With the big four banks accounting for more than one-quarter of the S&P/ASX 200 index by market capitalisation, financial services is a major driver of the stock market. Australian retail share portfolios may be even more heavily weighted to the financial services industry than that – more than 2.3 million Australians own big bank shares directly, and millions more are invested through their superannuation funds.
With the big banks paying dividends more than twice as high as what their customers receive from term deposits and other savings accounts, this is unlikely to change anytime soon.
But there is a lot more to the Australian financial services industry than the big four banks – and for that matter, the other top names of the financial services sector, such as Macquarie Group, Bendigo & Adelaide Bank, Bank of Queensland, QBE, Suncorp, AMP, Perpetual and Challenger.
The breadth of the financial services industry is very well-represented on the stock market, particularly at the small-cap and medium-cap level, and particularly in stocks that serve the $2.8 trillion funds management industry and its subset, the $2.4 trillion superannuation system. It’s a growing industry, and here is a group of smaller stocks that offer a range of exposures.
Link Administration (LNK, $7.86)
Market capitalisation: $2.9 billion
Consensus forecast FY18 yield: 2.4%, 10.7% franked
Three-year total return: n/a
Analysts’ consensus target price: $8.79 (FN Arena, $8.69 (Thomson Reuters)
Listed in October 2015, share registry and asset administration business Link Administration is the largest provider of super fund administration services to the $2.4 trillion Australian super industry, which is estimated by Deloitte to burgeon to $7.6 trillion by 2033.
Link is also a major provider of share registry, shareholder analytics and shareholder management services to the Australian listed company market. Last year, fund administration generated 58% of revenue, with information, digital and data services producing 21%, and corporate market services the same proportion.
Sold to investors at $6.37, Link surged on to the stock market at an 11% premium, at $7.10, and despite a late-2016 drop beneath $7, has moved smoothly to $7.86. Last month Link announced it will spend about $1.5 billion acquiring UK-based financial services group Capita Asset Services. This acquisition takes Link into the UK and European markets and should boost earnings growth. Credit Suisse, for example, estimates that Link could increase its earnings per share (EPS) by 50% between FY17 and FY20. After that the growth outlook declines, however the company will be a very strong free cash flow generator. It goes without saying that the acquisition carries significant integration risk for Link.
The acquisition is being funded by $664 million in debt and a $883 million four-for-11 entitlement offer at $6.75 a share. Last week Link completed the retail entitlement offer, with 85% of entitlements taken up, raising $159.5 million.
About 92% of Link’s revenue is recurring. Analysts expect earnings per share (EPS) to more than double for the year about to reported, FY17, and to rise by 8% this financial year, to 36.4 cents. The dividend is also seen as rising more than twice in FY17, before a 15% rise in FY18 takes it to 18.8 cents. That prices Link at about 22 times expected FY18 earnings, and a partially franked dividend yield of 2.4%. Growth is the focus for this stock, and analysts’ consensus sees healthy scope for appreciation.
Class (CL1, $2.97)
Market capitalisation: $347 million
Consensus forecast FY18 yield: 1.9%, 33.3% franked
Three-year total return: n/a
Analysts’ consensus target price: $3.54 (FN Arena), $3.59 (Thomson Reuters)
Class develops cloud-based software solutions for the Australian wealth accounting market, specialising in software-as-a-service (SaaS) administration solutions. The product range is led by Class Super, the leading cloud software for administration of self-managed superannuation funds (SMSFs), which is used by accountants, super fund administrators, financial advisers and auditors. Class Portfolio, the company’s non-super product, is a cloud-based software suite for streamlining investment portfolio accounting, administration and reporting: it is used by accountants, advisers and investors. SMSF DataFlow is a specialist software solution built for SuperStream, the data and payment standard introduced as part of the government’s Stronger Super initiative, introduced in July 2014.
The company’s software integrates with more than 40 partner product and service providers in the areas that the company does not cover, so as to provide streamlined services to SMSFs and other portfolio administrators.
Class finished the 2017 financial year with a record 31,503 new accounts added, beating last year’s record of 30,618. In the June quarter the company reached 140,000 SMSFs as customers: it estimates Class Super’s SMSF market share at 24%, up from 19% at the beginning of the financial year.
Class is benefiting from two major tailwinds, the ongoing growth of SMSFs, and the move to cloud-based solutions. For the year ended June 30, analysts expect Class to report earnings per share (EPS) of 6.8 cents, up 48%, and to boost that by 31% in the current financial year, to 8.9 cents. The FY17 dividend is expected to grow by 10%, to 4.4 cents, lifting by 1.4 cents, or 31%, to 5.8 cents in FY18, one-third franked.
While that prices Class at a hefty 35.9 times expected FY18 earnings, and a dividend yield of just under 2%, one-third franked, the analysts’ consensus sees the stock showing robust capital gains ahead.
Fiducian (FID, $4.20)
Market capitalisation: $131 million
Consensus forecast FY18 yield: 5%, fully franked
Three-year total return: 40.8% a year
Analysts’ consensus target price: $4.85 (Thomson Reuters)
The Fiducian Group is a specialist financial services organisation that provides financial planning and SMSF advice (Fiducian Financial Services), funds management (Fiducian Funds), investment platform administration, information technology and accounting/accountancy resourcing services. The main businesses are platform administration, financial planning and funds management.
Fiducian has total funds under management, administration and advice of more than $5.6 billion. Fiducian Funds manages $1.9 billion, across 15 managed funds: four diversified funds, four sector funds and seven specialist funds. The wrap and managed accounts platform, Fiducian Investment Service/Fiducian Superannuation Service, holds $1.6 billion in funds under administration. And the national boutique financial advice licencee, Fiducian Financial Services, has $2.1 billion in funds under advice.
Fiducian has been an impressive performer lately, lifting net profit by 22% in FY16, and by the same percentage in the December 2016 half-year. On Thomson Reuters’ collation, that has analysts expecting a 33% lift in EPS for FY17, to 25 cents a share, with 30 cents to follow in FY18. From that, analysts see FID paying a fully franked dividend of 16 cents for FY17 (up 28%), with that increasing to 21 cents in FY18.
On those expectations, at $4.20, FID is priced at 14 times expected FY18 earnings, and a 5% fully franked expected FY18 yield, which grosses-up to 7.1%. Although it is a relative minnow in market capitalisation terms, investors who understand the growth drivers of Australian financial services can definitely make a case for buying Fiducian on those numbers – and analysts concur, with a consensus price target more than 15% north of the current share price.
OneVue (OVH, 60 cents)
Market capitalisation: $158 million
Consensus forecast FY18 yield: n/a
Three-year total return: n/a
Analysts’ consensus target price: 94 cents (Thomson Reuters)
Investment technology company OneVue provides superannuation and investment management solutions across three operating businesses.
The platform business is the OneVue investment platform, which administers a wide range of assets, including unit trusts and managed accounts. OneVue is a both a direct and intermediated (used by financial planners and accountants) platform, which enables investors to transact, manage and report on their investments on a consolidated basis. The platform administers a wide range of assets, including managed accounts, unit trusts, term deposits, ASX-listed securities, as well as property and debt. It also provides a retail superannuation fund, as well as specialist SMSF compliance and administration services.
The fund services division provides outsourced unit registry services and installed software to a range of investment managers, trustees, and custodians. This division recently introduced a new fund marketplace, called the FUND.eXchange, which is accessed via the OneVue platform.
The third business, superannuation trustee services, was added last year when OneVue merged with Diversa, Australia’s leading independent retail superannuation trustee.
OneVue’s revenue growth has been impressive in recent years, growing at a compound annual rate of 77% between FY13 and FY16, and then surging by 50% in the December 2016 half-year. This growth well outstrips that of the superannuation sector as a whole. Recurring revenue represents 92% of total revenue.
However, OneVue is on its way back to profitability, having reported a loss in FY16, and has added a major growth business in its super trustee services. The company says all three businesses are now profitable, and OneVue can be expected to benefit from the super system growth, the continuing move to SMSFs and the rapid growth of managed accounts, which are emerging as a real force in retail investment.
After losing 1.9 cents a share in FY16, on Thomson Reuters’ collation, analysts expect OVH to report EPS of 1 cent a share for FY17, and boost this to 2.3 cents a share in FY18. Dividends are not expected for FY17 or FY18. But analysts like the outlook for the combination of the three business divisions: the consensus target price for OVH is more than 50% higher than the current share price.
Managed Accounts Holdings (MGP, 32 cents)
Market capitalisation: $43 million
Consensus forecast FY18 yield: 3.1%, unfranked
Three-year total return: 14.9% a year
Analysts’ consensus target price: 32 cents (Thomson Reuters)
Like OneVue, Managed Accounts Holdings taps into the rapid growth of its namesake product, the managed account. Managed accounts (MAs) are investment portfolios where the investor maintains direct ownership of the underlying investments, while having them managed according to a set investment strategy.
Managed accounts are highly tax-effective for investors, and offer advice practices huge efficiency gains; as such, the products are growing in popularity. Australian investors now have close to $31 billion in managed account products, according to the Institute of Managed Account Professionals (IMAP), and investment bank Morgan Stanley has forecast that that figure will double to $60 billion by 2020, driven by strong investor demand, and aided by investment products providers, fund managers, financial advisers and new technology platforms.
Managed Accounts Holdings is right in the middle of this growth. It creates, operates and administers customised managed discretionary account (MDA) solutions for a growing number of Australia’s leading financial advisers, Australian Financial Services Licencees and fund managers.
MGP recently (March 2017 quarter) passed the $2 billion in funds under administration (FUA) milestone, up from $1.3 billion at December 2014, and a May business update put FUA at $2.1 billion. The May update stated that MGP had 23 “mature” MDA services in place with licencee clients; 18 “in transition” clients that had signed and where the licencee clients were transitioning; four clients classified as “recent live” and four “builds,” where the MDA service implementation was in progress. The company is now partnering with specialist technology firm Capital Road, to outsource technology development.
Although a micro-capitalisation company at $43 million in stock market value, Managed Accounts Holdings is profitable, and a dividend payer. On Thomson Reuters’ numbers, analysts expect MGP to report EPS of 1 cent a share for FY17 – almost double that of FY16 – and pay an unfranked dividend of 1 cent, up from 0.8 cents in FY16. For FY18, analysts expect similar results, implying a 3.1% unfranked yield. The stock is trading at the analysts’ consensus target price, but managed accounts is a prime growth area in financial services, making MGP definitely a stock on which to keep an eye.
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