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New IPO opportunity – ManagedAccounts.com.au

Good growth can be hard to find these days. Indeed, for some sectors such as mining services, flat is actually the new growth. So when a business comes across my desk with a strong foothold in an industry with effectively government under-written high single-digit growth as a baseline, I take notice. The business in question is Managed Accounts Holdings or Managed Accounts, which as the name suggests provides managed account services, primarily to customers managing Superannuation accounts via a licensed adviser.

The business model is elegant in its simplicity, based on a 25bp administration fee and a $5 transaction fee. This fee structure equates to a total fee of around 30bps. The only real variable costs amount to a few basis points for the backend system (provided by NASDAQ-listed SS&C) and HSBC’s custody service.

The high percentage of fixed costs as a proportion of the overall cost base means that Managed Accounts is a highly scalable business. Once the breakeven point is passed, most of each dollar of new business drops through to the bottom line. The good news is that Managed Accounts recently passed breakeven FUA (funds under administration) of around $750m, which makes them now profitable and will in the near future be above the 1 billion mark.

The company also has a pipeline of new business such that FUA growth to $2bn is a very achievable target over the next few years. But that could be just the first step in what might become a much bigger story over the longer term.

There are two aspects to consider when assessing the long-term potential of this company. The first is the product itself, which is a step ahead of competitors. The second is the positive tailwind of organic superannuation growth, which is boosted for Managed Accounts by favourable regulatory change and a shift towards better performing and more cost effective Superannuation options.

Looking at the product itself, Managed Accounts’ differentiates itself through its reporting capability, flexible open architecture and visibility. For example, underlying clients receive tax reporting, which can reduce accounting fees they may otherwise incur, in addition to retaining full visibility of their portfolio via an online platform.

There is also a huge time saving for those Financial Planners that move their business to Managed Accounts. Managed Accounts removes the need for a Financial Planner to issue individual Statements of Advice in advance of each portfolio transaction. Instead, one trade is replicated across the various underlying portfolio’s at the touch of a button. This releases the business from the shackles of time constraints, vastly improving scalability and therefore growth – and as the Planner’s business grows, so too does Managed Accounts FUA.

Broader industry growth is underpinned by the mandatory 9% Super contributions, the move away from the higher-priced (and often poor performing) products of the majors and regulatory change. The main regulatory change that is set to benefit Managed Accounts is the requirement for providers of managed accounts to hold up to $5m of capital.

Many smaller businesses will not achieve this and will be aggregated by the larger players, some of which are existing Managed Accounts. This ties back to my earlier comments around the growth facilitating scalability that Managed Accounts provides its clients. Managed Accounts could also serve as the aggregator, given that businesses that sit on its platform will be covered by its capital.

In terms of what this business might be worth, it really comes down to what level of FUA is likely to be eventually achieved. Due to the operational leverage of the high percentage of fixed costs, earnings growth ramps up significantly with FUA. Given that the company’s existing pipeline provides visibility to $2bn of FUA, which should be conservatively achievable by FY16, this is a logical point on which to base an earnings multiple.

Assuming 6bps of variable costs and marginal fixed cost inflation, no interest and minimal depreciation (all development costs have been expensed), equates to NPAT in the region of $1.8m on $2bn of FUA. This would put Managed Accounts on a PE in the low teens at the IPO share price of 20cps, which is attractive relative to the longer term growth potential.

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