Sequoia Financial Group (ASX:SEQ) Presentation, FNN Investor Event, February 2022

Company Presentations

Sequoia Financial Group Limited (ASX:SEQ) CEO and Managing Director Garry Crole provides an overview of the company, discussing financial results and key performance areas, and delving into Sequoia's four business divisions.

Thank you, Matt. And I appreciate the opportunity to talk today in respect to the Sequoia Financial Group to the Finance News Network audience. I'd like to make a couple of points in respect to the disclaimer today. Firstly, everything I talk about today is general information only, and it's not taking into account anyone's personal circumstances. It's general advice in nature completely. That is particularly important for Sequoia because a lot of our business is about personal advice and providing the community advice. And the second point I would like to disclose particularly is that Sequoia Financial Group is the owner of the Finance News Network and the Yield Report, another business providing information into the public. And I think it's important that I disclose that for the listeners today.

I have four main agendas that I'm looking to inform the audience today of, and if I can achieve these four agendas, I think I would be happy. One of the things I think is really important from our point of view is that investors understand what we do. And that is one of the things that I'm going to talk briefly about, try and give you an understanding what Sequoia does, discuss the four divisions and 20 companies that make up the business within the group. I will then move to discussing the financials that were recently reported to the ASX for the half year 2022. We released our results last Thursday. And I will expand on the company's shorter term growth focus.

 And then finally, I will look to provide some clarity on the size of the opportunity that we see and the company's medium term revenue and EBITDA growth targets for full year '25. We've been talking for about three or four years now about trying to build a business as a tortoise rather than a hare towards 2025 when we're starting to see a business that's beginning to mature. So we're still very early days and we're on the growth focus, but I just wanted to make that point.

Talking about what we do, and I think this is particularly important for any investor, we talk about it as financial planners all the time. If you don't know what a company does, you shouldn't invest. And what we do is we are basically servicing the intermediary market, so the intermediary market in financial services. So there's 16,000 authorised representative providing advice currently under 2000 AFSL licenses in Australia. There's approximately 10,000 accountancy practices in Australia. In our opinion, these two groups of gatekeepers tend to be small to medium size businesses, and they are under price pressure to provide the community a value proposition, and they need range of services from external providers to be able to be cost effective to their end client base. In fact, there's not enough accountants and there's not enough financial planners to realistically serve the current community.

The Sequoia business, therefore, and this is our true investment proposition, is entirely based on providing numerous services to these parties. So the 26,000 odd individuals that are providing advice, whether it be an accountant or a financial planner, are our core client. And we're looking to think of everything that we can do to provide services to that community to make their business more cost effective and better. The market size itself is the entire financial services market. And it's huge. There's $14 trillion of private wealth, and of that private wealth that's currently had, $6.6 trillion is sitting in managed investment funds of some kind. The community that we're talking about provides the advice to much of that money.

Whilst there's a lot of people doing self-direct investment, there's a lot more, particularly the high end worth, that are actually seeking the advice of their accountant, their financial planner, they're doing it as a trustee of a self managed super fund, or in some cases, they're the wholesale investor. And they're the type of clients who we are looking to provide services to. There's a massive intergeneration of wealth passing through families in the next 15 years. And there's a lot of people coming into retirement and looking to capitalise on either downsizing their family home that's gone up in value a lot, and then using that capital that they generate from that downsizing to look to invest in financial markets.

 Over the last three to five years, the markets have been very, very bullish and the self-direct investor has done very well. However, the financial planner, and what we're doing at Sequoia is the tortoise rather than the hare. And our financial planners are looking to provide clients with long term financial planning solutions using strategy, a mix of various fund managers, a mix of different asset classes, and looking to build and protect their wealth on a tortoise type environment. And we're certainly not discouraging people to try and do it themselves and look to invest in the cryptocurrencies or the type of investments that direct investors might like to make, but that is not our market. We're looking to provide strategic advice, and provide those that give that strategic advice the services need to make it cost effective for the end investor.

How do we do that? We do that by, as I mentioned before, providing that end gatekeeper, being the accountant and the financial planner, a whole range of services. We do it across four divisions. Our wealth division is primarily providing financial planners a licensed. Currently we've licensed 400 financial advisors in three licenses, InterPrac Financial Planning, Libertas Financial Planning, and Sequoia Wealth Management. Two of those licensed are traditional financial planners, one of those licensed being Sequoia Wealth Management is stockbrokers. We also have an in house team in InterPrac Securities where we're actually the advisor themselves. The business has been buying... retiring advisors as client books and employing advisors to service that client base. So that is a strategy that we've understood.

One year ago, I'm sorry, 18 months ago, there was about 25,000 advisors. Today, there's 16,000 advisors. A lot of the advisors have retired, were in the 65 to 70 year old bracket, didn't want to necessarily go and do degree qualifications so they've been looking to transition out of the business as they reach their retirement, and Sequoia has been acquiring those businesses. Also in the wealth division just finally, we have two other areas. So one is the high net worth business. We have a Sequoia family office business that's providing advice to those Australians that have a family office business with sort of $5 million plus. A lot of that is particularly in the Asian community where we're supporting the SIV investors and also the high net worth Asian investor that lives in Australia. It's a very big market and we think we've got a specialty there. And finally in wealth, we also have the corporate finance arm. So where we're doing IPOs, equity capital market raises, and providing niche opportunities to our financial network.

The second area is professional services. And particularly this area is looking to service the accountancy practice. We're dealing currently with around 3000 accountancy practices in this business, and what they do is they buy their documents from us. So they buy when their client is setting up a company, a trust, or a superannuation fund for their client because they're starting up a business, they come to us and we set up that structure for them. It's a high volume business. We're doing around 120 to 130 new structures per day. And it's across a number of brands. We've been doing this for a long time and we've had an acquisition strategy in this particular area.

We're also providing accountants their general insurance needs. So we provide professional indemnity insurance for around about 1000 accountancy practices. And some of those accountancy practices are now referring us their higher end clients to provide general insurance solutions to them. And finally, the other thing we do in the professional service area is we provide self-managed super fund administration where an accountant or a financial planner doesn't necessarily have the skill and the resource to do the administration of the SMSF, but they have clients in their tax practice or their financial planning practice who have an SMSF and they need the administration done. So we're an outsource provider to that market. And that is an area of the market we're looking to certainly grow in.
 
Equity markets is two businesses in particular. One is that Morrison's business is a stockbroking clearer. We are currently clear for around 60 AFSLs. We are not in a discount stockbroking market to retail investors, we are in the market to provide services to AFSL holders and financial planners and accountants. Our average trade in the Morrison business is $90,000 per ticket. So we're at the higher end clearing and execution in that market. And as I said, we have around 60 AFSLs that currently use us. That business has been growing at a very quick rate, around 100% increase in turnover in the last 18 months, and it continues to grow. We're not a victim of the highs and lows of the market as such because the financial planner is not the day trader, he's not the person looking to do a $2,000 trade for $9, he's looking for high level of service. He wants a DTR, he wants dividend investment plans, he wants someone to talk to when he is doing the trade and so on. And we're looking to capture that market, and we are, and it's going very well.
 
We also have a Sequoia Specialist Investment business. And what we are doing there is we have a lot of sophisticated investors, we have a lot of financial planners, and we have a lot of accountants who are looking for thematic investing. And from time to time, what we're doing is we're coming up with ideas, pricing that thematic with the top tier banks, and then offering it out to our distribution networks to recommend to their particular clients. Finally, the direct investment arm is Financial News Network, which I'm talking on today. It's Yield Report, it's Sequoia Asset Management, which is a general advice business. And it's basically providing services to the direct investment committee. This particular business is an area we're looking to grow. We see a need for high quality content right across those 10,000 funds, right across every ASX company, right across every sector of the financial services market.
 
And whilst our current financials in this area are a little bit disappointing, it is an area we are looking to grow in. And as a subscriber to FNN, I can assure you that this is a business that we are looking to increase the breadth of the service services, and we will. We have a number of partners like Shaw and Partners Stock Broking on today's event, and other providers that have an AFSL and they're looking for content. And we're providing content to a whole range of different providers. And we're looking to touch the community and provide the highest quality content we can be possibly provide in respect to all asset classes.

I might just move to the financials quickly. I'm aware of time. The half year '22 financial results from our perspective were very good, but we are not looking to grow the business in a manner like a .com business or a mining company where you might strike a gold mine. We're very steady. The results this particular half compared to the other half show very high growth. Some of that from acquisitions, some of that is through organic. And we're continuing to improve all the major factors that I consider when I'm looking to recommend a stock and when I'm looking to recommend a managed fund. So our EBITDA was up 38 point something percent, 38.5%, I believe, to 5.5 million compared to the previous period. All revenue in all four divisions increased at high double digit. I'll touch on that shortly.
 
We have no debt. We have $17 million of current cash on our balance sheet. In the first half, our operating cash flow and our EBITDA were very similar. We're generating about $900,000 per month of operating cashflow. Our first half is always a little bit lower than our second half, and that's primarily because accountants and financial planners tend to give more advice coming into the June 30 period when clients are looking for tax effective solutions and they're looking for advice. General insurance broking tends to have a 30th of June renewal date, so always the Sequoia results are going to be slanted to the second half in respect to EBITDA. Revenues are probably similar, but EBITDA is certainly far higher in our second half.
 
In the second half, we're looking to generate $1.2 million per month of cash, each and every month. The business is very steady. The January result already reflects that we're on target to do that. We're definitely looking to provide shareholder revenue, shareholder value. The management that the board own more than 40% of the company. We absolutely have skin in the game. We are looking to pay a fully frank dividend of half percent in the first half, but that's a very low payout ratio. We're paying 15% of our operating cashflow because we are looking to grow this business. Whilst we're around about $130 million business at the moment in respect to revenue, we want be a $400 million business. And we expect half of that growth to come from organic growth and half of that growth to come from acquisitions.
 
The current capital structure is there's 133 million shares on issue. As I mentioned, cash at December 31 was $17.4 million. Our current share price is 75 cents, roughly, so an enterprise value of $83 million. We would expect, based on that $1.2 million per month for the six months, to end up the full year '22 at about $13 million of EBITDA. The EBITDA is pretty much cash. In fact, we had a higher cash conversion to EBITDA in this particular half than one. But I would think one or 0.95 is about what we would expect. So the current share price at 75 cents trading on about 6.5 times operating cash or EBITDA, so in our opinion, not expensive.
 
Quickly, I've mentioned before already the financial highlights, but just if you look at them on a case by case in respect to the key metrics that you look at when you're assessing a company, our revenue is $79.1 million for the half. That's up 51%, $9 million of that revenue would normally have gone into the second half. We actually closed some investments early. We're a little bit fearful of markets, so we wanted to lock in some profit for some of our clients in the specialist investment areas. So that's a little bit more than what you would normally expect. It didn't impact the EBITDA, but I would've thought normalised, the half year revenue was $70 million, but the $9 million would've come in the second half anyway. The operating cash net of tax was 3.4 cents per share. And the operating cash flow was $5.9 million. So as you can see, 0.5 cents against 3.4 cents of operating cashflow after tax is a very low payout ratio. We would like to get to, as I said, $13 million of operating cashflow pre-tax before full year '22.
 
Just going through the divisions, the wealth division is our equal largest division with the equity markets division. We expect long term for it to actually be our largest division. We expect it to, on the longer term, represent 45% of group revenue. We currently have 400 advisors that are licensed through those three licenses. We are in the acquisition mode and we are in the organic growth mode. We would like to get to 800 advisors by 2025. I would expect half of that growth will come from organic, and half of that growth will come from acquisitions. In respect to the acquisitions, because we have $17 million of cash, and we are generating $1 million of cash per month at least, we're funding acquisitions with cash.
 
We're not looking to issue lots of shares, we're not looking to do any capital raises for these acquisition targets I'm looking to make, and we're looking to self-generate cash and use that cash for acquisitions when the owner of that business is a seller. Occasionally we will come across opportunities where there's a merger opportunity and the owner of business is looking to be part of a bigger group, come into the management team, and be part of the longer term story. In those cases, we are prepared to give shares away to those parties because we want them to have skin in the game and we want them to have the feeling they haven't actually sold their business, they've just merged into our business. And we're all one.
 
In the corporate finance equity capital markets, we're looking for 50 cent revenue growth in 2023. We're getting as we grow and the name and the brand improves, and our capability to place opportunities into networks that are sticky money, more and more clients are looking to come to us to raise capital and what I would call not hot money. People that are in our network and are not necessarily looking for the quick return, they're looking to buy an investment in a business or an asset that's actually going to grow on the long term. And I think our corporate finance department is a beneficiary of that thinking, opposed to some other players in the market.
 
The professional services division, as I touched on before, provides documents and self managed super fund administration and general insurance. This particular business had a very, very good half year compared to the previous year. It's 113% up to 4.7 million for the half. Two years ago I talked about hoping to have a three year... Sorry, one year ago I talked about having a three year target to get to $10 million of revenue in this business. This business is growing very quickly. The acquisitions that we've made have been extremely positive. We're winning market share from our competitors, and more and more accountants are recognised that we're the premium provider in the document establishment business. And we added a legal functionality to that.
 
So the $10 million revenue number that I suggested a couple of years ago, I am now suggesting by 2025 that I expect revenue to head towards $40 million. This particular business has a high EBITDA margin. The wealth business is more like 7% or 8%. It's a very tight market and very competitive. But this particular market is more of a software as a service type business, and the margins are far more attractive and the margins that can improve the overall group return on revenue EBITDA.

The equity markets division, again, as I mentioned is the Sequoia Specialist Investments and the Morrison combination. As I mentioned earlier, this particular business is growing extremely strongly, $40.8 million revenue for the half is 88% higher than the same period last year. We are looking to grow this particular business to be 40% of the group by 2025. So we're looking at $160 million of revenue by 2025. And we would hope to be at an eight to 10% margin on that. EBITDA, as you can see, was $3.6 million on 40, so very strong and up very strongly.

The directed investment division, which is where Financial News Network sits and Yield Report sits and some direct general advice, is our smallest division, but it's our highest margin division. Currently we're on track to do about $2.5 million of annual revenue, up 14% on the first half last year. So not that strong, how the margin in this type of business is extremely strong. And we would like to grow this divisional revenue 10 times from where it is currently. So we would expect to do two and a half million dollars this year, but we are looking to get towards $20 million by 2025. We have a number of opportunities that we are currently looking at in this particular area. We're very excited about providing Australians, financial planners, accountants, self-managed super fund trustees a source of information like no one else can do.

In some ways, what we hope to achieve... and this would be absolute success, just like Seek did for the employment market and realestate.com did for the real estate market, we would hope that we can be the single source of information for financial services market. So when a financial planner or an accountant or a self-direct investor wants to know about a particular fund, wants to know about a particular share, wants to know about a particular interest rate, that we can be the common source of information, and we can deal with all the product providers in the marketplace to access, update that, and provide independent journalism in respect to the provision of that.

What does success look like? I talked about and I've touched on it through this presentation. This is not a forecast, this is what success looks like for us. This is what I'm talking to my management team about each and every day, and this is what success would look like for me by 2025. We would like to provide at least one service, and we're talking we have 20 services, to 30% of all accounting firms in Australia by 2025. There is absolutely no reason why every accounting firm cannot access one of our services. The services are so diverse and the services are very well priced and definitely improve an accountancy practice's business if they engage with us. And there's absolutely no reason why we can't reach 30%, but certainly we'd like to hope and wish that we could provide a service to every accounting firm in Australia at some time in our evolution. But 30% by 2025.

We'd like to at least provide one service to 10% of all authorised representatives in Australia. Currently there's 16,000, so that target is 1600. A service of some kind, whether it's them being licensed with us, whether it's them using Financial News Network on their website, whether it's them buying their documents through us, whether it's them using Morrison's, whether it's using our self managed super fund administration I don't mind, as long as we can achieve a relationship with 10% of the financial planners in Australia, provide them one service, build a relationship, and then over time, introduce them to more and more of our services and build a larger business.

We also want to not compete with our competitors. We would like to engage with 25% of all AFSLs in some capacity. I'm of the belief that the current 2000 AFSL holders out there need scale. And I think that it's most likely there'll be only 200 AFSLs by 2025 as scale drives the market and the pricing down. And if we can be providing 25% of the AFSLs, whether it is the 2000 or whether it is the 200 and the much larger licenses, I'm not sure. That is our goal. And the services that we do provide absolutely enhance an AFSL's performance to their advisors, and we would hope that we can align with more of those. At the moment we're providing service to about 80 other AFSLs, so well below that target and lots of room for growth.

As I touched on before, the goal is to reach $400 million top line revenue by 2025 and to achieve a minimum of 8% EBITDA and operating cashflow on that number. So I'm looking for $32 million of EBITDA, $32 million of operating cash flow on that $400 million revenue by 2025. That would be success. That would put us currently on about two times EV. So that would certainly be a success. I would like to lift the current dividend ratio to 50% by then. So in our belief, a $400 million revenue business generating $30 million of cash is starting to mature. At that point in time, I don't believe I would need as much cash to reinvest back in the business to further grow. I would start to believe with 130 million shares on issue, distributing $15 million of earnings in dividends would be an absolute success. A target myself and the board and the whole management team are looking to strive for, and we would like to pay back more of our income to shareholders that have come along for the ride at that point.

The point of reaching $400 million, I mentioned before that we are particularly focused on look looking to use our cash to increase the acquisitions. Some will be mergers as I pointed out, but we're looking to reward shareholders with strong capital management, and we definitely want to avoid heavy dilution in funding acquisitions. In the last 12 months, we've moved from around about 125 million shares on issue to 130 million shares on issue. All of the acquisitions that we made this particular year have been extremely positive to long term growth, and we've been able to do it without issuing too many new shares. And those shares we did issue have gone to people who are now in our management.

In every single case where we've used our shares to date over the last three years, those shareholders remain as shareholders with Sequoia. And almost in every case, they've actually increased on market their participation. So the strategy of giving cash to a business who's looking to sell and giving shares to a business who wants to be part of a merge is working currently. Touch wood the acquisitions we've made to date have been very positive, and in the future, our due diligence team and what we're looking for can continue to do that and reward our shareholders.

In finishing, I'd like to thank you for listing. I hope you now understand a little bit more about Sequoia and who owns the Financial News Network. And I look forward to our full year result. And over time, I hope you've put us on your watch list and you can see that when we make a promise, we keep it, just like any financial planner should always do. I'd like to thank you for your time and I'll pass it back to you. Thank you, Matt.


Ends

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