Countplus Ltd (ASX: CUP) is an aggregator of accounting practices. The company acquires small accounting firms which tuck-in to the Countplus member firm network, providing small businesses access to scale. Countplus listed on the ASX in 2010 at $1.40 and currently trades at all-time lows, making it one stock that is worth a deeper look.
Business model
Countplus acquires small accounting firms through a cash and/or equity payment. Interestingly, Countplus does not employ its own staff. Instead, Countplus keeps the Principals (owners) and staff of acquired firms employed and takes an annual royalty/franchise payment.
Management recently introduced a new direct equity plan which allows Vendor Principals to buy-back up to 40% of the member firm from Countplus. The scheme allows Principals to re-purchase equity from Countplus, leading to better stakeholder alignment.
This business model incentivises performance as Principals remain in charge of the business; since most member firms are small, owner-owned practices, Principals are usually the founders of the business and have a vested interest in doing well. This makes Countplus' business model an attractive proposition, given the majority of its shareholders are strongly aligned to the group's performance.
Earnings road bump
As announced in April this year, Commonwealth Bank of Australia (ASX: CBA) owned 36% of Countplus due to Commonwealth Bank's acquisition of Count Financial Limited in 2011. Speculation is mounting that this stake will be slowly divested in the coming years. This may place downward pressure on its share price, however, I believe most of that is already priced in, meaning the real driver to share price should be its earnings.
In its latest full year results, Countplus reported an increase in underlying profit of 15.9%. However, in absolute terms, earnings fell 15.1% due to the cessation of loyalty payments from Commonwealth Bank (which were part of the terms of the Count acquisition).
Performance expectations have tempered as a result, with the company providing an update to its outlook at its Annual General Meeting on 25 November 2015.
Stable income stream
The accounting industry is expected to grow by an annualised 3.7% according to IBISworld. Despite the lack of guidance provided by management, I believe Countplus should manage to grow earnings in the current climate.
If earnings per share remain flat at 9 cents per share, Countplus should be able to maintain its annual 8 cents fully-franked dividend. This places it on a forward yield of 11.9% (inclusive of franking credits), providing a solid income stream to the patient investor.
Foolish takeaway
In the interim, Countplus' current operations should continue performing to plan, with supportive industry dynamics providing favourable tailwinds for the business. Although management has indicated debt levels will rise as a result of further acquisitions, the long-term outlook remains positive. Accordingly, Countplus' current dividend yield on offer makes it worth a look at today's prices.
