01/10/2008

Junior financials offer hope at the margin

By Gabriella Hold
The Australian Financial Review, 1 October 2008

To suggest there are some good picks among small cap financials stocks may seem ludicrous given the fallout in the financial markets. Market volatility, concerns about debt and equity exposures and the added lack of liquidity in the junior names are keeping most investors at bay.

But there may be some good opportunities emerging for those investors willing to look through the short-term pain, with many stocks languishing at or near their lows and many underperforming some larger financial names, even though some are not as leveraged to market activity.

Plan B remains at its year low of 68¢, while WHK Group is precariously near its June year low of $1.04. By comparison, Axa Asia-Pacific has had a 21.4 per cent bounce off its August year low of $4.29 and Perpetual has gained 25.7 per cent off its July low of $37.55. And while near-term upside is by no means guaranteed, fund managers say there are good longer-term picks in the sector among the more diversified names and those less reliant on equity market activities.

Pengana Capital portfolio manager Ed Prendergast likes WHK Group for its attractive valuation and more defensive earnings profile. WHK is the fifth-largest accounting business in Australasia based on annualised fee income, making it less leveraged to overall market movements. The group derives about 70 per cent of its earnings from accounting services and sees this division as helping it to deliver sound earnings growth in 2009, following a 20 per cent lift in net profit for fiscal 2008 to $29.25 million.

WHK, which also provides financial planning services and accounting and related services to the small to medium enterprise sector and wealthy individuals, believes this income and earnings diversification places it in good stead over the medium to longer term.

While it did not provide specific earnings guidance for the current year, WHK is shifting its focus to integration and organic growth after a number of acquisitions over the past year to strengthen its focus across the Australian and New Zealand market.

Prendergast also believes WHK looks cheap, with the stock trading on a one-year forward price-earnings ratio of 8.6 times, significantly below peers IOOF, on 17.2 times, Snowball on 10.4 times and Count Financial on 15.9 times.

Shares in Plan B might have suffered a similar fate to other minnow financial stocks caught up in the sharemarket rout but its business model makes it stand out from its peers, according to Souls Funds Management chief investment officer Frank Villante.

"The differentiation in [Plan B's] offering and the track record in terms of the offering makes it quite a different beast relative to a few other stocks," he says. "Its got long-established operating businesses, high-quality, sticky relationships with its customer base, its client base is skewed towards the higher quartile income-generating individuals and it has grown from its West Australian base to the east coast and New Zealand."

Plan B is a boutique wealth management firm that provides a range of services to both individuals and corporations including wealth management, portfolio administration and funds management and trustee services. Its shares have tumbled 54.7 per cent in the year to date and are trading on a price-earnings ratio of 10.6 times. Villante also says Plan B is a key pick due to this low multiple, solid track record, a good balance sheet and longer-term growth profile.

"The sector in which they are operating is a growth one . . . It's an attractive, strategic area to be in over the next 20-plus years and I think they will grow over time."

Plan B posted an 11 per cent increase in profit after tax in fiscal 2008 of $4.81 million on a 1.1 per cent lift in funds under management to $1.77 billion. While it remains cautious given market volatility, it plans to maintain an aggressive growth stance and is continuing to evaluate acquisition opportunities to continue its expansion on the eastern seaboard. As at June 30, 2008, the company had $14.4 million in cash compared with $6.7 million in the previous corresponding period.

It's the track record and value apparent in Over Fifty Group that makes it a key pick for Investors Mutual portfolio manager Simon Conn. Shares in the group, which provides financial services for older Australians, have shed 65.8 per cent year to date and are near their year low of 75¢.

"The share price has fallen with the general decline of the financials sector, to the extent that the company is now trading at only a slight premium to its stated net tangible asset [NTA] valuation of 69¢," Conn says.

"This NTA is backed by cash, investments and property. At these prices investors are getting a free option on the funds management operations of Over Fifty Group."

Conn also says 2009 should be a better year after a board reshuffle and the appointment of John McBain as chief executive resulted in the company refocusing on its two core businesses, property funds management and its friendly society operations. Earlier this year, the group joined the growing list of companies withdrawing from the reverse mortgage market due to the liquidity crunch. Bad debt write-offs related to its now closed commercial mortgages division, a downturn in the value of its property assets and the sale of its financial planning division resulted in Over Fifty posting a $2.71 million net loss in the past fiscal year following a $6.51 million net profit in fiscal 2007.

"The clean-up costs involved with some of these legacy businesses has clouded the 2008 result, but we believe with a more focused portfolio of businesses and a reduced level of overhead the company is well placed," Conn says.

While Over Fifty remains cautious given market volatility, it plans to manage the market upheaval through the focus on its core businesses, a tight rein on expenditure and a focus on its $2 billion in funds under management.