What is the stock?
Equity Trustees (EQT AU) is a listed financial services company that operates in niche segments of the wealth management value chain. It is an independent operator, specialising in RE (responsible entity) services, superannuation trustee services as well as in a private client niche of philanthropy, charitable trusts and estate management services. It has a market capitalisation of $470m.
How long have you held the stock?
In 2016, we were initially shareholders in EQT, but we built a more meaningful position over the past year, as it became evident that their business could benefit from changes in the financial services sector following issues raised during the Royal Commission. With the focus on the integrity of the role of the trustee and the heightened risk environment, we think that EQT is well positioned, and there will likely be an increase in the outsourcing of the trustee function.
What do you like about it?
EQT has a leading position in each of the niche segments that it operates in. It is a strong cash flow generative business, run by a disciplined and reputable management team and is leveraged to favourable industry dynamics in the wealth sector. While there is sensitivity to equity market movements, there is a large recurring revenue base as the client base is relatively ‘sticky’, supported by multi-year contracts or enduring tenure on the estates.
We believe that there are fertile opportunities in the current regulatory backdrop, as the role of the trustee has been brought into focus by the Royal Commission. Currently, only a small proportion of the funds in the superannuation industry are managed by external trustees, which we believe will change. EQT is well positioned to benefit, and there is operating leverage in this division, both from a capital and costs perspective.
There are additional growth levers, such as the opportunity in EQT’s will bank, or in providing a broader offering across multiple geographies via the TCL acquisition. We expect that the TCL international division will shift into profitability in 2H19. Additionally, organic growth is likely to be augmented with acquisitions. EQT has a healthy balance sheet with net cash, and the management team has built a track record on acquisitions to supplement growth and accelerate strategic priorities.
Over the long term, we like the industry dynamics that EQT is exposed to – growth in the wealth management space and the intergenerational wealth transfer that Australia will experience with its ageing population. EQT will benefit from this, as a trusted brand in independent estate planning and estate services, which are core competencies of EQT’s private wealth division.
How is it better than its competitors?
From a strategic perspective, EQT decided that it does not need to be present across the entire wealth management chain. As such, it is an industry leader in each of its specific niches in which it operates. EQT has a strong and reputable brand in the trustee space and is considered to be a leading independent specialist player with scale; whereas in the private client niches, the complexity of the offering in estate planning and philanthropic trusts has seen it build a strong brand accompanied by a robust referral network from private client banks and high net wealth advisors.
What do you like about its management?
We like the management team and view them as reputable and disciplined in their approach. They are executing on the strategy to broaden the offering, grow organically, and have built a track record on acquisitions to augment growth.
What is your target price?
Our target price is $25.50.
At what point would you sell it?
We would sell this name when its share price exceeded our fundamental valuation.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
We built a meaningful position in the portfolios over the last 12 months, which has added 27 basis points to our relative performance against benchmark in the year to 30 September 2018.
Where do you see the value?
EQT has undergone a restructuring transition in recent years which has impacted its reported financial results, but we believe that as growth materialises in their core business, the market will re-rate the stock accordingly.
There are fertile opportunities for EQT to grow organically, particularly in the current environment where the role of the trustee has been brought into focus. We think the market is underestimating the growth optionality as well as the significant operating leverage in the trustee divisions, which will lead to margin expansion.
We believe the valuation is undemanding as the stock is trading at an industrials market multiple, and we see upside compared to our price target of $25.50. We view the valuation metrics as attractive, trading at an industrials market multiple, an NTM EV/EBITDA multiple of 10.5x and supported by a fully franked dividend yield of 4.4%.