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Is the Equity Trustees share price a buy?

This morning EQT Holdings Ltd (ASX: EQT) reported its half-year results for the period ending December 31 2018. Below is a summary of the results with comparisons to the prior corresponding half year.

  • Net profit after tax of $11.2m, up 17.3%
  • Revenue of $46.3m, up 7.2%
  • Earnings per share of 55.13 cents, up 16.1%
  • Dividends per share of 44 cents, up 10% from 40 cents
  • Funds under management, administration, supervision (FUMAS) “down slightly” to $77 billion

The Equity Trustees share price is up 2.3% to $24.05 today in response to a strong result and the stock is now up around 33% over the past 3 years plus dividends thanks to a mix of organic (new client wins, etc,) and acquisitive growth.

The Melbourne-based group is also in the middle of an ambitious attempt to expand its services into the far larger UK and Ireland financial markets.

The group splits its operations into corporate trust (primarily Responsible Entity (RE)) services) and private wealth advisory services.

The core RE business has performed well recently and earns its keep by charging fees usually on a tiered scale as a percentage of funds under management on any individual fund it is acting as the RE for in conducting compliance, administration, and fund accounting outsourcing services (unit pricing) etc.

Typical clients tend to be start-up equity funds looking to outsource everything except the investing, with even the RE being indirectly leveraged to the strength of equity markets as its fees are usually a fixed percentage of the underlying manager’s funds under management. Although an RE can also work for debt, money market, or hybrid funds if it so chooses.

A couple of points to note around this business are that to grow strongly it’s reliant on winning more clients than it loses, although generally once a fund manager selects an RE it’s unlikely to leave unless it’s seriously unhappy (as it’s not worth uprooting your entire operations for a minor cost saving potentially) or runs into trouble of its own making via poor performance, etc.

However, winning clients consistently is not easy as REs have little competitive advantage (except perhaps reputation), no real moat, and little pricing power as another RE can offer to do the same work for marginally lower fees.

As such while EQT has a good track record largely based on a decent reputation it’s not my cup of tea as a bet for long-term growth.

That’s not to say it won’t perform well into the future, it’s just not an especially attractive business model in my opinion.

Others in a similar space to EQT include Perpetual Limited (ASX: PPT) that also operates a directly competing RE business, while Mainstream Group Holdings Ltd (Fund BPO) (ASX: MAI) provides the outsourced fund accounting services often contracted out by the REs.

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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