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Treasury Group Limited reports solid earnings growth: Should you buy?

Australian $50 dollar notes

Funds management service provider Treasury Group Limited (ASX: TRG) reported a 36.1% gain in half-year underlying net profit and a materially higher reported net profit after significant items.

The company provides financial services focused on boutique funds management companies. The seven boutique funds in the group are involved in a range of investment types from small Australian equities to global infrastructure equities and hedge fund management.

Here are the key half-year results:

–  Revenue   $1.16 million,  up 12%

–  Equity share of associates    $9.51 million, down 2%

–  Share of earnings from Aurora    $1.94 million

–  Net profit after tax (NPAT)   reported NPAT $137.3 million after sale transaction  / underlying NPAT $9.8 million, up 36.1%

–  Earnings per share    41.4 cents per share, up 41%

–  Dividend per share    interim dividend 24 cents per share, up 4%

Half-year business highlights:

— In November 2014, the company merged with US-based multi-boutique business Northern Lights Capital Group. With the merger, a new Australian trust, Aurora Trust, was formed and now holds an interest on 21 boutique fund management companies.  Treasury Group owns 61.22% of Aurora Trust. Aurora Trust holds about $50 billion of funds under management (FUM) as of 31 December 2014.

– Once the merger was complete, both Treasury Group and Northern Lights sold their respective businesses to Aurora in exchange for units in Aurora. From this, Treasury Group recognized a $127.5 million gain, net of transaction costs and related income tax expense, on the sale of investments. That materially increased reported NPAT.

—  Funds under management were up 2.7% to $50.9 billion for the half-year, showing strong growth from several boutiques in the December quarter.

Over the past several years overseas financial markets like the US have been rising steadily. Fund management companies like Magellan Financial Group Ltd (ASX: MFG) and Perpetual Limited (ASX: PPT) have seen substantial earnings gains from domestic and international equities.

The merger should give Treasury Group more exposure to overseas investment opportunities. Analysts forecast earnings growth to be 15% annually on average for the next several years.  Likewise, dividends are expected to grow in the double digits.

Trading at 20x forward earnings, the stock is reasonably priced and offers a 4.0% yield fully franked. Long-term dividend investors could benefit from having Treasury Group in their portfolios.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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