Plan A might be to examine Plan B

PORTFOLIO POINT: The Perth-based wealth manager Plan B has the attraction of strong revenues and the possibility of takeover.

John McBain, CEO of the listed Centuria Capital group, told an investment conference this week that while young analysts might like him to break up his company and concentrate on property asset management to make their job easier, he was more focused on making money.

This means Centuria’s financial services arm, which markets capital guaranteed and income accumulation bonds, will remain in the fold leaving Centuria, formerly the better-known Over Fifty Group, a diversified financial services company despite having a market capitalisation of less than $40 million.

Tower New Zealand is another small-cap diversified financial services company listed on the Australian market. It operates in health, general and life insurance, three of the most complex niches of the financial services industry. No big-cap companies are attempting to operate in all three of those fields, let alone other small-cap players.

Typically sophisticated investors want to buy into a company for leverage to one theme. The days of conglomerates such as Pacific Dunlop receiving widespread investor support are long gone.

One small-cap financial services company that is a relatively simple proposition is the Perth-based wealth manager Plan B (PLB). It offers relatively straightforward exposure to stockmarket recovery at a relatively attractive multiple.

Plan B is a wealth-management company with $1.7 billion of client funds invested mostly in enhanced index style products, and a further $500 million of funds under advice not sitting on its platform. Traditionally, funds were sourced exclusively from high net worth West Australian clients, but in recent years the firm has expanded into Victoria and New Zealand through acquisition and alliance.

It is vertically integrated, comprising several advice businesses, an investment platform and an in-house funds management capability. It generates a relatively high level of revenue from its funds under management, due to a past commitment to perform most functions in-house. The firm’s cost base looks to be one of the higher in the industry, even when its modest funds figure is taken into account.

The chief appeal of Plan B is the strength of its front-end advisory business, as it has durable relationships with its 4000 relationship managed clients. It is possible that Plan B is on the radar of a still larger number of east-coast suitors but it also has the capacity to expand independently given its ungeared balance sheet.

Plan B has built a useful executive advisory service (EAS) focusing on the resources industry. Corporate clients include executives of Rio Tinto, Wesfarmers, Woodside Energy and WorleyParsons. This is a clearly differentiated and proven effective client acquisition strategy.

Nevertheless, at less than eight times forward earnings per share, Plan B trades on one of the lower forward multiples in the listed financial services company arena.

A once-off 5% cut to the cost base in 2011-12 would lift 2012-13 earnings assumptions by 25%, such is the leverage offered by the stock.

Cost containment in areas such as salaries, travel and rent should also be possible over time.

Plan B occupies one-and-a-half floors of perhaps the premier address in Perth: Central Park office tower. I appreciate the benefits of customer-facing staff being based in that location but believe that over time back office staff can be moved to somewhere cheaper.

Moreover, I believe new management could look to outsource a number of functions around the administration of their funds under management and administration, for instance the administration of parts of their legacy book.

PLAN B’s long-time fee for service business model means the company is well positioned for the introduction of the FOFA reforms.
However, the company has its challenges. Given Plan B’s current FUMA balances, at present it can be considered a sub-scale player.

Parts of the Plan B business inherited from a former joint venture with BankWest are essentially in run-off. About 18,000 customers hold small account balances in these older style products.

Like all wealth managers, Plan B is experiencing negligible organic fund inflows at present. Wealth managers offer leverage to rising markets, but in times of falling margins, a largely fixed cost base will accentuate declining profits. This week it was reported that a number of its salaried advisors had departed the company.

At this stage, Plan B looks more likely to be prey than predator in the land grab for FUM and distribution capability in the Australian financial services industry which could prove attractive to investors.

-Comparison of market capitalisation to funds under management - the opportunity
	Mkt Cap ($m)	FUM ($m)	Mkt cap v FUM
Perpetual	1000	25400	3.90%
Plan B	41	1800	2.30%
Equity Trustees	107	1312	8.20%
TRU	181	3400	5.30%
Fiducian	38	1150	3.30%
Snowball	251	3700	6.80%
Treasury Group	78	16760	0.50%
IOOF	1400	24300	5.80%
Australian Ethical	20	644	3.10%
K2	128	897	14.30%
Clime	18	230	7.80%
Prime	22	1100	2.00%

Stewart Oldfield is a research analyst at Investorfirst Securities.