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A fresh approach to value investing in
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Easton Investments Limited (ASX:EAS) - a beneficiary of the Royal Commission

Chris Steptoe, DMX Asset Management - April 2019

 

In this update, we look at an under-the-radar company that is likely to be a significant beneficiary of the changes in the financial advisory space following the Royal Commission into the financial services industry.

 

Easton Investments (https://www.eastoninvestments.com.au/)  works with, and provides services to, more than 3000 accounting firms and over 900 limited and authorised financial advisor representatives. Accounting support services (for small and medium accounting firms) include face-to-face and online training, practice support, an online help desk and document precedents. Wealth management solutions (for financial planning and accounting firms) include a full range of dealer services such as training and licensing, with a focus on enabling qualified accountants to provide financial advice.

 

With this comprehensive service offering, Easton is well set to benefit from opportunities emerging as a result of the recent attention on the financial services sector:

 

1) Easton’s professional services training business, Knowledge Shop, which provides training to accountants and financial planners, is likely to see a significant increase in demand. With much attention on the quality and education of financial planners, financial planners are now required to undertake 40 hours per year of Continuing Professional Development (CPD) if they are to continue to practice. Easton is well-placed to fill the large increase in CPD required across the industry and has been investing in building out the appropriate training programs. Easton is forecasting the number of annual training hours it delivers will increase by almost 50% from FY18 to 55,000 in FY20. The growth in this high-margin, recurring offering should add a further $1.5m EBITA to Easton’s profit.

 

2) The focus on the quality of service provided by financial planners is likely to see more people turn to their accountants (with whom they often have a long-standing trusting relationship with) for the provision of financial advice. This is a key area for Easton, who work with accountants to enable them to provide financial advice. In the 6 months to 31 December 2018, the number of Limited Authorised Representatives (LARs - accountants that wish to provide some limited form of advice) operating under the Easton License increased in numbers from 406 as at June 2018 to 699 as at December 2018. While this level of growth will not repeat in future periods, there will be a meaningful uplift in profit over the next 12 months as each LAR contributes $4,500 annually of high margin subscription revenue. We estimate this will add approximately $1m to Easton’s EBITA on an annualised basis.

 

3). Easton’s non-aligned dealer group subsidiary GPS Wealth, is also likely to attract new advisors as advisors continue to move away from vertically integrated large institutional dealer groups to higher quality, niche, independent firms.

 

1H19 was a good result with a 33% increase in EBITA to $2.1m, with Easton declaring a maiden interim dividend. Earnings are consistently skewed to the second half and while the company has not given forecasts, we expect a FY19 EBITA of close to $6m increasing to well over $7m in FY20 as a result of the organic growth drivers mentioned above. This would see Easton trade on a PE multiple of around 7x NPATA.

 

With high quality, repeating revenue streams, we think Easton is a truly undiscovered opportunity.

 

We see Easton as a core position for our portfolios and our recent meeting with MD Greg Hayes reconfirmed that belief. Directors have been consistently buying shares on market, and while the share price has been lagging the overall market, we believe the FY19 full year result will highlight the progress that is being made within the business and should provide a catalyst for a rerating.