Carbon accounting. It really adds up

The carbon tax is good for the accounting sector. In short, more taxes means more revenue.

PORTFOLIO POINT: Investors wanting some indirect exposure to the carbon tax can do so through the listed Australian accounting firms.

Looking to make money out of the introduction of the carbon tax introduced on the weekend? Look to the money men.

History shows that the accountancy profession is a major beneficiary of each wave of new regulatory reform, whether it be the introduction of international accounting standards, the GST or the Financial Services Reform Act.

Australia’s accounting industry is expected to grow at an average 5.5% per annum over the next five years, generating $20.7 billion in revenues in FY2017.

Revenue growth of Australia’s accounting industry
Source: IBISWorld.

If individual firms can combine 6% or 7% top-line growth (driven by annual price increases and modest growth in client bases) with good staff cost control, then they should be able to generate 10% earnings growth into the medium term, which is good enough for us.

We need to invest in sectors that offer leverage to positive economic trends. Unexpectedly good things happen to companies exposed to such positive long-term trends, whether it be the internet, an ageing population or outsourcing.

The prospect of a more complex regulatory environment represents another economic trend that investors can make money from. If you believe any government is capable of actually cutting tape and overseeing a sustained period of regulatory certainty, then think again.

Investors are offered two exposures to the accounting profession: WHK (code: WHG) and Countplus (code: CUP).

Vital statistics
Source: Investorfirst Securities.

We launched coverage on WHG Group with a 'buy’ recommendation and a $1.28 valuation last week.

There is a lot to like about the sector. Defensive revenue streams, solid dividend yields and the opportunity for management of the two companies to learn from the past mistakes of others.

I believe accountancy-related revenues rank alongside life insurance sales as being amongst the most defensive in financial services.

WHK Group is the fifth-biggest accounting group in Australia and New Zealand.

Essentially WHK is a mid-tier accounting firm sitting behind Deloitte but ahead of Grant Thornton, even after the latter’s recent takeover of BDO in Melbourne and Sydney.

WHK offers attractive leverage to a number of growth sectors including the administration of self managed superannuation funds (SMSFs) and a rebounding rural sector.

WHK’s new management is committed to driving organic growth rather than growth through acquisition, a strategy that I believe will deliver for shareholders over the next two years.

I view WHK as a strategically significant business. It administers more than 11,000 self-managed superannuation funds and is the biggest provider of accounting services and advice to Australian SMEs and high net worths by number of clients.

WHK has been a reliable source of dividends

Key share price catalysts include an upgrade to expected savings generated by the already-announced shared services initiatives; the appointment of new principals or a strategic investor buying into the company.

Both Countplus and WHK have underperformed the broader small cap sector over the past 18 months. WHK now trades at an appealing 7.3 times FY2013 forecast EPS.

Share price performance of WHK and Countplus versus the Small Industrials index
Hugh Robertson is an executive director of Investorfirst Securities. hrobertson@investorfirst.com.au

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