Since June 2012, the Fiducian Group Ltd (ASX: FID) has outperformed the ASX by 391% with a total return of 475% compared to the ASX All Ordinaries total return of 84% over the same period. It has delivered double-digit EPS growth in 14 out of the last 18 years.
That's a staggering performance as the small cap stock takes on industry heavyweights such as IOOF Holdings Limited (ASX: IFL).
Continuing on its growth trajectory, the Fiducian Group recently released its HY 18 results. Here are the highlights:
- Revenue was up 12% to $20 million
- Net profit was up 26% to $3.4 million
- Funds under Management, Administration and Advice (FUMAA) were up 63% from $3.8 billion in December 2014 to $6.27 billion in December 2017.
How has this small company outperformed the ASX and can it keep doing it?
Management has a simple but effective strategy to achieve this:
- Fiducian grows funds under advice organically and through strategic acquisitions of financial planning businesses.
- When funds under advice grow, this creates cross selling opportunities to drive these funds through Fiducian Group's platforms (thereby increasing funds under admin) and fund managers (thereby increasing funds under management).
- The growth in overall FUMAA increases 3 revenue streams as the funds go through the entire value chain
- Most of Fiducian Group's costs are fixed at roughly $11 million and so as increases in FUMAA drive revenue growth, the bulk of this growth goes straight to the bottom line. As such, management extrapolate that if FUMAA went up by 59% from the current $6.27 billion to $10 billion, EBITDA would go up by a staggering 257% from $7 million to approximately $25 million.
In my view, there are a couple of risks to this strategy:
- Firstly, there is a strong reliance on management's capabilities to keep making smart acquisitions. Fiducian has a policy of not disclosing the names of the financial planners who join their business and so it's difficult for the market to perform its own due diligence on new acquisitions.
- If the overall market crashes, Fiducian's FUMAA will crash as well and so will Fiducian's revenue.
Overall, I do think there is some exciting growth ahead for Fiducian but investors might need to temper their expectations of consistent double digit earnings growth.
