Diverger (ASX:DVR) - Management Call #4
Notes + Call with Nathan Jacobsen about AFSL Compliance Acquisition
Today's deal of AFSL Compliance fits the type of deal I want to see from Diverger, a smaller inorganic deal priced at 2.7x upfront EBITA with scope for another ~4x upfront EBITA from earnouts over the next 3 years. So after tax, you have ~10x PE which isn't mind blowingly cheap but diversifies revenue well into the fast growing self-licensed segment of advisors, so It would not be surprising to see this business grow organically quite strongly.
quick model
#risk
This seems to be a sole proprietor business, henceforth we need to properly assess the key-man risk. lack of durability?
In-house knowledge diverger has alleviates this?
Until this deal, the business was entirely independent, which could be appealing to self-licensed advisers. Would an affiliation with a listed company that owns several dealer groups create friction in that relationship and as a result have churn in ongoing compliance clients?
Alleviated in part by earn out payments, but years 1 & 2 are tied to revenue so maybe not. What is year 3 earn out target (uplift in earnings?)
#synergies
Possible revenue synergies with Knowledge shop adviser education?
Possible ability to leverage staff from licensees to provide self-advisor compliance support - knowledge in house is clear.
Self-licensed market is growing, in fact the only area of growth so this business should be in demand and growing.
#ManagementCall
Questions Call with Nathan
is there key man risk given that Stewart seems to be the only staff member? If not how many is there?
He is the only staff member, he has been runnning at capacity for 2 years, pushing back 2-3 enquiries a week, indicating significant potential growth given current client base is ~160 ongoing advisers.
They have basically not been doing AFSL set ups at all for the past 2 years
Nathan did assess key man risk and Stewart expects to remain employed for >10 more years and they have incentivised financially well to retain him.
What synergies are you expecting between the group and this?
Synergies with all parts of the business, cross sell incentive in place (STI) for this, KS wealth advice etc.
What are the margins?
"all drops to the bottom line" $700k in revenue in FY2022 w/ $500k in EBITA.
They are going to put 1 staff member in the first year into the busines to be able to take on new customers. Expected Short term impact on profitability.
How much working capital does the business have?
Next to none, billed in arrears but customers typically pay within a week or so.
what are the earn out requirements for years 1,2,3?
Next 2 years revenue targets are for modest organic growth
3rd year is a financial return earnout for shareholder strategy target.
What has historical growth in revenue and earnings been for the business?
Steady growth from 2010 until 2 years ago when stopped taking new business. (nathan did not want to disclose the growth exactly).
Would an affiliation with a listed company that owns several dealer groups create friction in client relationship and as a result have churn in ongoing compliance clients?
Keeping stewart on and stressed that nothing would change besides access to more new services so does not expect any material churn.
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