This week Ron Shamgar takes a look at one of the hottest stocks on the ASX for the past month. CountPlus has been more than a strong performer recently but is there more petrol in the tank?
CountPlus is a network of eighteen member firms offering both accounting and financial planning services. During the first six years of their listed life, CUP went about acquiring firms without making sure the principals in these firms retained any equity and therefore remained incentivised to grow the businesses. Understandably, that strategy failed to perform and the company struggled under the previous management team and a large debt balance.
Fast forward to today and under the leadership of a completely new management team and board, especially new Managing Director Matthew Rowe, the company sold off non-core investments and firms that did not meet performance targets. All of this has resulted in a company that has now lifted member firm earnings margins to the industry average of 15-20% and is now in possession of a balance sheet with $20M of cash supported by revenue of $70M and EBIT of approximately $7.2M for this year.
CountPlus announced the brilliant acquisition of Count Financial from Commonwealth Bank (CBA.ASX) for $2.5M in June. The acquisition brings with it 160 firms and 369 advisors, $25M revenue, and more importantly $12M of net cash. Yes that’s right, CBA is effectively paying CUP to take Count Financial off their books. Keeping the fallout of the Royal Commission in mind, the deal also includes full indemnity from any potential remediation costs for inappropriate advice above the $200M that is already guaranteed.
For a little bit of background, Count Financial (Count) was bought for $378M in 2011 by CBA. They were also CUP’s IPO sponsoring company back in 2010 and a significant shareholder with a 36% interest in CUP. We now expect that shareholding to be divested by CBA before the end of the year.
The relationship between CUP and Count is relatively close from an operational perspective. The majority of CUP’s member firms are franchisees of Count and operate under Count’s AFSL. In addition, CUP has been sourcing acquisitions from within the Count Financial network as part of their strategy to acquire accounting and advice firms that meet their newer and stricter financial criteria.
The late Kerry Packer once said that “you only get one Alan Bond in your lifetime”. This was said in regards to the sale and consequent buy back for significantly less of Channel Nine from Alan Bond. Well, in our minds, it is possible that CUP could say the same about CBA a year from today (we will check back on that in due course).
Post-acquisition, CUP management will be busy transitioning the acquired firms to the new financial advice “fee for service” model and extracting synergies from the business. We estimate $2M EBIT contribution next year from Count. CUP's share price has rallied by around 70% since the deal was announced and is getting closer to our near term valuation of $1.00+.
Although we expect the accounting firm roll up to slow down following this deal as management bandwidth is taken up, any further acquisitions or better than expected earnings from the acquired Count Financial could see the valuation of CUP increase dramatically.
We bought CUP for the TAMIM All Cap portfolios and the TAMIM Fund: Small Cap Income portfolio six months ago at around the 55 cents mark. The company is expected to pay a minimum of 2 cents in dividends each year.
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.