Mainstream Group Holdings (ASX:MAI) Presentation, FNN Online Investor Event, September 2020

Company Presentations

Mainstream Group Holdings Limited (ASX:MAI) CEO Martin Smith presents on the company's client base, financial record, FY20 highlights, and business outlook at FNN's Investor Event.

Thanks, Clive, and good afternoon, everyone. Thanks for giving me the opportunity to talk to you today. I've got about eight slides. I could talk for a lot longer than I have. So the stock code we're talking about today is (ASX:MAI) which is Mainstream Group Holdings.

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Mainstream was formed in 2006. We IPO'd in 2015. We have a market cap circa $90 million. We actually operate in eight countries and our reported numbers at June is about $196 billion.

So what do we do and what is our strategy? We provide full-service fund administration, essential services for back office for fund managers. We look after over a thousand funds. Many of you would know the names of our respective clients. So when you're transacting in a fund, more often than not, you're transacting and interacting with us. We're also striking the unit price, providing performance reporting. We can be providing post-trade compliance. The financial statements that you receive, the distributions you receive and the tax statements you receive, typically come from us and we have circa 350 clients.

On the left-hand slide is a composition of our register and also a composition of our revenue. The business was started in Australia. We moved into Asia, Singapore, and Hong Kong in 2012-2013, and more recently we've moved into Europe and the US. We've seen quite a dominant position for us in the Australia market. There's a lot of disruption happening, which I'll talk to you about.

Really our strategy is an organic growth strategy. We did do some acquisitions since IPO to build out the platform, but the last two years has been very much about leveraging that platform. We have quite expensive technology. We have six licenses and we have a very good reputation around the markets that we operate in. We leverage alliances and partners with trustees, global banks and law firms and accounting firms to grow.

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Won't spent too much time on this, but this gives you a composition of our clients. There's a couple of big names that you would know. There is one, we're not allowed to use the logo, but Magellan is our biggest client. They've recently just hit a $100 billion. We've also secured a five plus five year contract with Pendal, which goes live in February next year, which will see our AUM increase by more than $20 billion. We have long-standing relationships with our clients. We've had more than 13 of our clients for five years. We renewed Magellan for another 10 years last July. And the other big three client is Macquarie Bank.

So we have some household names, but we also have some up-and- coming boutiques. And the two sort of recent wins has been Pendal and Redpoint. What's it called out to think of the opportunity is most of the banks in Australia, because of the Royal Commission, are exiting wealth administration. And that's how we were able to secure Pendal, previously administered as part of Westpac. Redpoint was part of NAB, NAB Invest. And we're seeing that trend continue as the banks are decoupling their wealth businesses. MLC is in discussions or in a process of being sold. So is Colonial, they're currently in-house and the opportunity within new owners is for us potentially to become a provider.

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So our business inside PO has basically grown 300 plus per cent and is expected to continue to grow another 20% this year. Our compounded growth rates of revenue and EBITDA are 30% and 59%. A call out is, we've actually in two of the last three years, we've been nominated as a fast 100 company by the AFR, which is an independent process. I think we came in in the eighties issue, in the seventies last time. A few call-outs is, you'll see, FY 20 we actually had a particularly good second half, considering COVID. We actually grew during that year, the top line grew, by 11% and the bottom line grew by 20 odd per cent, but our business is particularly resilient and was resilient during COVID and continues to be resilient. We're seeing a lot of disruption because of the Royal Commission, because there's a flight to reliable counterparties and there's a flight to independence.

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So some of our financial highlights that we reported in August is that our revenue is $55.4 million and our EBITDA is $9.2 million. We also saw under particularly volatile markets our AUM increase by 14% and our fund numbers increase. We're tending to see bigger funds, less clients, bigger funds operating in sort of that mid-market of one to a straight billion clients. That's our sweet spot. We obviously take on smaller clients. We took on Magellan when they were a hundred million in 2007. Everyone else said no to them. And today they're more than a hundred billion. So we don't neglect what could be the next up and coming managers. We've also invested in the US in UK, and we've made some really good progress in the US and that business is now profitable from July this year. So we're really pleased with that investment we did. The last two years has been an organic growth investment.

The opportunity in the US is massive. There is more than $24 trillion in private funds in the US. There is more than 34,000 funds greater than 150 million registered with the SEC. And last year in the private equity space, the US registered 3,500 new funds. As a comparison, Australia only registered 36 new funds. So there's a massive opportunity for the business. We've put troops on the ground. We have a presence in New York, on the West coast, in San Fran, and also, more recently, in Texas. They're probably the three biggest markets for fund administration. And we have a processing centre near the university in Indiana.

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All important thing is dividends. We've paid dividends since we IPO'd. We did pause our first half dividend in March this year, but we've re-instated the dividend in the second half. It's already gone Ex on the 3rd of September and we paid on the 14th of October. However, the trend and the expectation from management and is the board, is really we're driving a circa 3% yield. Now, we'll be 50% franked because we earn approximately about 42% of our profit last year abroad. And we expect with the US now firing that it will be closer to 50%. So it is 50% franked. We also have hardly any debt. Today we have $6 million of debt and more than $15 million of cash. And we've elected to re-pay $1 million of that debt out of cycle. We're really just managing dividends, working capital and debt repayment in these unprecedented times.

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So our business is linked to funds under administration. We earn a range of fees. We earn fees as minimum fees, whether the funds got a dollar in it or a billion dollars. We typically earn on a basis point, about 70% of our business has basis points. And as you can see, since 2012, we've grown exponentially. And that's lead our revenue at the time of IPO was about $14 million, our guidance for this year is $65 million, so it's a 20% growth from last year. That's significant growth.

Probably the thing we haven't seen is, you can see that we had a massive market correction in March that was made up for by the securing of new clients, but what we haven't seen in the June quarter is the full recovery of the March quarter. So we anticipate in the September quarter to see that recovery, our preliminary AUN at August has cracked $200 billion to be circa $201 billion. We grew at $23.8 billion for the year, even with that market correction and that's served us well. We are seeing a little bit of consolidation of the smaller clients. A bigger relationship is more profitable for us, less overhead of managing the relationship. So we're expecting some consolidation of managers, and we think that COVID will cause a number of managers to be closed or consolidated under a bigger organization.

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If you get nothing else from this presentation today, this is the slide for everyone. I could spend an hour talking about this, but I'll try and do it in the remaining time I have. So the guidance we have in the market is $65 million and an $11.5 million EBITDA. It's a slight increase in margin through scale. It's growing faster than the revenue. We do earn 50% of our revenue in US dollars. So we are sensitive to that. We've modelled our budget, our internal budget, on 72 cents and we are sensitive to that.

Because we're a high growth company, client closures aren't really affecting us. The demand is definitely greater than supply, but we are exposed to market movements and exchange rates. Interest rates can't really go much lower, but we would be affected if interest rates became negative. The opportunities are there's significant market industry consolidation. We've seen a number of our competitors in play. We've seen a number of our competitors who are unlisted struggle with the transparency and the visibility that you get as a listed company. A number of our competitors are owned by private equity. So there's counterparty due diligence.

We're seeing a significant expansion in the US. The US grew at 86% last year and we expect it to grow at more than 70% this year. We've been promoting our private equity solution for those funds that I talked about, and we launched, and I could spend an hour just on this, the Quadrat Fund, where you can buy and sell and manage funds. We did that in partnership with Magellan. If any of you are interested, it's Airlie, Australian Share Fund, AASF. You can now buy and sell that fund without any paperwork. As long as you've got a broker account. We think it's an Uber moment for the industry. We hope our competitors take it up, but we think we have a 12 to 18 month first mover advantage and obviously partnering with someone like Magellan generally leads to success.

The key messages from this presentation is we've had solid growth track record, and we're continuing to see that. We had some very strategic clients being Pendal, Macquarie, and Magellan, which underwrites our annuity revenue. We have high degrees of annuity. More than 90% of our revenue is reoccurring. So even though the markets may correct and transactions volumes might change, we've got certainty in those minimum fees and transaction fees. We've proven we've been able to improve our margin by a couple of per cent, 2%. There's more work to do. We're also keen to continue paying dividends and managing, and balancing that too out there.

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There's a lot to absorb here. If anyone would like to place any questions, our company secretary's details are provided there. In finishing, really, the outlook for Mainstream is solid. We've shown over the last five years, sort of a 300 plus per cent growth that we've been able to achieve. There's significant opportunities in the future. We're really thinking about this business as how do we get it to a $100 million? And how do we get the margin from sort of circa 16% to 25%. That is my objective and mission as the CEO. And we're really focused on executing against them. Thank you again everyone for allowing me to present today. Drop Alicia a line if you would like to ask any questions. Happy to come back to you and everyone have a great day.


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