the ducks are all lining up here finally:1) strong free...

the ducks are all lining up here finally:

1) strong free cashflow 

2) leverage in the business model at scale such that margins are expanding as revenue grows

3) a diversified income base

4) a consistent history of profit growth over 3 years which is often a filter criteria before fund managers will look at it

5) zero debt

6) a tantalisingly high dividend: they paid out greater than 95% of 2017 eps (7.8c) as a dividend (7.5c) which grosses up to say  10.5c equivalent after franking credits... so if they grow the divi 20% (conservatively) to 9c, that grosses up to around 13c for 2018! given they have no major capex going forward and are cash rich i would expect they will continue 90% payout at least unless they find a better ROIC use for it. so the divi is currently around 12-13% grossed up 

7) they are investing heavily in technology with IP protected software and systems that will likely be an avenue for future revenue growth as they commercialise their technology and capitalise on their investment, in addition to the internal financial rewards of the r&d then implementing the new systems in terms of efficiency etc. i like the way they are thinking as a nimble fintech rather than a conservative bank in which things change at an often glacial pace.

8) they are expanding into new markets ie new york which increases their reach for ECM activity, retail/ insititutional client base, analyst stock coverage, etc. 

9) they have identified 7-8m in cost savings/ synergies as a result of the TPP acquisition which will potentially provide further bottom line growth and margin expansion in the mext 2-3 years.

10) they have a highly regarded management team who have on average 3 decades of industry experience, they have low board turnover and management/ board have strong skin in the game with high ownership which aligns the interests with those of shareholders. this is still a founder led business.

the main factors dragging bfg down in my analysis are:

1) it is a financial sector stock weighted towards equities and thus earning may be cyclical; given we are at the later stages of a 8-9 year bull market then there is a real risk of a major downturn which could flow through to profits due to lower FUM, less low-touch recurring revenue, less ECM activity, etc. i would argue however that a major downturn in Aus is unlikely and most of the correction has already occurred given fundamental remain intact other than a potential mild china slowdown and the rising cost of eaising debt due to US fed rates/ bond yields rising (which is probably mostly factored in now). this remains the biggest risk to bfg eps.

2) the second factor is history which, following on from point 1 above, saw bfg have an IPO closely followed by the gfc and the stock plummetted. if history repeats then bfg could plummet again and those with long memories may still be averse to bfg as a result of the disastrous pre gfc ipo.

3) the business is small and i therefore believe many fund managers/ analysts dont believe bfg has the scale to compete with the giants like mqg, morgan stanley, UBS etc etc for retail/ ECM and institutional business. bfg continues to prove these bears wrong as t grows all segments of its business, but skeptics may be reluctant to change their thesis.

4) the 4th practical factor is market cap and liquidity. its a small cap with relatively low daily and weekly volume and higher insider ownership so an institutional fund can only take a small

 position otherwise its impossible to get out in a hurry if a negative shock occurs.

overall i feel the positives will continue to drive interest from new retail investors and small cap funds and high yield funds, and analysts will continue to upgrade bfg over the next 12months as numbers continue to grow.

im a happy albeit alert / vigilant holder who is happy to see this through to a 1.20+price target over the next 6-12 months. becuase it has grown from 60c to over 1.00 i should probably trim around 1.15-1.20 because i am already moderately overweight at around 10-12% of my portfolio now. i will continue to hold >50% of my holdings as long as the long term company fundamentals are on track, regardless of short to medium-term market and economic fluctuations.