results and the company has maintained solid momentum registering 20.2% year-on-year growth, or $8.24 million, in Revenues for FY18 to $49.12 million. Breaking it down and we see that there was a healthy contribution from both organic and immediately accretive acquisitions while the divestments had a slight offset. This is illustrated in the ‘waterfall’ chart below:
Source: 27 August 2018 Company Presentation
The organic growth contribution of circa $5 million (+15%) was largely driven by the Fund Services business which saw a massive influx of new clients up 61.4% year-on-year to over 145,000 and likewise ramped up “processed items” which is recurring revenue. According to management, recurring revenues now account for 92% of the total (FY17:90%) with about half not sensitive to the market.
Acquisitions were also immediately accretive with the KPMG Superannuation business contributing an incremental $2.1 million in revenues while the NMP portal provided $400k and the Diversa acquisition added $2.7 million.
The divestments had a more muted impact with the SMSF and RE businesses sold partially offsetting the gains by a $300k decline. The ceasing of the Investment Management business, to focus on “outsourcing” (fund administration), has had a short term circa $1.6 million impact. Ultimately, we view this move to be highly beneficial as the scale of funds continue to increase.
The graphic below illustrates the significant improvements in operational metrics across the three business segments:
Source: 27 August 2018 Company Presentation
Moving on and taking a brief look at each segment, we start with the flagship Funds Services. This segment continues to be the fastest growing unit with the new mandates driving margin expansion (20.4% vs 13.7%) and revenue growth (~72.3%). The KPMG acquisition has catapulted the company to be the 4th largest superannuation member administrator in the market.
The Platform Business is also benefitting from the secular trends with an increasing degree of institutions outsourcing this role to OneVue. An advantage the company enjoys is that part of its contractual negotiations with institutional clients often fund or at a minimum co-fund the Platform development costs leading to lower CAPEX needs and higher margins.
Revenue growth from the Core Platform (excluding the divested businesses) was up 29% in the second half compared with the prior corresponding half and 2H was up 24% on the 1H reflecting the inflows momentum.
The graphic below summarises the year-on-year performance across segments:
Source: 27 August 2018 Company Presentation
Moving on to the Trustee Services segment and this unit also benefitted from the shift in the Royal Commission’s perspective on conflicts of interests from vertically integrated operations which benefit independent trustees like OneVue. As such revenues and margins continue to increase as more and more institutions marked increased interest in switching to independent third-party trustees.
Overall, the favourable industry dynamics, the increasing scale and management decision to focus the strategy (divesting RE and SMSF) have greatly benefitted the bottomline with EBITDA surging 62% year-on-year to $6.9 million and NPAT up $6.9 million year-on-year to $7.1 million following the maiden profit last year. The group level performance is illustrated below:
Source: 27 August 2018 Company Presentation
We are pleased with the overall progress and direction the company is making, having continued to build up a successful niche as a wholesaler which benefits from increasing scale. Going forward, management has noted that they continue to seek out deals to ramp up scale, noting that they expect to transition at least 300 additional funds in 2H19 to the Funds Services area while also on-boarding 5 well known institutions into the Platform business.
Turning to the charts, and prices have backed away from resistance at 80 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. This is now being tested. If prices were to head the other way, resistance at 80 cents, being the 78.6% Fibonacci retracement, would come back into focus. 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. As a result, the Fiscal 2018 results have indicated a highly positive result, with the increasing scale adding significantly to the bottom line. Overall, we are pleased with this and maintain our positive view on the company.
On the valuation front, the shares currently trade at 29.6x forecast FY19 earnings which is expected to fall to 27.5x for FY20. Substantial operating leverage will drive robust, ‘sticky’, profit 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.
