The Mainstream BPO Ltd (ASX: MAI) share price climbed 3.7% higher today after the company revealed its financial results for the six-month period ending December 31 2016. Below is a summary of the results for the fund administrator and unit registry.
- Revenue of $13.1 million, up 49% on prior corresponding period
- EBITDA (operating income) of $1.8 million, up 58%
- Net profit of $0.7 million, up 106%
- Revenue per employee of $210,000, up from $160,000
- Number of clients 187, up from 108 in pcp
- Funds under administration of $106bn, up from $50bn in pcp
- Fully franked interim dividend of 0.5 cent per share
- Guidance for full year EBITDA between $3.6 million to $4 million
The Mainstream BPO share price has fallen around 10% over the past year, although at 56 cents it is significantly above the 40 cents initial public offer price when the company floated in September 2015.
As a fund administrator and unit registry the growth of Mainstream BPO has been impressive given it has little competitive advantage and operates on slender earnings margins of 13.7% as at 31 December 2016. The earnings margins are low as often the way to win new clients is to offer lower fees for your administration services that are performed by staff members.
Staff costs then are a key overhead and one way to lift profit margins is to require staff to work longer hours in order to effectively lift what the company calls "revenue per employee".
The company has also been on an acquisition strategy to chase growth in earnings per share, although the notes to the company's accounts reveal this has been partly funded by the issue of $7 million of debt in September 2016 at a fixed interest rate of 10.5% per annum over a three-year term. This alone is 1.8x the midpoint of the forecast full year EBITDA and while debt-funded acquisitions may lift earnings per share to management's benefit it's questionable whether borrowing at 10.5% in today's low cash-rate world is a sensible long-term strategy.
Notably Mainstream BPO also has one big client in Magellan Financial Group Ltd (ASX: MFG) and it has enjoyed the slipstream of Magellan's growing funds under management. Other more high-profile fund managers it provides services to include Morphic Asset Management, NAOS Asset Management and Hunter Hall International Ltd (ASX: HHL).
However, due to its debt profile, acquisitive strategy, low barriers to entry and lack of competitive advantages Mainstream BPO is definitely not a business that interests me as an investment opportunity.
