Fiducian Group Ltd (FID) Earnings Call Transcript & Summary

Good afternoon, all. Indy, would you like to start off?

Yes. Good afternoon for all our shareholders. Welcome to this presentation. I think the best thing would be for us to take you through a quick review of what the organization does and what our core strengths are and what transpired over the last year. I think I'll hand you over to Rahul, who has the presentation with him. So Rahul, you could load it up and please present.

Thank you, Indy. As you all know, Indy is the...

We'll answer any questions as they arise.

Thank you, Indy. As you know, Indy is the Group Chairman and the Founding Director also. He has been established -- he has established the company more than 25 years now, and we have been listed in ASX for 22 years. My name is Rahul Guha. I'm the Executive Chairman of Fiducian Services, one of our subsidiary, and my role is to provide the services to rest of the company. I've been with the organization for 6 years -- for, sorry, 10 years. As Indy has suggested, what we might do today is -- hopefully, you can see my screen all of you. What I wanted to do today is just give you an overview of business, our businesses, different business elements of ours. Also the financials we look at, and we'll also ask Indy to elaborate the growth opportunities that we have in our company. So with that, I might start off. Any questions, we'll set aside some time for the questions at the end as well. Our business overview. Our platform administration, which is our first line of business. If I can please request all of you just to mute yourself and when you need to speak, you can unmute as well. Thank you. Fiducian overview. Platform administration, we have got a market competitive offering for superannuation, investments as well as SMA. We offer all of our Fiducian funds, which is about 15 Fiducian multi-manager funds, which we'll look at in the following slides. But on top of that, we also have more than 50 -- almost about 60 external fund managers, and we offer a lot of SME structures, a separately managed account structure in addition with the term deposits. We have got our own in-house system, which has been in operation for over 10 years now, very stable system, very scalable system. And you know what, on the media, we read about all the different platforms, spending sometimes $0.5 billion, sometimes $1 billion of their shareholders' money and coming up with a lot of new and really cutting-edge function it is. And maybe look at that, and I'd list some of them like electric signatures, Straight Thru Processing and so on and so forth. So those are some of the functionalities that we have got in our system, maybe 1 year or 2 years before our competitors have. So our system, what we pride upon is just the efficiency of our system. It's very easy to use, very efficient system, which really helps in saving up planners time so that they can move -- spend more time with the clients, and also clients, it's a simple system, very easy to use. And the general feedback is it's quite efficient and time saving component from -- for our advisers to go. In terms of our fees, like everyone else, we continuously compare ourselves and benchmark ourselves in terms of the fees that we charge. But a good thing about our system is it's very customizable, that is depending on how our clients want to pay, depending on how our advisers want to set up the fees, whether it's asset based or whether it's a fixed fee, whether it's a charge monthly, quarterly, different type of fees, our systems are able to handle that. And when we do our benchmarking, we are very comfortably sitting with the bottom half of the industry that is we have looked at a spectrum of maybe 20, 25 different platforms. And we are very pleased that we are able to sit on the bottom half. And one of the reasons we are able to do and some of you have been with us quite a long time. But what you know is we do not only have Fiducian platforms, but we have got other elements in our business as well and that enables the whole group to offer very competitive fees, which works for our clients as well as which works for our planners. In the last quarter, what we have been able to do is really come up with a new product, primarily targeted to independent financial advisers and the SMA market. And in Indy's section, he can give some overview as to what we see where the industry is going. But just for now, I think what we have seen in the industry is there's a lot of demand for the SMAs and especially for the smaller planning groups. And we have found a niche there and a vacuum that we think that we'll be able to be fill with the smaller advisers, maybe 1, 2, maybe 10 adviser planning group. And we have launched a product, the distribution team has got a long pipeline that they are working through, and we expect, hopefully, some results will come through as well in the quarters to come. In terms of the revenue, our platform generated in the half year of $9.3 million revenue and contributed to a $6.2 million profit and with a $3.2 billion funds under administration as of end of December. And just looking at the profitability just for a moment, and I talked about the efficiency. When I reflect back to 10 years ago, our funds -- our platform had a balance of roughly about $800 million or thereabouts. And today, as you can see, we have got at $3.2 billion. So when I joined, again, the company, the platform -- our platform administration team had a staff of roughly about 18 people, 18 to 20 people, supported the number of clients that we had for $800 million. Today, our number of staff ranges from about 10 to 12, while our funds have grown up about 3.5x compared to what we had about 10 years back. Again, that's one of the angle of the efficiency that we have been able to roll out and that works very well for, obviously, the clients and planners. But again, from a management point of view and a shareholder point of view, we have been able to translate that into higher and stable profit margins at the same time reducing the cost as well. Just going on the next slide. I just wanted to spend a couple of minutes on how net flows have been. In the half year to December, we had a net flow of $163 million, and that's a significant uplift from the corresponding December '20 net flow that we have had. And if you look at the chart on the left of the screen, generally speaking, except for when coronavirus hit us, generally speaking, in the second half of the year, we have had a more stronger net flows compared to the first half. Now $163 million, that's very close to the target that we had set ourselves. And we are very pleased to announce that this net flows is coming both from the salaried and franchise networks. And also, very importantly, a contribution both from the organic net flows that we are seeing coming through from direct client referrals, client campaigns and so on and so forth. But also the strategic acquisitions we have done externally in the recent times. In the bottom chart, again, you can see a sort of a linkage between how the average FUAdm moved to compared to the revenue and the profit before tax. And as you can see, the green line, which is the average FUAdm that is moved over the years, over the last 5 years. And that has got a direct correlation between the revenue as well as the profit before tax that the segment -- this platform segment is generating. So with that, I'll just want to move on to our next business segment, which is the funds management. And again, in terms of funds management, we are a multi-manager, which means that we have got an investment team and investment committee. Our role internally is not to select the stock for our investors, for our clients, but really to select the managers. So currently, we have got roughly about 44 managers, best of the world and best from Australia also. But where our strength lies is really on the selection process and the regimen that we have, the related structure that we have got in the investment process. Our target is not to shoot the lights out, clearly. Our target is to produce a little bit extra return compared to the average by taking a little bit lower rate compared to the average. And what we've experienced is that when we do that year in, year out, in about 3 years' time, we end up in top quartile. And I've got some statistic to share in the next slide, which I'll come to just in a moment. But when we measure ourselves and may be wrong use of words, we let Morningstar, which is an independent research house to measure us. And when we do that in the last 20 years, when we take our diversified funds and we do this ranking -- we do this stock take every quarter. And what we found that out of the 64 readings that we had across 4 different diversified funds, in all of the 64 readings, we were able to position ourselves in the top quartile and many of the cases in the top decile as well. All the one -- Indy, you may need to unmute yourself.

Plus, I think we were also a bit surprised when there were quite a few #1 rankings, the best out of, I think, 200 fund managers. We've had quite a few of those too.

Absolutely. So this business segment generated about $14.2 million in 6 months December on a fund base of about $4.4 billion. And again, the profit margin remains very stable at the profit -- total profit before tax remained stable at 75 -- at $7.5 million. I just wanted to show again, as Indy touched upon before, I just wanted to show the ranking. And as I said, these are not calculated by myself or my team. These are calculated by Morningstar. And if I pick any funds, ultra growth fund as an example, the last line. On a 1-year return, we produced 23.2%, and we were 12th best fund manager out of 134 operating in Australia. And this was returns as of December, 1 year to December 2021. And if I go to a 3 years' return, we were third best fund manager. If I go to fund 5 years return, 5th best fund manager; 7 years return, 12; 10 years return, 3rd out of 100-odd fund managers. And this message and this doesn't really dilute depending on the period that I'm -- depending on when I'm during the measure, whether it's December '21 or June '21 or the investment horizon that I'm taking, but it's a very consistent result that we have been able to produce, not by targeting returns, but by very strictly following our investment process and the manager fund concepts that Indy introduced in Australia about 25 years or 30 years back. Just moving on to our fintech capabilities. As I touched upon in the platform section, we have got our own development team, and we have developed our own back-end all clients software, administration system, which is Fastrack. We developed our own FORce, financial planning software, which is like Xplan and also the client reporting. And again, I don't intend to go through each bullet, but I'll just take one example on the FORce. Like we are meeting you guys, we also meet a lot of planners and investment managers across Australia. And one of the consistent feedback that we get is Xplan is great because they have used -- they have developed the system for 10,000 planners. And -- but when one individual planner wants to go and use Xplan, they are sort of lost and they want to do one particular thing and they need to find one particular function among 300-odd functions that Xplan has developed. So the general feedback that we get was -- is that -- and again, it's a consistent feedback. There is a great system, but very clunky and very difficult to navigate. So we took those messages on board, and we worked very closely with our planners to develop a very, very simple but efficient system that works and that doesn't have all the bells and whistles that no one uses or no one needs but really focuses on the client needs and the planer needs. And as a result, what we find is the planners that used the systems are finding a lot of efficiency to free themselves, free their administration time and again, maximizing the client-facing time. Fourth line of business, which is financial planning business. Now this is a very key element of our overall offering. And the way we look at this business line, it's more of an enabler of steady flows to Fiducian funds and Fiducian platform. Currently -- sorry, wrong use of words. As of end of December 2021, we had about 66 planners with 46 offices. And as some of you may know, we have done quite a big acquisition, and Indy will talk about that acquisition in a moment. But since then, we have added about 16 planners also to our network and 2 extra offices. Now you've got a very selective recruitment, a very selective process as to who we bring in into our fold, and we are very selective on who joins. And there has to be a cultural fit, there has to be a compliance fit and a strong compliance performance and records and only then -- when all the criteria are satisfied, we bring up the planners in. Planners has got a very distinct style of operating and they are not fund managers. We believe the best fund managers are the investment managers in Australia and overseas, and we leave that specialist work to do by the specialist. Our planners focus on the best outcome for the clients and deliver holistic outcome for our clients. We have grown our clients book as well a planner books organically, but we have also done inorganic acquisitions over the period. When we do an acquisition, and this is maybe laying the road for you Indy. But when we do the acquisitions like the one that we have done for People's Choice Credit Union, we spend lot of effort upfront. And we will be spending days and hours and months to see the client base. And when we look at any opportunities, we look at whether the clients are really going to benefit joining the Fiducian process. And if the clients benefit, we know that the management, the company and the shareholders will benefit too. And we've put a lot of emphasis on that. And one of our maybe thumb rule is that if you can't add benefit for our clients, more than 50% to 2/3 of our clients, maybe that's not a good acquisition for us. So we have let go a lot of acquisitions. But for the ones that we have acquired, what we have experienced is that we can add the benefit for the clients over a 1-year to 3-year period, which means during that time, [indiscernible] their current funds are. If it's right for the clients, that funds can move across efficient platform and Fiducian funds, which in turn can also help the clients to get a proper process, proper returns, but also for the shareholders to get some extra revenue synergies. With that, Indy, if I can request here to maybe give an update on PCCU acquisition from your perspective, please?

Thanks, Rahul. Yes, this was quite an exciting acquisition. In fact, we were quite thrilled when we were selected in a tender process and pretty tough people, the PCCU selection team. But they are very professional outfit, I must say. They care for their members and the staff, and we've had some very professional dealings with them. But what this brings to us is a phenomenal advantage in being able to work out of South Australia and Northern Territory. These are exposures we've never had before. The acquisition will also bring us about 40 staff, which includes, I think, 17 financial planners and $1.1 billion of funds under advice with about just over $8 million of recurring revenue, which will be quite supportive of our profits and revenue. We paid about 70% upfront and the rest will be paid after 12 months, just once we ensure that all the accounts have stayed with us. We have communicated already to the clients. And of course, PCCU, the credit union, expects us to provide quality services to their members. So it's -- we take that quite seriously because we want to meet their expectations and also grow of the members. I think the transition has been pretty smooth. We've had 3 weeks of induction training days to separate groups. And the last third week was this particular week, this one. And I think everyone is very positive. They cheered us when we told them we've acquired the business. They made some very complementary and constructive questions and responses. And I think the management has already met the people, brought them on board. They're an excellent group of employees that we brought on to Fiducian, and I think it will do quite well. Meanwhile, obviously, we're still looking at other acquisitions. There's one where we're doing the number crunching as we speak. And there's another one that we're in negotiation. So we think these acquisitions, as Rahul explained, will be beneficial provided we can add value for the clients. And we will only buy those businesses where we can actually add value for the majority of the clients. So over to you, Rahul.

Thank you, Indy. No, that sums up very much. But if I can maybe just complement, Indy, what you said on a couple of angles. So this has been a very exciting journey for us. And the management and quite a lot of people in Fiducian Group has been working on this acquisition for the last 6 months. The staff are very, very excited. The PCCU staff that came across they're very, very excited, but all of us are very excited in this opportunity. So needless to say, there has been countless hours and days and weeks and months of effort have gone in. And we have spent a lot of resources, a lot of our management time but also some of the expenses to make sure that we're not cutting any corners to get it across. In the last half -- in the first half, we have had maybe a little bit elevated level of expenses compared to what we have had in the past, mainly to support this acquisition, which includes the staff costs, the transition cost. When a client size of this is, which is over 5,000 clients are coming in, we need to make sure that our systems are fully ready. We had some legal costs, some consulting costs and some implementation costs. The good thing is that we have already factored in all of those costs in the results and what we're expecting that going forward, the cost will be very much well managed and we will go back to the previous levels. But what really excites me -- on the financials, of course, what really excites me is not so much on the cost, but really the opportunities. One of the things that Indy has mentioned now and then and he had an investor presentation this morning also, which was live telecast. But when we bought these acquisitions, we priced it based on a revenue of $7.6 million or thereabouts. When today, if we look at the numbers, that annual recurring revenue is sitting at more than $8 million. So we're starting this acquisition, so it's about $0.5 million more revenue compared to what we expected. And some of you know the industry very well, and you know that it's very, very hard to make money in financial planning business alone. So our group's strategy and the Board's direction is that if you're able to break even on financial planning, that's a good outcome. Now when we looked at this business acquisition, our objective was to break even. Now we didn't anticipate that we'll start the acquisition with $0.5 million extra revenue compared to what we expected. And also one other upside is that PCCU planners used to write a lot of one-off revenues. And again, we hadn't counted any of this one-off revenues in our calculations on a conservative basis. And we're expecting that some of those one-off revenue might continue in the next -- in the current year as well as the years to come. So again, long and short of it is that in case there are -- in the instances, there are some client losses, we have got added capacity in our balance sheet and in our P&L to absorb those and some to produce some extra benefit for our shareholders and to the bottom line even before any revenue synergies start to come through. So with that, I just wanted to look at on the financials. Again, I don't intend to go through each line by line on this slide. But what's pleasing is just the last column. And we have got 2 numbers, 2 digits on each of these metrics. And as you know, just reiterating our Board's strategy and the Board's objective is to produce double-digit returns for our clients. And we can see all of these metrics are going in the right direction. Operating revenue increased by 20%. Our underlying net PAT statutory impact increased by 17%, and we have also been able to generate an increase in the dividends that we pay out to our shareholders. Promising thing is the funds under management. And one of the slides we talk about, which I'll come towards the end of the presentation, is that there's a very strong correlation between the level of FUMAA that we have got and the EBIT that we are generating. So we'll look at that in a moment as well. But FUMAA also grew very strongly during this last half. In terms of our segments, funds management, financial planning, platform administration, and for the last half, we have split out the corporate services also. So I'll just start off and maybe spend a minute or so in each of the segments. The funds management segment is a pure funds management business, and that's a very, very scalable segment. Unlike some of the fund managers, when we have got more monies to manage, when their cost can go up. In our case, actually, the costs come down. And I'll, again, try maybe in 10 seconds to explain how it works. So when we contract out to our mandate manager, we give them to say $50 million, and for $50 million, we give them a certain fee to manage. But when that $50 million goes up because of net flows coming in or markets rising, then the additional $10 million that we would give to them, we can negotiate a better rate. So whatever we've negotiated before x percentage, we'll -- for the extra money that we allocate, we'll give them a little bit less. So what that means for us is that as the FUMAA, as the funds under management grows up, our margins would tend to increase as well. We produced a return of $7.5 million profit before tax on the funds management segment. Financial Planning business, that's a strange one for want of better words. But the way we report our financial planning business is we report only the direct cost in this segment. That is the cost to service our clients and that is the financial planner's cost and also the direct support cost. With that view, financial planning business generated a profit of about $1.3 million; platform administration business, $6.2 million; and corporate services, which is support cost and other management costs like IT cost and finance and so on and so forth generated a loss of about $3.6 million, but that's very much expected to support the rest of the business. So that's the segment reporting. And looking at just quickly on our share performance on Slide 18. Again, the slide gives the picture, so I don't need to explain too much on this slide. Looking at 10 years back, the Fiducian stock has performed 1126 percentage returns compared to 172 percentage returns on all ords. So we have outperformed all ords quite strongly. Our dividend payout policy remains at 60% to 70% of net profit after tax. And again, the shareholders could enjoy a 20% uplift in the dividend of $14.80 compared to the previous period of December '20. In fact, if one of our shareholders had invested $1,000, and I know some of you have been long-standing investors in our company, but if one of you have invested $1,000 in 1st of July 2012, today, your dividend yields would be $152 for 1 year, that is more than 30% in an annualized basis. And as I mentioned before, we have been able to produce double-digit EPS growth based on our UNPAT in 17 out of 23 years. This is one of my last slide before I hand it back to Indy. Now this is not a projection or a forward-looking statement. It's more of a conceptual representation. But in this slide, if I look at, this slide captures the data from 2013 onwards. So all the solid graphs or lines are the actuals and other shaded or the dated ones are really conceptual predictions. So if you go back to 2013, our FUMAA balance which today is about $11.5 billion as of the end of December. In 2013, that was $3.1 million. And the blue graph, the horizontal -- sorry, the vertical graph that you can see had an EBIT of roughly about $5 million. Now at that point of time, our red line, which is the fixed cost, that was at a certain level. And as our FUMAA has increased, that line has increased but very, very slowly. But if I contrast that with a green line, the revenue line, the net revenue line, in fact. As you can see, as our FUMAA has grown, it has got a clear divergence between the red line and the jaws of growth is very much expanding in the past and what we believe will continue with this trend in the future if we are able to manage our costs and manage our margins. So what this graph tells me is that there's a distinct possibility that our EBITDA will grow so far we keep on growing FUMAA. And as you can see, the FUMAA, as I mentioned, $11.5 billion end of December, but this doesn't include the $1.1 billion acquisition that Indy touched upon before. And as this $1.1 billion acquisition from PCCU finds its way, if it's right for the client, of course, finds its way into Fiducian platforms and Fiducian funds, that $1.1 billion funds under advice will translate to additional funds under platform and funds under management. So we expect that as that happens, that FUMAA has got the prospect of growing as well. So with that, Indy, if you're able to sum up the growth opportunities that you see for the -- in the industry as well as in the company, please?

Thanks, Rahul. Yes, basically, as Rahul mentioned, we have 3 key revenue-generating businesses. First is obviously the platform business, which does administration for superannuation and IDPS for ordinary investments for investors. So what we're going to do there is obviously capture some share from the disintegration of some of the larger wealth businesses. We want to attract IFA firms to use our platforms, and we want to expand the SMA and Software as a Service business. Now we just launched a new -- or 2 new products. One is for super; one is for normal money called [indiscernible], which is purely focused now on the SMA market. These are external groups, external financial planners, not Fiducian planners who have been supporting us. And this product will be targeted to them. And as I hear from business development and distribution team, there seems to be quite a bit of interest being generated for it. So we'll see what happens over the coming year. The second part is the funds management business. That's growing exceptionally well. As Rahul showed you, the performance has been quite superlative. I think any fund manager anywhere in the world would be envious of these numbers. And we're continuing to work very hard to deliver those returns for our investors. We already expanded into New Zealand. With the new funds passport regime that the government is allowed, we have about 5 or 6 funds registered on platforms in New Zealand and 1 KiwiSaver account, which is also there. We're looking at other countries right now. So we will be distributing these through other platforms overseas through clients by other people, not Fiducian. So I'll just expand our capturing the market for our funds from other investors besides those referred by Fiducian financial planners. The third, obviously, is the Financial Planning division. It's got about [ $4.3 billion ] on their advice. A lot of those are clients who would be better off in the Fiducian process. And as I speak, our planners are already talking to many of them. Once you add the $1.1 billion coming from PCCU, that will raise the financial planning funds under advice to about $5.1 billion to $5.2 billion. And that's a big boost. So I think all 3 areas are being explored, work is being done, new products are being launched. And yes, we are constantly looking for acquisitions. There is another one, as I might have said, where we're doing the number crunching. There's one that's already there, which we're actually negotiating and trying to get on board. So that is the acquisition. Along with that, I think there's about 5 financial planning businesses that are negotiating with our business development team to take up franchises from Fiducian. So yes, it's looking quite positive for the whole business in all 3 areas. Over to you, Rahul.

Thank you, Indy. So with that, that brings an end to our presentation, but we may open up for questions for Indy, if anyone of you have any questions. Any questions from the floor? With that, I just wanted to thank again all of you for your time, and really appreciate your ongoing support for the Fiducian company and to the management. Indy, any final words?

Just got a message from [ John Percival ]. Thank you, John. You commended us for our excellent results. And all I can say is maybe I can assure you we will continue to work very hard to keep up this result and deliver good returns for our shareholders. So thank you very much from my side, and thank you as well for having confidence in Fiducian and for supporting us. So have a nice day, and thanks once again.

Thank you all.