Stock markets may have recently given back a good portion of the gains made so far this year, but half-yearly reporting season has thrown up another set of generally bullish results. Financial services companies are in the thick of it, with inflows continuing at a heady pace and a rash of superannuation changes only adding to the public's appetite for investing in financial services. Many of these companies' share prices have been hovering around all-time highs. Strip out the major banks and there are still plenty of diversified financials listed, which are now under the scrutiny of investors at least twice a year when their results become public.
"It's a very attractive space with the way that the superannuation set up is and the legislative changes that are going on," Austock Securities analyst Warren Jeffries said. "They are all trying to carve their own niche and provide themselves some insulation against the big institutionalised financial services offerings." Jeffries, who analyses emerging companies, cited the examples of DKN Financial Group and Snowball Group as businesses that are looking to make the most out of an industry looking to consolidate. "I think a big part of what DKN and Snowball are doing is the early stages of a consolidation in the industry, one that allows people to exit their business and monetarise what they believe is their equity in it and secondly to give them some greater protection from margin squeezing," Jeffries said.
"Compliance is certainly a cost issue for a number of small groups; also margin squeeze in getting funds onto platforms and therefore getting scale and holding margins." DKN posted a net profit after tax (NPAT) of $2.15 million for the half year to December 31, a 25 per cent increase over the previous corresponding period. Funds under advice (FUA) grew 15 per cent for the half year and 27 per cent for the 12 months. "The last set of results show the merged entity that is now DKN has built their FUA up and they promised that they would get a certain margin out of the business and they are doing that. It's the fifth set of results that we have seen and they have delivered every time," Jeffries said.
Snowball reported a before tax half-yearly operating profit (after finance costs) of $1.38 million, up 48 per cent on the previous corresponding period. Combined revenue from Outlook Financial Solutions and Outlook Tax and Accounting Solutions was $7.94 million, up 37 per cent on the prior corresponding period. The operating results for the half year ending December 31, 2006, relate to Snowball Group Limited prior to the merger with Western Pacific Financial Group, which has resulted in FUA increasing to $4 billion, compared to $1.8 billion as at January 2006. The results for both companies were encouraging, Jeffries said. "Both Snowball and DKN exceeded expectations of FUA, both in terms of new fund flows coming in but also in terms of market movement in terms of the platforms they are in," he said.
"They are getting a double hit there and that is putting some price of earnings premium into these stocks as people know these strong inflows will continue in the second half . and this will set them up well for 2008." Perpetual reported a 34 per cent increase in NPAT for the half-year ended December 31. The operating profit after tax increased by 18 per cent, while the NPAT rise included operating profit after tax plus a $30 million profit on the sale of a portion of its investment portfolio. "Yet another good result at the NPAT line, all the major divisions did well," Aspect Huntley analyst David Walker said. "Contributing to the rise in NPAT was the company's sale of 46 per cent of its equity portfolio and a number of seed investments in Perpetual Funds during the period."
IOOF, one of Australia's oldest financial services institutions, reported NPAT of $23.3 million, an increase of 33.1 per cent on the previous corresponding period. IOOF reported it had increased funds under management (FUM) by 30 per cent to nearly $29 billion. "The early departure of the IOOF chief executive has confused the market, but I believe the restructure he has carried out, in time, will be shown to have been necessary," Walker said. He said the recent market correction, if it continued, could have implications for FUM for a number of financial institutions. IOOF suffered large wholesale outflows, but still managed to record an 8 per cent increase in inflows, predominantly due to favourable market movements and real estate inflows.
Perpetual's FUM rose 21 per cent or $4 billion, but $3.3 billion was as a result of positive market movements and investment performance, and only $700 million was from inflows, Walker pointed out. "If nothing happens to total inflow, funds under management may come under downwards pressure, as during a downward market retail funds tend to dry up," he said. "If the correction is short lived then there will probably be little effect on discretionary investment in managed funds."
