Weekly Reports | May 27 2021
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One of Australia’s oldest listed companies follows a super new path
By Tim Boreham, Editor, The New Criterion
The walls of the Melbourne headquarters of Equity Trustees ((EQT)) are adorned with the portraits of former prime ministers, premiers and governors-general who have served on the board of the stately 133 year old institution.
The roll call of dignitaries includes 19th century premier Sir Charles Sladen, prime ministers Stanley Bruce and Robert Menzies and former governor general Ninian Stephen.
In March former Abbott/Turnbull era cabinet minister Kelly O’Dwyer joined the board, filling a seat vacated by former Victorian premier and Hawthorn Football Club president Jeff Kennett.
(Kennett’s great grandfather, Edward Fanning, was a director for 30 years from 1888 to 1917).
But while most ex pollies hailed from the conservative side, Equity Trustees CEO Mick O’Brien insists they don’t have to be right of the political spectrum.
“It's important for us to have some government experience,” he says. “We are doing what regulators want and it’s important we are close to them and understand them.”
Traditionally, trusteeship has been seen as an estate-planning service for toffy squatters or ageing industrialists.
Behind the old world veneer, Equity Trustees has been transforming from a funds custodian for the landed gentry to a leading player in the arcane but burgeoning superannuation trusteeship sector.
The company recently picked up the mandates for investment platform HUB24 ((HUB)), AMP Life (after being sold to Resolution Life) and Comminsure (when sold to AIA Australia).
“We have had incredible success with superannuation in the last two years,” he says.
Equity Trustees is now the custodian of $30bn of super; a year ago the number was $12bn and four years ago a little over $1bn.
Early last year its key rival, Sargon Group, entered voluntary administration, having bought the Diversa Trustees business from listed platform provider OneVue Holdings ((OVH)).
Earlier, Perpetual ((PPT)) sold the acquired Trust Company of Australia's super business to OneVue, which on-sold it to Sargon.
The stricken Sargon business was acquired by Pacific Infrastructure Partners which, after restructuring, lives on as Certane Group (chaired, incidentally by former Labor minister and ex Essendon Football Club president Lindsay Tanner).
But O’Brien says the biggest competitor is the status quo: the internal model. Most super trustee functions remain in-house, including the subsidiaries of the large wealth managers and the industry super funds.
These providers obviate conflicts of interest by appointing independent directors – a process scrutinised by regulators in the post Hayne (banking royal commission) climate.
But O’Brien argues that, individuals being individuals, the risks are greater than appointing an external trustee specialist such as, er, Equity Trustees.
These days Equity Trustees enjoys the status of the only listed pure-play trustee company. Its equivalent, the Trust Company of Australia, was subsumed by Perpetual in 2013 after a spirited takeover tussle with Equity Trustees.
Bookish types will remember Trust Company as the custodian of the Miles Franklin Award.
Perpetual is predominantly a fund manager, but competes with Equity Trustees for private clients and corporate trustee gigs (Perpetual sold the acquired Trust Company’ of Australia super business to OneVue, which on-sold it to Sargon).
The trustee sector is still archaically state based, with Equity Trustees strong in Melbourne but Perpetual stronger in Sydney and AET dominating Adelaide and Perth.
The Queensland market is “up for grabs”, so watch this space.
As with Perpetual, Equity Trustees is also prominent in philanthropy, overseeing $100m of annual distributions from long-standing charitable trusts.
The biggest include the $200m Viertel Foundation (medical research), the $130m William Buckland Foundation $130m, the Felton Bequest (artwork) and the Harry Lyon Moss Trust Fund (Royal Childrens’ Hospital).
“The sector will chew up every dollar you give them, whereas if you set up a properly structured vehicle it will keep giving forever,” O’Brien says.
“60 years ago Harry Moss could have given one million pounds to the hospital and it would be spent by now. But he set it up as a trust that’s giving away $3-4m a year and it will be forever.”
More broadly, he says, billions of dollars of wealth is transitioning from expiring pre-war and baby boomer generation “and we hope a lot of this will end up with philanthropy.”
Equity Trustees posted a $9.8m net profit in the half year to December, down -14%, with funds under administration, advice and supervision lifting 27% to $128bn.
Paying a 4% yield (5.4% fully franked) Equity Trustees could be viewed as a low risk (albeit lower growth) alternative to the banks or listed fund managers.
The only broking analyst covering the stock, Ord Minnett’s Nick Burgess, says superannuation has been the “standout area” for the company over the last 12 months.
“That said, new business wins can be lumpy and difficult to predict.” He adds: “we believe Equity Trustees is a well run, high quality company with a strong financial position and leverage to an ongoing recovery in global equity markets.
“In the near term, super and the corporate trust division offer the greatest upside to increasing regulation and oversight, higher responsibility for trustees and increased cost of compliance are all powerful drivers of outsourcing.”
Burgess says the company trades on an “undemanding” current-year earnings multiple of 23x, although that makes it dearer than the banks or asset managers such as Perpetual and Pendal Group ((PDL)) and wealth manager such as AMP AAMP)).
The company’s share performance has been solid but not spectacular: a 20% gain over the last year and a 70% increment over the last five and ten years.
We’re sure the 133-year price graph looks quite decent.
Having served for two decades at Axa – formerly National Mutual – O’Brien says the culture of the rarefied trusteeship world is far removed from that of the old foot-in-the-door life insurance sales culture.
“The interesting thing about a trustee company is that almost all of your clients really need your services,” O’Brien says. “It’s not as if you have to sell them.” How olde worlde is that?
Class Limited ((CL1))
We’re still on the topic of super administration but don’t doze off, because opportunities abound for alert investors.
A giant in the self managed super funds (SMSF) administration sector, Class simplifies back office functions for accountants and financial advisers.
As CEO Andrew Russell laments, the $200m market cap stock looks well undervalued – especially when referenced against other relevant tech plays such as Elmo Software ((ELO)).
But investors are likely to feel the love as Class furthers a multi-pronged reinvention push to diversify from the SMSF sector.
Known as Reimagination, the strategy expands Class’s addressable market by 250%, to $365m. In essence Class is leveraging its core skill of building software with complex rules based coding, to streamline the work flow of accountants’ back offices.
At the heart of the strategy is a $42m acquisition blitzkrieg that saw the company pick up three businesses in the legal documentation management and corporate compliance sector.
Most recently, the company bought the Reckon Docs business from the listed Reckon ((RKN)) for $13m.
Meanwhile, Class has entered the trust accounting arena organically, launching its newly created Class Trust arm last October
Despite the travails of the pandemic, Class is solidly profitable and even pays a sustainable dividend equating to a circa 3% yield, which is about as sexy as it gets in these income-straitened times.
Disclaimer: Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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