Our next investment definitely won’t make the ‘Top 10 sexiest companies of 2018’ – accounting and wealth management firm Prime Financial Group.
Prime started life on the ASX around 20 years ago, and has growth through investing in lots of other little accounting firms across the country. As a result it offers integrated accounting, business advisory, wealth management and capital services, focusing on providing highly personalised advice whilst being able to draw on its network of firms to offer broader finance advice and services.
It’s tiny by ASX (Australian Stock Exchange) listed company standards, with a market capitalisation of only $29 million. But that’s not such a bad thing – it’s been ticking along under the radar the past few years without much excitement, and after a little burst towards the end of 2017, it’s dropped back down to a share price of $0.155 today. This follows some recent issues with its auditors, which I’ll talk more about at a later date.
I’m buying around 30,000 shares in this little business, for an initial investment of $4,650. Let me explain why….
Since 2013, Prime has paid a very stable annual dividend of 0.8 cents per share, nudging up to 0.9 cents this past year. At the current price of $0.155, this is a dividend yield of 5.8%, or 8.3% Fully-Franked.
If you’d bought in any time between June 2014 and June 2016 when shares were selling for around $0.10, you’d have been collecting a nice Fully-Franked dividend of around 11.5% – not bad even despite the lack of excitement in the share price!
And to top it off, Prime only pays out around half of its earnings as dividends. It requires very little capital expenditure, and spends the rest of that cash on further acquisitions.
But even with that great dividend at today’s prices, that’s not the number 1 factor that gets me excited about this investment…
It’s all about value at the end of the day. But value is definitely something the Market isn’t showering Prime with at this point in time.
Prime’s earnings seem to have dropped in 2017, however this doesn’t reflect how the business is running. The decrease is from a ‘technical accounting’ adjustment, including the expensing of goodwill following the sale of one of its businesses. Excluding this, its earnings are roughly in line with last year.
The current ‘adjusted’ P/E multiple of just under 7x is pretty much in line with the average over the past 6 or 7 years. Another similar listed company, Countplus, has an average P/E multiple of around 15x over the same period (although it’s run into some trouble recently – potentially worth a closer look as a candidate for the Fund!)
Why the big difference? Its earnings growth has been pretty similar, and whilst it’s current share price makes it twice as big as Prime, it’s still relatively tiny in the scheme of things, nowhere near enough to warrant such a discrepancy!
Prime is starting to show some signs of growth following a couple of further acquisitions, and Funds Under Management (FUM) from its wealth business is growing. If this continues and the Market catches on, there’s plenty of upside for Prime’s valuation to be re-rated by the Market – especially if some brokers start covering the company.
Around 70% of Prime’s revenue is from recurring clients which has helped keep earnings relatively stable – another factor in its favour.
The other more interesting perspective on value for Prime is looking at its assets…
The assets on Prime’s balance sheet are mostly intangible, resulting from the many acquisitions of other small accounting practices over the years. However, the Market clearly doesn’t believe these numbers, valuing the intangible assets at around 37% less!
This can be an indicator that perhaps the Market is right, and these book values need to be tested via a thorough valuation exercise (or ‘impairment test’). The company has done this, and the auditors don’t seem to have any issues with the recorded values. Clearly a difference of opinion – so who will be right at the end of the day?
Not only that, but this doesn’t even include any other intangible assets that Prime aren’t allowed to record on the balance sheet, such as the implied intangible value we looked at for Telstra and Virtus.
Not much to comment on here, other than doesn’t appear to be a problem (you’d be forgiven for thinking I only look at companies with a debt / equity ratio in the 30%’s based on these first three entries to the Fund!).
On top of all this, Management and Directors of Prime also own a relatively large proportion of shares. This is also a good sign, making their interests more aligned with ours!
- A steady dividend payer that generates plenty of cash, with a Fully-Franked yield of around 8.3%
- Appears to be valued very cheaply by the Market at a P/E ratio of around 7x, and only 63% of the value of its net assets
I certainly can’t predict what the Market will do, or how it will value Prime in the future, but I do think there is far more upside than downside. And while we wait patiently, I’m happy to receive a generous 8.3% Fully-Franked dividend thank you very much!