WARNING: This will bore most people more than a brown-suited, bespectacled AUDITOR doing a stand up comedy routine...but I press on in any event!
Prime Financial Group (PFG)
Company Overview – 8/09/2023
Share Price: $0.22
Market Cap $44.03m
Enterprise Value: $53.5m
What does it do?
Prime Financial Group Limited is an Australia-based professional services firm. The Company's segments include:
(1) Wealth Management & Protection financial planning and strategic advice, retirement planning, superannuation advice, investment advice and life insurance)
(2) Self- Managed Superannuation (SMSF) - establishment, administration, compliance and strategic advice.
Together these two divisions represent $15.22m in revenue or 45.4% of total trading income and 44.7% of trading NPBT (excluding corporate).
Y-O-Y revenue increased by 34.9% and NPBT by 8.55%.
(3) Accounting & Business Advisory (ABA) - accounting and tax compliance; business growth advisory and strategy; outsourced chief financial officer (CFO) and accounting services; grants and research and development (R&D) tax incentives, and commercialization advice.
(4) Capital & Corporate Advisory - corporate development, mergers and acquisitions (M&A) transactions, capital raisings and corporate advisory.
The combined accounting and capital divisions had FY23 revenue of $18.31m (or 54.6% and $5.49m in NPBT or 55.3% of trading NPBT.
Y-O-Y revenue increased by 22.7% and NPBT by 8.3%.
What interested me in buying these shares?
(1) Sticky & annually repetitive income flows which a traditional accounting firm generates plus the ability to build onto that well established relationship with additional products & services.
(2) Somewhat recession proof and it’s a business which easily adjusts (or passes on) inflationary impacts – witness its ability to keep labour costs steady in FY23 at 55% in a year of wage increases and staff shortages.
(3) A well-managed company with both directors and staff having a large slice of ownership (45% ownership by management & staff with incentives to acquire more shares).
(4) The industry itself has huge consolidation prospects with PFG astutely acquiring other companies - so there are growth prospects both organically and via acquisitions.
(5) Generally a good, steady cashflow generator, though working capital requirements blew out in FY23 as it ploughed cash into growing the new Capital division and WIP increases. The company has set improved operating cash flow as a major priority for FY24. Look to see SP/OCF per share stabilize around 8x to 10x which appears to be the industry mean average).
(6) Good capital allocators with a blend of acquisitions, good dividend payout ratio (40% to 60% of reported NPAT) and are comfortable ploughing excess cash into a share buy-back program. At mid-July 2023 they had bought back 5.364m shares at an average of 18.3c (versus current SP of 22.0c)
(7) Strong Balance Sheet – Net Debt to equity – 19.8%
(8) Strong grossed dividend of 1.5c in FY23 which represents a grossed-up dividend yield at 22c of 9.7%. Expectations are for a 5% to 10% dividend increase in FY24 giving a forward gross yield of 10.4%. Dividend policy is to pay out 50% to 70%.
(9) It isn’t a complicated business and has high transparency.
(10) ROE is a solid if unspectacular 9.3% - but this is rising as they fulfill their FY25 targets.
Where do I think this company will be at the end of the current financial year – FY24?
Company is forecasting 15% to 20% revenue growth in FY24 to $38.5m to $40.2m. Extrapolating this and the EBITDA guidance of 10% to 15%, I estimate an NPAT of $5.0m with eps of 2.5c. Dividend to be 1.6c fully franked.
Where do I think the company will be in 3-years’ time (FY26)?
The company’s goal is to double group revenue to $50.0m by end of FY25 (3 years) via organic growth and acquisitions. Presuming they maintain the current NPAT/Revenue margin of 14%, this will represent FY25 eps of 3.5c ($7.0m NPAT)
I see FY26 revenue at $55m, NPAT @ $7.7m and eps @ 3.85c.
Presently the average PE for the 11 companies directly involved in this sector is 16.6x with the heavyweight in Kelly Partners being priced at 55.5x whilst PFG is at a PE of just 8.7x
Presuming a rerating to a conservative 12x would imply a PFG value of $0.46c
Conclusion on Gross Returns over the Next 3 Years
Dividend stream of grossed up dividends of 7.7c plus an implied value per share at FY26 of 46c.
What about Balance Sheet strength?
Current net debt to equity is just 19.8%. Current ratio is a comfortable 2.16x plus the company has some $10m to spend on acquisitions (per FY24 presentation discussions).
What are the catalysts for a rerating of this company?
(1) Improvements in its gross and net margins
(2) Improvements in its ROE (currently 9.3% versus the mean average of the group of 9.05%
(3) Earnings accretive acquisitions acquired at less than its current forward looking FY23 EV/EBIT of 6.29x
(4) Execution of its 3-year growth plan
(5) M&A action to acquire the company
What about management’s ability to develop the potential of the company?
Stable hands-on management team with many years of experience
What are the likely red flags which might trigger a sell decision?
(1) Management and/or key staff leaving and/or significantly selling shares
(2) Blow out in labour costs which are the significant cost of the business.
(3) Materially failing to meet plans, budgets, and forecasts
(4) Class actions or significant actions for negligence
(5) Over-paying for acquisitions
(6) Changes to legislation in the area of accounting and investing
