MGP – Managed Accounts Holdings Ltd
LT Buy, ST Buy: Target Price $0.45 on successful deal
Managed Accounts Holdings Ltd (Managed Accounts) has announced a non-binding bid for Linear, another platform solutions provider. The deal appears transformational for Managed Accounts which will elevate their business to a multi-channel platform provider. Managed Accounts has proposed a $34m equity capital raising at $0.28.
In Addition Managed Accounts has signed an MOU with Shaw & partners who have $2.5bn of FUA
Metrics of the deal:
Acquiring Linear for $42.5m comprising:
- $14m Script (at $0.33 and 12 mth escrow),
- $28.5m cash
- $34m capital raising from Institutional and Sophisticated investors
o Includes an additional $5.5m for transaction fees and further acquisitions
- The capital raising price is set at $0.28
- Linear $9bn Funds Under Advice (FUA), currently breakeven profit
o $2bn Evans & partners on % FAU fee basis (similar to existing Managed Accounts)
o $5.4bn BT / Westpac fixed fee ~$900 pa per client
o $1.5bn other fixed fee ~$900 pa per client
- $3.5m cost synergies identified
o Equates to double digit accretion
Combined FY18 potential:
- $14bn FUA post Linear and Shaw & Partners (up from $2.1bn as at 30 Jun 2017)
- ~$5m NPAT (FY17 profit $0.9m + FY18 gth, + $3.5m synergies)
Combined Service Capability
- In addition to new services available to the combined group, Managed Accounts will also offer for their existing clients:
o Non-custody solutions
o International investments
o Cash Management
Managed Accounts is a platform administrator providing portfolio administration software to independent financial planners. Pre Linear, Managed Accounts focussed on the niche segment of independent financial advisors who offer discretionary managed accounts (MDAs) to investors. Independent planner groups have been a beneficiary of the shift away affiliated planners. I expect this shift to continue particularly with the spate of bad press and scandals arising from the major financial institutions. The shift to Self-Managed Super Funds (SMSF) will also benefit managed account operators such as Managed Accounts and Linear. The growth outlook for the industry is robust with Managed Accounts a good way to play this theme.
Company Quality Assessment: High at 9.7 (out of 15)
Managed Accounts is a high quality company with strength in its business model. MGP predominantly charges a percentage of FUA on their platform which provides a growing annuity for the company. Clients are unlikely to switch providers unless they are unhappy with the service provided by MGP. The Linear deal will somewhat dilute the leverage to markets as they charge a flat fee for some of their services, however the opportunity to continue growing the percentage of FUA revenue remains.
Liquidity Risk Assessment: Very High
MGP is a micro-cap company with current market cap of $34m. Liquidity in the stock is tight given the major shareholders own over 83% of the company. Upon completion of the deal, the Linear vendors will end up owning 14% of the combined group.
o New clients in new and existing verticals
o Leverage to strong financial markets
o FUA growth of clients
o Synergies from Linear integration
o Leverage to weak financial markets
o Loss of Clients
o Linear vendors sell down script component
o Acquisition integration issues
o Adverse regulatory outcomes
o Inability to convert clients to a % of FUA revenue model
The 12 mth target price for the base business is $0.31
- This assumes continued modest growth in FUA of $200m pa and some additional costs to support the growing business
On completion of the Linear deal the 12mth target price rises to $0.45, an implied 45% capital return relative to the base business
- The metrics of the Linear deal are attractive and will deliver $3.5m initial cost synergies
- Further synergies are available once the transaction is bedded down (which are excluded from the price target)
The company pays a $0.002 ($0.008 pa) unfranked quarterly dividend which equates to a 2.6% net dividend yield at the base business target price. The dividend may be suspended until the completion of the Linear deal.
Management and Board
Non-Independent Executive Chairman – Don Sharp, founding director since Jun 2013, former founder of Bridges Financial
Independent Director – Alex Hutchison, director since May 2016, former CEO of Clearview Wealth
Independent Director – Peter Brook, director since Apr 2017, former CEO of Pillar
2 Independents, 1 Non-Independent
+ 2 Non-Independent Linear appointed directors on consummation of the deal
The board has diverse experience including solid platform and technology expertise.
CEO David Heather has done a good job growing and managing the client base and FUA. He has deep knowledge of the industry and has navigated the company through regulatory change.