After a successful series of mergers and cost-cutting measures, the listed financial planning and wealth management firm SFG Australia has positioned itself to benefit from any market recovery.
Despite one of the toughest markets in living memory for businesses of its kind, SFG has eked out a profit increase in the first half of the 2011–12 financial year and announced that it expects to achieve an additional $3.7 million of “annualised savings and synergies” by 2012–13, taking the total to $10.5 million, following “successful re-negotiation of the group’s portfolio administration supply contracts”.
On Monday SFG announced a net profit after tax of $13.6 million, a 5 per cent increase on the previous corresponding period, on a 5 per cent increase in earnings before interest, tax, depreciation and amortisation (EBITDA) and a 2 per cent increase in net operating revenue to $57.8 million.
The company announced a 1c per share dividend, fully franked.
“The essence of the business is that it does really well when confidence is around,” says Tony Fenning, managing director of SFG.
He describes the firm’s clients as having their “hands in their pockets”, and that “we know we have to get our growth from somewhere else for the time being”.
For now, growth is coming from careful cost cutting, re-negotiating arrangements with key suppliers and achieving benefits of scale from acquisition and merger activity.
Cyclical, secular
But growth is difficult to come by in an environment where financial planning businesses are being buffeted by both cyclical and secular factors. Cyclical factors relate to the economy and investment markets; secular factors relate principally to regulatory changes, especially the Future of Financial Advice (FoFA) package, due to start on July 1 this year.
Last week, Plan B – also listed on the ASX – announced it had lifted its stake in MyAdviser from 33 per cent to 93 per cent, making it the majority shareholder, and can drive cost savings through economies of scale and synergies. The managing director of Plan B Group Holdings, Andrew Black, says that being in control of costs is vital during a period when markets are tough and businesses are grappling with extensive legislative and regulatory changes.
“If the cyclical bit fixes itself, then what tends to happen to this business is all good news,” explains Fenning. “You get additional profits purely from markets dropping to the bottom line ahead of analysts’ expectations.
“The only difficulty this time is that you’ve got some secular stuff going on at the same time.”
Figuring FoFA
Foremost among these issues is uncertainty surrounding the Future of Financial Advice (FoFA) changes. Fenning says it’s hard to put an accurate figure on it, but the cost to SFG of FoFA so far is in the $1 million to $3 million range.
“We’ve been preparing for FoFA for more than two years, from the very first announcements,” he says.
“We’ve been having to scenario plan for it, because it has not been clear up to now what the detailed, important bits of it are.
“When we talk to our main suppliers, who are Westpac and Colonial First State, they still have very different interpretations of what the outcome is gong to be.”
Fenning thinks potential effects range from one extreme – “not having to change very much at all” – to the other: “potentially us having to invest significantly in becoming the trustee and operator of the platform”.
With more than $11 million cash sitting on its balance sheet – and no debt – cash will be used to meet the company’s short-term dividend and small acquisitions, Fenning says. It has the capacity to raise debt should it be needed for larger acquisitions.
As at December 31, 2011, SFG had $10.8 billion of funds under advice, $9.2 billion of funds under administration and $4 billion of funds under management. Its Shadforth and Outlook financial planning businesses had 116 financial planners, and its Western Pacific subsidiary had 37.
“While market conditions are as they are, [those numbers] will be relatively static,” Fenning says.
“But they will grow again on the upswing.”
Tony Fenning, Sam Gannon, Phil Guest et al at SFG have to be congratulated for pulling together one of the Australia’s greatest amalgamation of professional investment, structural, risk and strategy strategists. Their next quest, whilst continuing to roll-up and amalgamate like-minded businesses, is to prosper and grow on-going profit flow regardless of external market performances and sentiment. The first advice brand that can build prosperity for themselves whilst delivering greater financial certainty for their clients regardless of market performances or legislative changes will set the benchmark for all future financial advice firms.