Australian equities fund manager DMX Asset Management is backing three financial advice licensees.
In a monthly update for its DMX Australian Equities fund, the firm said it is expecting the ease in industry headwinds and increased adviser base to translate into improving profits for the financial advice space.
The three licensees it is backing are Sequoia, Diverger and Fiducian.
Shares in Sequoia are up 3.5 per cent in the last 12 months, Diverger are up 11.9 per cent and Fiducian is down by 14 per cent.
Portfolio manager Michael Haddad and research analyst Chris Steptoe said: “Sequoia’s current pricing reflects concerns around how management will deploy its large cash balance, together with scepticism around execution given disappointments over the last 18 months or so, but also more broadly reflects the lack of investor interest in small illiquid companies.
“With consistent recent director buying and Sequoia’s use of its buyback at current levels, its substantial cash balance ($35m) relative to its $70m market cap, and improved confidence that earnings growth is back on track and industry conditions improving, we think it now makes for an attractive set-up.”
In a recent ASX update, Sequoia said it is targeting 500 advisers by 2026 which will be achieved by making acquisitions of sub-scale AFSLs, with the firm noting that only 40 of the total 1,876 AFSL holders in the industry have more than 100 advisers.
In FY24, it is seeking to have 15 per cent growth in advisers using its AFSL from 325 in FY23 to 380 in FY24.
The licensee said it is seeking to embark on this growth strategy at the current time because of commercial tailwinds from improved industry dynamics, enhanced leadership capability to drive earnings growth and a capital management program supported by strong balance sheet and compelling valuations.
Sequoia is one of three advice licensees held by the fund. It also holds exposure to Diverger, which is in the process of being acquired by Count, and has made a new investment in Fiducian.
The appeal of Fiducian, which was founded by Indy Singh in 1996, is its core level of profitability, its acquisitions and organic growth, DMX said. Its core revenue sources are fund management fees, financial advisory fees and platform administration fees.
“Its dividend yield is over 5 per cent, and the company enjoys a debt-free balance sheet with cash at hand to help underpin its next leg of growth. It is well-positioned with strong industry tailwinds.
“The main risks include key main risk around its charismatic CEO, Indy, though the bench is wide and deep, and the company has been built very much for the long-term and with long-serving executives. Market risk is a factor as the company is exposed as a fund manager and financial advisor. But this risk is mitigated by its value-conscious, multi-manager approach, and a multi-sector approach to its business.”
Moving onto Diverger, the firm has been vocal about its lack of support for the acquisition with Count. It highlighted Diverger’s largest shareholder, HUB24, had recently acquired Diverger shares for $1.26, further demonstrating that the $1.14 offered in the Count bid undervalues the business.
