Over the past year, ASX financial shares have provided generous returns to their investors, with the S&P/ASX 200 Financials Index (ASX: XFJ) rising 22%. However, the performance of this lesser-known small-cap share surpassed the impressive growth seen in large-cap financials.
Generation Development Group Ltd (ASX: GDG), a small-cap ASX financial share, delivered outstanding returns, with its share price surging over 90% in the past year.
In fact, this was one of the shares highlighted in November 2022 in our interview with Maple-Brown Abbott's Phillip Hudak. Isn't it easy to say, "I should have bought that," with the benefit of hindsight?
Let's find out what the investment case was then and, more importantly, whether it still holds true today.
Specialising in tax-effective investment bonds
Generation Development Group (GDG) specialises in providing capital to financial sector businesses. As a registered pooled development fund (PDF), it offers tax benefits to the company and its shareholders. The company operates through its key subsidiary, Generation Life.
In our 2022 interview conducted by my colleague Tony, Hudak highlighted the company's defensive nature and continued fund growth. He then said:
It's a market leader with approximately half of the industry flow coming through for the company. It's highly defensive with average investment terms greater than 17 years. In addition to that, they made a Lonsec acquisition, which has outperformed expectations, and they've just launched an annuity product recently that is gaining momentum off a low base with key product differentiation, including more investment options and greater flexibility versus other annuity products out there.
More recently, boutique fund manager Ausbil highlighted this company in its June 2024 investor letter for the company's strong leadership and long-term growth prospects. Analysts at Ausbil said:
GDG is a specialist provider of financial solutions led by a strong team in Chair Rob Coombe and CEO Grant Hackett. Historically known for its leading investment bond product, GDG has diversified through the acquisition of Lonsec, providing strategic exposure to the fast-growing managed account market. Having followed the story for some time, we believe the full acquisition of Lonsec is strategically sound and positions GDG for a period of strong growth.
Insiders, including management, own approximately 25% of the company.
Robust fund growth continues
The company's strong fund growth continued to the most recent quarter. In the June 2024 quarter, the company's funds under management (FUM) grew 26% year-over-year to $3.3 billion, marking the highest quarterly FUM inflow in its history.
The company believed that several initiatives introduced in FY24 had a positive impact and that this momentum should continue into the new financial year.
CEO Grant Hackett remains positive about FY25. In the June update, he said:
Pleasingly, the sales momentum continues to build for both Investment Bonds and Lifetime Annuities, with a healthy pipeline of business set to fall in the first quarter of FY25. We have seen more significant increases in active advisers each month than in previous financial years. This is the first time that we have been able to achieve this and gives us confidence that we will continue to grow the business into FY25.
How expensive are GDG shares today?
GDG shares are valued at 34x FY25 earnings-per-share (EPS) estimates by S&P Capital IQ. For comparison, the company's price-to-earnings (P/E) ratios have ranged between 18x and 60x over the last five years.
The S&P Capital IQ consensus estimates suggest that EPS will increase by 45% in FY25 to 7 cents, followed by another 30% growth in FY26 to 9 cents.
After such strong share price performance, the current share price seems to reflect some of the high growth expectations. With that said, EPS growth of 30% to 45%, backed by strong market dominance in its niche, is rare to find on the ASX. So this might justify a P/E premium to other ASX financial shares.
