I recommend talking to some current and former staff of WHG before you totally marry this one.
As a former WHG staff person I regularly talk to current and former staff and what I can say is that all is not well.
WHG is merely a mashing together of a lot of former independent accounting firms to create a firm. It's an aggregator if you must, but aggregating individual firm cultures is always a difficult process. This could be papered over during the boom times but to quote a clique “The wallpaper is now pealing”
What WHG did was as you point out, is rush around and buy accounting firms at over inflated prices to create the 5th largest firm in Australia. Little heed was paid to organic growth. The people they purchased the business from were then called principals and had a handcuff placed on them for a period of time and after that time had to give 6 months notice. As time went on new principal status was given to staff and they too have to give 6 months notice to leave. I have not worked at WHG for over 3 years but it would be a reasonable assumption that all handcuff agreements have now ended and all that is required is 6 months notice to leave.
Accounting firms require little capital to run their business; this makes sense does it not. You need software, a computer, a desk and a chair. Accounting firms are in fact the ultimate commodity business. The only differentiator is the staff. My first accounting Job was in the late 1980’s at Price Waterhouse. I would say without a doubt the client had a relationship with Price Waterhouse not the staff. It had a brand and the client relationship extended beyond any one staff member. I can say without any doubt that this is not the case with WHG.
As the accounting firms were merely mashed together the relationship is clearly between the staff and the client. When principals leave after their 6 months’ notice they can take with them their clients. The client has no contact with WHG and is free to go to any accountant they want. As principals are just staff they have built up extensive sick and holiday leave. They can of course use a portion of this 6 months notice on leave establishing their own new accounting firm. I can’t vouch that is has happened but I have been told that is has.
I can’t remember the exact figures but a fair slice of WHG’s revenues comes from regional Australia, areas that have been servicing the booming mining sector and the largely buoyant agricultural sector. To top this off the SME’s still have to get their tax done every year . Accordingly, in my humble opinion the firms revenue should have held up a lot better that is has over the last 3 or 4 years. Just have a look at the explosion in SMSF in the last 12 months across Australia and WHG could only manage a 1% increase in revenues. That is less than inflation in a boom sector. Given new funds have come on board and existing funds fees would have been increased by say 5% you only need grade 4 maths to work out they have lost clients and lots.
I grant you that cashflow has enabled large debt reduction, but this was achieved by taking lockup (the time taken from when time first goes on the WIP to when the money is received) from 120 days to 90 days. This improved cashflow enormously but has little to no effect on EBIT and has soured the client relationship in a large number of cases. Further improvement beyond 90 days is not possible in my opinion.
I admire your FCF approach to investing Cam but you also have a good business with a good moat. WHG is not that in my opinion.
It has no moat and is losing lots of clients. Given my telephone conversation with someone who was working at WHG as recently as November the situation would appear to be getting worse. This may or may not be reflected in the half year results but they certainly will be in the full year accounts.
Just my humble opinion but this is a business in serious decline and it is a total AVOID!!!!
WHG Price at posting:
$1.00 Sentiment: None Disclosure: Not Held
