Ann: Full Year 2021 Results Presentation, page-14

Diverger Memo below

https://hurdlerate.substack.com/p/memo-5-diverger-ltd?s=w

1H22 Results were decent with net revenue up only 11% due to an abnormal pcp for the accounting division (high demand in training for covid related subsidies, previously flagged as more volatile than the membership portion) Memberships are up 13% and the wealth business has grown 30% with margin expansion on top. ~11m of liquidity for M&A

These growing numbers were offset by an increase in corporate costs due to new hires, elimination of a deemed risky CARE license fee and the lack of stimulus received by taxbanter in 1H21. Net profits were down 5% as a result. Some more colour below in addition to the write up in next post

First of all, the exiting in general is dependent on how far ASIC and regulatory burdens go, there has been an initial wave of exits which is largely over for the time being due to the FASEA guidelines. This is really the main thing pushing advisers out for the time being. There will be another decisive event in 2026 which may lead to more exit, but this is all in an effort to further legitimise the industry and bring it to the standard of other comparable financial services such as Accountants or Investment advisors. The timeline is as so:

1 Jan 19 = CPD requirements commenced for all advisers
1 Jan 20 = Code of ethics commenced for all advisers
1 Jan 22 = All advisers need to of passed this ethics exam
1 Jan 26 = Existing advisers must have completed education pathways (Previously all you needed was a diploma to provide advice, this has been upgraded to requiring a bachelors degree in FP OR a relevent degree + adv diploma in Fin. Planning)

On 'Self' licensing, these advisers have grown from ~18% of the overall market in 2018 to ~25% in FY21, but the absolute amount remaining about the same at around ~5000 advisers (with much of the overall shrinking advisers just being bank aligned advisers exiting). It will probably continue growing, but I don't know if it will be a particularly fast grower. A competitor to DVR's wealth arm 'Centrepoint Alliance', has a material exposure to Self-licensed advisers with ~35% of that segment lying within the Centrepoint business, I previously invested here when they were still getting trailing commissions and paying back more in ASIC claims. This has now ceased and CAF is a decent business, made a few bags in a short time frame in a PA.

In any case, Easton X is only just a new service, so it will be interesting to see their value proposition over time as the rising fees of licensees is also pushing advisers into this. Centrepoint seems to still make a decent profit for their consulting service to self-licensed advisers, which is effectively similar to a licensee w/out the license and the baggage (APL's, standardised templates etc.). Nonetheless, not all advisers are interested in taking on the regulatory burden, which is why you haven't seen a dramatic shift.

On M&A, this business has previously had a chequered past due to their chopping and changing around business focus. However, there is a few stand outs more recently that have shown some reasonably strong discipline on this area. Notably, the Taxbanter acquistion was very accretive with about a ~14% earnings yield on entry. The best of all deals was SMSF expert at a ~35% earnings yield on entry. GPS wealth was really just rotten timing as just 6 months afterwards, the Royal commission was announced, causing the mass exodus of adviser exits and consumer distrust. Nonetheless, to maintain a reasonable return even in that scenario was commendable, mostly due to the secular shift from managed funds to managed accounts pushing that CARE FUM up considerably, which was favourable as that part of the business exhibits attractive unit economics.

This is still an area to monitor for me over time. I don't suspect this to be a dramatically long holding period, which comes down to my general idea of longer term ROIC - WACC being hard to see a dramatic gap consistently. I'm moreso banking on a couple years of clean results and an absurdly low price for the overall business quality here (especially the accounting side). What also helps diligence is that these are all boring businesses. The thesis isn't quite M&A dependent. It's in some way reliant on it, but actually atleast half if not most of the growth i expect to come from organic sources of revenue and margin expansion. If they do one or 2 decent sized deals it could change the thesis a bit. That's something to assess at the time. Management is at the very least, adverse to diluting at discounts to intrinsic value without good reason to, that much I gathered through my discussion with management.

On CARE & Knowledge Shop growth. No these are 2 distinct and very different businesses. CARE being a managed accounts business and Knowledge shop being a training business for accountants. The growth in knowledge shop training and memberships is driven by the everchanging complexity in accounting space (Knowledge shop is quite a strong brand here). CARE is driven by fund flows from Managed funds > Managed accounts (note many managed accounts invest into managed funds anyway), it's just delegating the 'investment' side of advice to a dedicated investor.

The valuation in the memo above is as you probably could of guessed were just numbers to throw out there. I don't believe in precision particularly, but if you wanted my general opinion. I think they will reinvest >100% of their earnings at a moderate premium to their cost of capital in addition to the organic growth eluded to earlier. The per share variance is just me theorising that if they did a larger deal they would need dilution, as they have ~11m in liquidity as it stands (perhaps more like ~12m given the 2 months since year end)