Should I buy more Fiducian Portfolio Services Limited (ASX:FID)?

Claude Walker — Wed, 30 Jul 2014 18:04:39 +0000

Fiducian Portfolio Services Limited (ASX:FPS) is a small fund manager that also owns a small network of financial planners and even accountants, and software on which planners can run their business. Shares are up over 40% since I put Fiducian Portfolio Services into the Hypothetical Ethical Equities Portfolio.

The company is part funds manager, part financial services roll-up and part software company: three businesses that each have attractive characteristics. The funds under management provide recurring free cash flow (in the form of the dreaded management fee) and the software segment has the potential to provide a decent revenue stream if the company is able to license it to more independent financial advisers. However, these accountancy resource services provided just 3% of revenue in FY 2013. The acquisition of small financial planning practices and small funds gives the company a roll-up element which, combined with share buy-backs, are driving earnings per share growth for Fiducian. Basically, as long as the company continues to grow FUM or rather, FUA (Funds Under Administration), profits should rise.

Although the most recent quarterly slightly under-performed my expectations, historically, the company generates more cash in the fourth quarter. Embarrassingly, I freaked out a bit until a friend pointed this out to me (thanks again). The company bought back some shares earlier this financial year so even if earnings remain flat (which I doubt) earnings per share should grow.

I'm not crazy keen about the ethics of the business but for what it's worth I do think the company has very strict standards for its advisers and I believe they have booted planners in the past for not doing the right thing. Unlike the Commonwealth Bank, I couldn't find any examples where they had caused significant harm to customers, and I suspect most clients do OK, even if they under-perform the market. The company's Indian investment fund may also prove to be a strong selling point in the years to come, especially if India becomes a growth powerhouse. I doubt it will any time soon, but it may, since the new government seems a bit more focussed on basics like half-decent sanitation. Once you have decent sanitation and better power supplies the population can become a lot more productive.

In other news, the company announced that it had purchased a financial planning business with $66 million FUA from which it expects to extract NPAT of "up to $400,000" per annum within 2 - 3 years. The company says the purchase is estimated at 4x EBIT (which I suspect may be a bit optimistic) but in any event it looks earnings accretive. Based on EBIT of $2.8 million for the first half of 2014, the company is trading at about 9 x EBIT.

More important for me was the news that the company now has a bit over $1.3 billion in funds under advice (including the $66 million). That means the company has either more FUA than it ever has, or very close to it. With a market capitalisation of only $54 million, the value proposition should be clear, especially since margins should improve with scale. Suffice it to say I feel stupid for selling some of my shares and am even considering buying some more. In my book Fiducian is a reasonable buy at $1.70. Just watch out below if the market tanks, because at that price, the margin of safety is not what it should be for a funds manager. In part, I'm not buying more Fiducian right now because I also own Australian Ethical Investments Limited (ASX: AEF) (purchased at $33 from memory) and I probably don't want too much exposure to fund managers in case the market does tank. On the other hand, I confess I'm tempted (or is that just greed getting the better of me?)

The author owns shares in Fiducian Portfolio Services Limited. Nothing on this blog is advice, ever, and may even be plain wrong. The purpose of this blog is to document my thoughts on different companies in an easily accessible way and to make connections with likeminded investors. Subscribers to the Free Newsletter get send research first, and have access to the Hidden Research.

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Fiducian Portfolio Services announces growing operating cashflow (ASX: FPS)

Claude Walker — Thu, 07 Nov 2013 03:08:29 +0000

I bought shares in Fiducian Portfolio Services a couple of weeks ago because, based on a conservative discounted cashflow valuation, I believed their shares were undervalued. I'm now adding Fiducian Portfolio Services to the Hypothetical Sample Ethical Portfolio, with the caveat that 10% of the profits of Fiducian should be donated to charity, because Fiducian is not a particularly ethical investment. The hidden report contains a discussion of the ethics of investing in Fiducian.

Fiducian has a network of financial advisers: some are franchisees and some are employees. This network is responsible for most of the funds invested in their boutique funds, which bring in about 70% of the company's revenues. Although their boutique funds are not stand-outs, they have generated reasonable returns for investors over the long term.

In the hidden report, I considered the strong, long-term record of the parent company:

"In 10 years Fiducian has generated $41.47 million of cash from capital expenditure of $9.05 million, that is, $4.58 for every $1 spent... The company has also paid $22.8 million in dividends to share holders."

I offered a discounted cashflow model that suggested the shares were worth buying at below $1.20 (they are still $1.18 at the time of writing). However, that cashflow model assumed free cashflow of $3.8 million for FY 2014. It now seems almost certain that the company will exceed this for FY 2014, because the operating cashflow in the quarter to September 2013 was $1.8 million. This indicates I have probably underestimated the company. I'm content with this state of affairs, as I aim to make conservative estimates of the value of a business, so as to incorporate some "margin of safety."

To read a deeper description of the business, a discussion of the companies strengths and weaknesses, a history of FUM and my notes on the board of directors, sign up to the Newsletter and receive my blog post on Fiducian Portfolio Services direct to your inbox.

The Author owns shares in Fiducian Portfolio Services. Nothing on this website is advice, ever. This post is for entertainment (and for my own reference!)

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Should I buy more Fiducian Portfolio Services Limited (ASX:FID)?

Fiducian Portfolio Services announces growing operating cashflow (ASX: FPS)