Small Caps | Jun 12 2012
– SFG Australia is an independent wealth management company
– Group's focus is on high net worth clients
– Moelis sees upside longer-term, plus an attractive yield
By Chris Shaw
SFG Australia ((SFW)) is a vertically integrated wealth management company, offering an alternative independent operation to major banks and industry funds. The company was formed via the merger of the Shadforths advisory business and Snowball Group in June of last year.
SFG's focus is on high net wealth clients with an average of $800,0000 invested. As Moelis notes, this focus has resulted in funds under advice of more than $10 billion. This offers good scale in the view of Moelis, as well as delivering a level of client stickiness and good cross selling opportunities from new products and services.
Most of SFG Australia's advisors are salaried under the Shadforth brand, while the group also offers affiliate and B2B (business to business) advice models through the Western Pacific and Actuate brands. Moelis notes around 80% of SFG Australia's revenues are generated from asset based fees.
While this suggests little risk to funds under management based fee structures as client assets grow via inflows, the current stockmarket volatility does present a risk to revenues and earnings.
Helping to offset this is the potential for industry consolidation opportunities, as Moelis suggests the costs and regulatory risks associated with FOFA (Future of Financial Advice) reforms will make many smaller operations unprofitable.
Looking forward, Moelis is forecasting earnings per share (EPS) for SFG Australia of 3.8c this year, rising to 4.4c in FY13. While downside risks are modest within the currently volatile operating environment, Moelis sees growth prospects underpinned by integration synergies and upside potential from bolt-on acquisitions.
This leads Moelis to suggest the current earnings multiple of around nine times for FY12 is undemanding, especially as the strong cash flow attributes of the wealth management sector will support an attractive dividend payout ratio.
Moelis expects dividends of 2.2c this year and 2.6c in FY13, which translates to fully franked yields of 6.6% for FY12 and 7.8% for FY13. Factoring this in, Moelis rates SFG Australia as a Buy, with a price target of $0.40.
Moelis adds to what is sparse coverage on SFG Australia, which reflects a market capitalisation of around $250 million. The FNArena database shows only BA Merrill Lynch researches the company and has a Buy rating and $0.47 price target on the stock.
Shares in SFG Australia today are slightly weaker in a stronger market and as at 12.30pm the stock was down 0.5c at $0.335. Over the past year the stock has traded in a range of $0.31 to $0.37.
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