CENTREPOINT ALLIANCE LIMITED (CAF)

Transcription

1 Low Return High Financial Results 25 August 2014 CENTREPOINT ALLIANCE LIMITED (CAF) ACTION & RECOMMENDATION Financial planning and SME insurance premium funding business Centrepoint Alliance (ASX code: CAF) continues its reconstruction under new management. We have made further upgrades to future year earnings forecasts. Given its size we continue to see CAF as a higher risk proposition than its larger and more diversified peers, but with a cost-to-income ratio of 88% there is plenty of room for further efficiency gains. 12m Target Price (AUD) $0.55 Share 22-Aug-14 (AUD) $0.52 Fcst 12m Capital Return 4.9% Fcst 12m Dividend Yield 4.2% 12m Total S holder Return 9.0% Stewart Oldfield stewart.oldfield@wilsonhtm.com.au Tel Bit by bit What s Changed CAF has reported 2H14 NPAT of $2m, up 47% on 1H14 and in contrast to its loss-making performance for the previous three financial years. The result was driven by cost-cutting in the wealth business and continued revenue growth from the premium funding business. Cash claims costs remain elevated. A 2.2 cent dividend was declared, as flagged. Following a 2H14 capital raising CAF had $21.4m of cash and term deposits on its balance sheet at 2H14. s & Catalysts Catalysts. CAF offers strong operating leverage to growing demand for independent financial advice. Its ability to exploit industry consolidation in its premium funding business will also drive profits. s. Claims provisions and claims payments could continue at elevated levels. The loss of further advisers and associated funds under advice post the introduction of the Future of Financial Advice (FOFA) reforms. Key person risk in executive ranks. 12m Share Price Performance $ CAF XSI Rebased Aug-13 Dec-13 Apr-14 Aug-14 1m 6m 12m Abs. Return (%) Rel. Return (%) WHTM Return Re-Investment Matrix Share Price Business Cash Generator Challenged Champion Potential Low High Re-Investment WHTM Assessment Low Med High Spec Year-End June (AUD) FY13A FY14A FY15E FY16E FY17E NPAT Rep ($m) NPAT Norm ($m) Consensus NPAT ($m) EPS Norm (cps) EPS Growth (%) P/E Norm (x) EV/EBITDA (x) FCF Yield (%) DPS (cps) Dividend Yield (%) Franking (%) Source: Company data, WHTM estimates, S&P Capital IQ Key Changes 21-Aug After Var % NPAT: FY % Norm FY % ($m) FY EPS: FY % Norm FY % (cps) FY DPS: FY % (cps) FY % FY Price Target: % Rec: HOLD HOLD Mkt Cap: $74m Enterprise Value: $58m Shares: 143m Sold Short: ASX 300 Wgt: n/a Median T over/day: $0.0m Wilson HTM Equities Research Issued by Wilson HTM Ltd ABN Australian Financial Services Licence No , a participant of ASX Group and should be read in conjunction with the disclosures and disclaimer in this report. Important disclosures regarding companies that are subject of this report and an explanation of recommendations can be found at the end of this document.

2 PRICE TARGET Enterprise ($m) 65.8 Net Debt ($m) Minorities / Other ($m) 0.0 TOTAL ($m) 81.9 TOTAL ($ / Share) 0.57 Valuation Price Target EPS (FY15 cents) 0.04 Market PE (FY14) 16.4 PE Relative 0.8 PE Multiple (x) 13.4 PE Valuation per Share 0.55 KEY ASSUMPTIONS Revenue Growth (%) EBIT Growth (%) NPAT Growth (%) , EPS Growth (%) , EBIT / Sales (%) Tax Rate (%) ROA (%) ROE (%) Advice & Prod Rev growth (%) Prem Fund Rev growth (%) INTERIMS ($m) Half-yr (AUD) Dec 13 Jun 14 Dec 14 Jun 15 1HA 2HA 1HE 2HE Sales Revenue EBITDA EBIT Net Profit Norm. EPS EBIT/Sales (%) Dividend (c) Franking (%) FINANCIAL STABILITY Year-end June (AUD) FY14A FY15E FY16E Net Debt Net Debt / Equity (%) Net Debt / EV (%) Current Ratio (x) Interest Cover (x) <0 <0 <0 Adj. Cash Int. Cover (x) 3.9 <0 <0 Debt / CashFlow (x) < Net Debt (cash) / share ($) NTA / share ($) Book Value / share ($) Payout Ratio (%) Adj. Payout Ratio (%) EPS RECONCILIATION ($m) FY14A FY15E Rep. Norm Rep. Norm Sales Revenue EBIT Net Profit Notional Earn Pref./Conv. Div Profit for EPS Diluted Shrs(m) Diluted EPS (c) RETURNS FY14A FY15E FY16E FY17E ROE (%) ROIC (%) Incremental ROE Incremental ROIC PROFIT & LOSS ($m) Sales Revenue EBITDA Depn & Amort EBIT Net Interest Expense Tax Minorities / pref divs Equity accounted NPAT Net Profit pre Sig. Items Abn s / Ext s / Signif Reported Net Profit CASH FLOW ($m) EBITDA Interest & Tax Working Cap / Other Operating Cash Flow Maintenance Capex Free Cash Flow Dividends Paid Growth Capex Invest. / Disposals Other Inv. Flows Cash Flow Pre Financing Funded by Equity Funded by Debt Funded by Cash BALANCE SHEET SUMMARY ($m) Cash Current Receivables Current Inventories Net PPE Investments Intangibles / Capitalised Other Total Assets Current Payables Total Debt Other Liabilities Total Liabilities Minorities / Convertibles Shareholder Equity Total Funds Employed Wilson HTM Equities Research 2

3 In FY14 financial planning and premium funding business Centrepoint has, as expected, returned to profitability for the first time since FY10. CAF reported statutory profit of $3.2m compared with our expectation of $2.9m. Cost-cutting offset the impact of a 10% fall in revenues in the wealth business to drive a return to profitability of $2.96m while the premium funding business posted 43% growth in pre-tax earnings to $5.1m. TABLE 1: THE COST-OUT OPPORTUNITY FY Cost to income ratios Source: Company reports Income Operating costs Cost to Income $m $m % CAF % AMP % SFG % IFL % CHART 1: CASH CLAIMS COSTS REMAIN ELEVATED $m H11 2H11 1H12 2H12 1H13 2H13 1H14 2H214 Source: Company reports TABLE 2: PLANNER NUMBERS FY14 FY13 FY12 FY11 FY10 Millenium CBA PIS Source: Money Management annual survey Wilson HTM Equities Research 3

4 CHART 2: UP AGAINST THE BIG PLAYERS $b AMP CBA IFL NAB WBC ANZ PPT CAF CRH Centric Source: Money Management annual survey TABLE 3: PEER VALUATION Company Price Diluted PE Ratio Dividend Yield Diluted EPS Growth ($) (x) (%) (%) FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E CAF % 4.2% 4.2% -90.6% % -17.0% PPT % 3.7% 4.9% 21.0% 34.7% 19.0% EQT % 4.2% 4.4% -5.9% 1.2% 14.9% IFL % 5.3% 5.8% 11.7% 10.4% 10.5% CRH % 3.0% 8.6% -50.4% -30.1% -5.7% CVW % 2.4% 2.6% -11.0% -4.8% 22.6% Source: Capital IQ Wilson HTM Equities Research 4

5 Low Return High 25 August 2014 RETURN RE-INVESTMENT MATRIX RISK MEASURES Cash Generator Challenged Champion Potential Low High Re-investment Attractive reinvestment opportunities exist across the group if capital becomes available. Share Price Business Low Med High Spec Business risk uncertainty over future claims activity and ability to stabilise financial planner numbers require a description of business risk as high. Share price risk historical volatility in revenues requires description of share price risk as high. BUSINESS DESCRIPTION (CAF) controls one of the biggest non-institutionally owned financial advice and accounting network in Australia, Professional Investment Services (PIS). It also provides funds management, investment platform products, insurance premium funding and other niche financial services. INVESTMENT THESIS Centrepoint is committed to becoming the leading non-aligned financial advice business in Australia. We expect cash cost of claims related to past advice to fall following a strong market rally. On most valuation metrics Centrepoint looks to be one of the cheaper financials providing it can demonstrate that it has stabilised planner numbers and show sustained reduction in claims costs. REVENUE DRIVERS Funds under management and advice Planner numbers Premium funding volumes MARGIN DRIVERS Planner remuneration arrangements FUM growth on fixed cost base KEY ISSUES/CATALYSTS Workout of enforceable undertaking Stock market gains Cost-cutting initiatives Capping or closure of pre-2011 claims expense RISK TO VIEW Higher-than-expected claims Departure of advisers Negative outcomes from regulatory oversight BALANCE SHEET Intangibles worth $6m booked on balance sheet BOARD Rick Nelson Chairman John de Zwart MD Noel Griffin Non-Executive Director Stephen Maitland Non-Executive Director Matthew Kidman Non-Executive Director MANAGEMENT John de Zwart MD Glenn Toohey CFO Anne Fitzgerald GM Strategic Initiatives Bob Dodd CEO Premium Funding Soula Cargakis CEO AAP Mat Walker CEO Product and Platforms CONTACT DETAILS Address: Level 6, 2 Elizabeth Plaza, Sydney, NSW 2060 Australia Phone: Website: Wilson HTM Equities Research 5

6 Head of Research Head of Institutional Sales Shane Storey (07) Richard Moulder (02) Industrials Sydney James Ferrier (03) Jonathan Scales (02) Stewart Oldfield (03) Duncan Gamble (02) George Gabriel (03) Michael Pegum (02) Daniel Wan (02) Anthony Wilson (02) Andrew Dalziel (07) Peter Tebbutt (02) Healthcare and Biotechnology Melbourne Shane Storey (07) David Permezel (03) Joseph Michael (02) Adam Dellaway (03) Resources Phillip Chippindale (02) Wealth Management Research James Redfern (02) Peter McManus (02) Liam Schofield (02) John Lockton (02) Quantitative Nathan Szeitli (03) National Offices Return Reinvestment Matrix and Measures Definitions at Recommendation Structure and Other Definitions Definitions at Disclaimer Brisbane Ph: (07) Sydney Ph: (02) Melbourne Ph: (03) Gold Coast Ph: (07) Dalby Ph: (07) Hervey Bay Ph: (07) Our website: Whilst Wilson HTM Ltd believes the information contained in this communication is based on reliable information, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. To the extent permitted by law Wilson HTM Ltd disclaims all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage) however caused, which may be suffered or arise directly or indirectly in respect of such information. Any projections contained in this communication are estimates only. Such projections are subject to market influences and contingent upon matters outside the control of Wilson HTM Ltd and therefore may not be realised in the future. The advice contained in this document is general advice. It has been prepared without taking account of any person s objectives, financial situation or needs and because of that, any person should, before acting on the advice, consider the appropriateness of the advice, having regard to the client s objectives, financial situation and needs. Those acting upon such information without first consulting one of Wilson HTM Ltd investment advisors do so entirely at their own risk. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever. If the advice relates to the acquisition, or possible acquisition, of a particular financial product the client should obtain a Product Disclosure Statement relating to the product and consider the Statement before making any decision about whether to acquire the product. This communication is not to be disclosed in whole or part or used by any other party without Wilson HTM Ltd s prior written consent. Disclosure of Interest. The Directors of Wilson HTM Ltd advise that at the date of this report they and their associates have relevant interests in Centrepoint Alliance Ltd. They also advise that Wilson HTM Ltd and Wilson HTM Corporate Finance Ltd A.B.N and their associates have received and may receive commissions or fees from Centrepoint Alliance Ltd in relation to advice or dealings in securities. Some or all of Wilson HTM Ltd authorised representatives may be remunerated wholly or partly by way of commission. In producing research reports, members of Wilson HTM Ltd Research may attend site visits and other meetings hosted by the issuers the subject of its research reports. In some instances the costs of such site visits or meetings may be met in part or in whole by the issuers concerned if Wilson HTM Ltd considers it is appropriate and reasonable in the specific circumstances relating to the site visit or meeting. Please see disclosures at Disclosures applicable to companies included in this report can be found in the latest relevant published research. Wilson HTM Equities Research 6

7 Regulatory Disclosures Wilson HTM Corporate Finance Ltd acted as Lead Manager in the March 2014 placement and entitlement offer of Centrepoint Alliance Ltd securities for which it received fees or will receive fees for acting in this capacity. Wilson HTM Corporate Finance Ltd also acted as underwriter for the entitlement offer for which it received fees or will receive fees for acting in this capacity. Wilson HTM may have a conflict of interest which investors should consider before making an investment decision. Wilson HTM Investment Group Ltd and its related bodies corporate trades or may trade as principal in the securities that are subject of the research report. Wilson HTM Equities Research 7