Prime Financial Group is an ASX-listed professional services business operating along the east coast of Australia which offers several different service lines including financial advice, corporate advisory, accounting services and SMSF administration. The Prime business was founded by father and son duo Peter and Simon Madder. The original company was the Prime Development Fund (PDF) which went on to form an AFSL holding entity which took minority stakes in a distribution network of accounting firms to disseminate its financial advice services.
The business has had a mixed track record as a listed company with an initial reverse takeover in 2007 by the then named AVFM Ltd. In the following 3 years it suffered due to significant exposure to equity markets and saw it’s NPAT vary significantly as a result. In the period of 2010-2015 the group went through a period of divesting its funds management business and further diversifying into increasing stakes of accounting firms before eventually taking a controlling position in a fast-growing accounting firm ‘MPR’ in 2016. From here the business has made several key acquisitions and senior hire’s which have diversified the Prime business model and generated meaningful value for shareholders in the past 7 years. As of 31 December 2022, the group generated LTM Revenue of $30.2m and employs >150 team members.
Ownership is very important at Prime, with 45% of the company owned by staff and associate shareholders, with performance rights being a recurring theme in rewarding staff. Ordinarily this may be seen as negative and dilutive to shareholders but the incentives to be granted these rights are reasonably intensive in nature, requiring a 3-year compounded growth rate in parent attributable EBITDA of 8% p.a. and share price of 20% p.a. Obviously the EBITDA target is not ideal (ignores per share metrics and interest cost), but my belief is that insider ownership is so material that abuse of dilution and debt is unlikely. Furthermore, these targets are merely on capital growth, and are not inclusive of the fully franked dividend payout ratio of 40-60%. Therefore, if the group does not dilute, incremental ROE targets are in the mid-teens in effect (8% growth / 50% payout).
Speaking of financials, accounting services billing model centralises around timesheets, wealth is a mix between fixed fees and % of AUM fees on SMA’s, corporate advisory is transactional and SMSF is fixed fee. The cost base is quite similar between them however, with the primary resource being fee earners, and minor variances in other costs. EBITDA Margins are all in the realm of 25-35%. The group distils it’s four major service lines into two reporting segments, ‘Wealth & SMSF’ and ‘ABA & Capital’ in their financial reports. 2022 segment profile is shown to the left as a % of total revenue.
Working capital has been fast increasing in recent years, largely due to the increasing working capital profile of the ABA/Capital division, which accounts for just shy of 60% of revenue but 100% of the lockup given that wealth and SMSF revenue is largely point-in-time. The accounting service line generally has 30-day credit terms but when conducting R&D tax incentive services the firm does not get paid until the claim is successful, the matter of which is subject to multiple successive ATO reviews typically (we all know how fast government turn-around is…). This is mentioned in the trade receivables note starting in the FY2020 year so presumably it is the primary driver of all the working capital in the group.
Going forward, I would like to think that working capital would remain relatively consistent and that most of the group’s increase in cash conversion days is behind them, with internal lockup targets of ~90 days quoted by Simon during the FY2022 results presentation.
Speaking to the future of Prime Financial, the group has a strategic plan to reach $50m in revenue by 2025 with implicit EBITDA margins of 30%, without diluting shareholders (beyond performance rights) and using strictly debt in a stated range of 0.5x – 1.0x Net Debt / EBITDA. From the 2022 income year this would represent a CAGR of 25%. Through 1-1 discussions with Simon myself, it seems they intend to get there with growth being 2/3 organic and 1/3 inorganic. With the acquisition of Intello we have a general idea of their price discipline with a multiple of ~5x EBITDA, 3.3x upfront and 1.7x subject to 12-month performance. Intello however has a website asset and if we assume similar premises cost to the group, NPAT margins would approximate 15% as a result, a PE of 10x. For the purposes of figuring out how much they need to deploy, they paid 1.5x revenue for Intello, which at that valuation they would need to deploy another $7.5m to get to the inorganic target. Over the 3-year period, it would equate to deploying $13m into M&A + $5m into working capital with NPATA increasing $4m, a ROIIC of ~22% for shareholders.
Prime trades an enterprise value of $52m and is likely to generate ~$6m in run-rate NPATA, a valuation of <9x earnings. With a 40-60% payout ratio and franking credits Prime will pay a dividend of 8-12% whilst growing it’s earnings at a rate of 20%+ p.a. with c. $8m in retained earnings it is estimated Prime will have to take on an additional ~$10m in debt to fund it’s growth strategy, meaning that in 2025 Prime would have $10m in NPATA on an EV of $62m, a valuation of 6.2x earnings, whilst paying a fully franked dividend yield of 9-14% on the enterprise value. Either way, Prime’s valuation appears quite frankly, undemanding and an investment has been made at a cost basis of $0.21 per share.