update on fps

ROE, you mailbox was full on Aussie Stock Forum. Here is my update and thoughts after talking to Jai.

The half-year result came out a few days ago and you can see how wrong I was. Ironically, we still gained 10 percent in the last month and 5 cents in dividend per share is in the making. I called the company and talked with the CEO's son for an hour. Here is the update together with my recent thoughts on the situation.

To begin with, I was overly optimistic about the revenue growth. The past result showed FuM always outgrew the ASX200 index and this time there came an exception and it will not be the last one. It showed once again how dangerous it is to predict things based on past performance. ASX200 index was up 10% for the last half fiscal year in AU, but AuM only increased by less than 5 percent. However, revenue increased by 8.5 percent, and NPAT is up 21.1 percent. This is a good performance, but compared to the period between Jan-Jun 2010, there is nothing to be excited about.

There are a few reasons that FuM rose less than the index, which indicated a net outflow of the funds Fiducian is operating. The decisive factor is the majority of Fiducian's customers are still uncomfortable to overweight in equities. My impression after reading so many annual reports in AU is that, without the consideration of resource stocks(which I skipped reading), AU market is not an expensive one, especially in the financial services sector. The financial crisis is still overhanging, and the incoming FOFA and other reforms are depressing the valuations(more on this later). The interest rate is quite attractive(1 year yield 4.81%) and it is understandable why the public has not been driven into the stock market. The real estate market is red hot, and the public is widely expecting a correction.

So how will FuM and EBIT go from here? Despite the stuff I mentioned above, there are several factors that will cause FuM and EBIT go up in the coming months. Let's start from the internal initiatives. Fiducian just added 6 financial planners to its existing crew, and that is a 10 percent increase. It is very obvious the market is getting better and Fiducian is now expanding. I asked Jai Singh(CEO's son) if those FPs are all seasoned and with assets, he said some of them are. It takes at least 2-3 years for a new FP to be productive, so we will probably see 3-5% organic growth from this side. We also talked about the incoming reforms and when I expressed my view that it will be overall positive for Fiducian, he said I was very spot-on. It turned out that Fiducian has been trying to buy FP business at a very attractive price. In 2007, when the market at its peak, a FP business was valued at 4x revenue(peak). But now Fiducian is paying 2.25x revenue in a bad market. So for the one closed, it will bring 100k in revenue and Fiducian paid 225k. As Jai said, those revenue will fall directly to the bottom line. In his own words, those are "pure" EBIT. It is very interesting to see that Fiducian, while the majority of its business is in asset management, was shunned by a lot of investors because of the incoming legislation to the financial planning industry. So if we expect the second acquisition is of the same size of the first one, we will probably see 1.5-2% increase in EBIT. The third source of increase would be from the SMSF(Self Managed Superannuation Fund) offering. As I said in the previous email, Fiducian has built a software platform with a carrying value of only 220k. Fiducian will promote this service both internally and externally. In AU, most of the SMSF account will have to be serviced by an account. Fiducian's role is to take care of almost everything the account does and reduce the workload without going directly to the clients. A typical account will be charged 5000 per year, Fiducian's fee is only 2000, and the margin is very good. Jai would not breakdown the exact number, but those kind of revenues are recurring, just like a software company. Internally, Fiducian will charge the full 5000 to its own planners which will be passed onto customers. So as Fiducian rolling those offerings over, I am expecting it will add 1.5-2% to the growth of EBIT. Besides, those businesses will help the FP side by generating more referrals.

Even though Fiducian is doing a good job on its own, the fortune will be made only when the market condition improves. It is impossible to predict the market movements, but 5% per year over the next decade is possible given current valuation. The advance in FuM will be decided by another factor, which is investor's confidence. Once the market starts to go up dramatically, more people will put money in the equities, and therefore any upswings will likely to be amplified. Longer term, I still believe Fiducian should grow its FuM faster than the general market. Another thing which might be good for Fiducian is the high housing price. The housing price is so high that nobody is expecting a reasonable return from investing in housing. Therefore, there might be a time people will flee the housing market pour money into equities. But that is a big if. I just read on article on Business Week about stocks and I liked it very much. It asked a simple question: Stocks are for the long run, but for how long? There might be a protracted period where equities will return just nothing. It is very impervious to assume that AU market will repeat the gain from 2003-2007. Low expectation is the key!

When take all those things into consideration, the bottom line is Fiducian is a very cheap stock and we are being paid 7 percent a year to just wait. In addition, I like the exposure to a country which is resourceful, fiscally disciplined, and open to immigrants. USD and EUR have their own problems and I have a hard time to have any faith in them. If AU market can go up 5% year, it is reasonable to expect earnings will go up 10%. With dividend, it is not heroic to project a 15-20% return down the road without much risk, assuming no multiple expansion.. Fiducian has demonstrated again and again it will use its capital precariously, and this make a huge difference in the long run. If we are lucky and AU market can repeat the days from 2003-2007 for the next 5 years, it would not surprise me the share price will shot to the moon.

There are two stock forums I visit often in AU. The first one is Aussie Stock Forum where almost every stock has a thread, while Fiducian does not have one. The second one is HotCopper, where Fiducian has a thread but nobody made a comment for a good 2 years until I went there. The entire financial planning industry in AU was surrounded by great uncertainty. People are trying to avoid everything about financial planning business. However, Fiducian makes the majority of its money from asset management, and any regulatory change will be absorbed using transfer-pricing internally. I really do not know how these changes can affect the profitability. The valuation of FP businesses is dropping like a stone, and this is a good time for Fiducian to make attractive acquisitions. That said, I like to be a contrarian at this moment and put my capital into this overlooked industry. As Jim Rogers said, buy stocks when it has a P/E of 8 and yielding 6%, and sell them when it has a P/E of 22 and yielding 2%. We are doing exactly that.

All the best,

Fan