Company Overview: EQT Holdings Limited (ASX: EQT) is a trustee company and offers fund governance services. It has two business units through which it offers its services to its retail and corporate clients- Corporate Trustee Services (CTS): Provides global fiduciary services for managed investment funds on behalf of fund managers and sponsors, as well as customised trustee services for corporates and structured multi-party transactions; Trustee & Wealth Services (TWS): Provides private client, philanthropic and superannuation trustee services which include estate planning and management, charitable, compensation, wealth management, advice, etc.

EQT Details

Decent Growth in Profitability Aided by Recovery in Equity Markets: EQT Holdings Limited (ASX: EQT) is one of Australia's leading trustee company. The market capitalisation of the company as on 15 March 2021, stood at ~$501.61 million. The company has a healthy capital position during the end of the H1FY21 period with low gearing, decent liquidity and a positive net cash position. Moreover, the company has a decent dividend payout policy in the range of 70% to 90% of reported NPAT, reflecting its focus on delivering returns to its shareholders.

During H1FY21, EQT delivered decent performance despite the disruption in the economic environment due to the impacts of the COVID-19 pandemic. Funds under management, administration and supervision (FUMAS) grew by ~27% on the previous half to ~$128 billion. The growth in funds was aided by a strong recovery in the equity markets during the period. The revenue stood at $48.3 million, an increase of 3.7% on the previous half. The company reported a decent increase of 27.4% in the statutory net profit to $9.8 million on H2FY20. It declared an interim dividend of 44 cents per share during the period. 

H1FY21 Financial Performance (Source: Company Reports)

Decent Rise in FUMAS Level: The company reported a decent rise in the FUMAS position to ~$128 billion during the end of the H1FY21 period. It was driven by decent growth in the TWS segment owing to appointments of large superannuation trustee. In this regard, AMP Life Trustee was appointed from 1 July 2020, and Hub 24 Trustee was appointed from 1 August 2020. Favourable momentum was also witnessed in the CTS segment, including Corporate Trust and Securitisation services.

Rise in FUMAS Position in H1FY21 (Source: Company Reports)

Resilient Business Units Performance: CTS revenues have increased by 3.1% in H1FY21, on the prior corresponding period. The revenue from this segment is linked to the prevailing market levels, and this reflects the gradual recovery of investment markets from the lows witnessed in H2FY20. The organic growth and positive impact of market recovery were however, offset by a small number of fund closures during the period. Despite this, the funds under supervision have increased by 9.8% in the second half of FY20. There has been continued growth in the CTS UK and European teams, and the combined businesses supervise thirty funds with ~£2.25 billion of funds under supervision. The TWS segment also witnessed decent organic growth momentum driven by Superannuation Trustee Services in H1FY21.

Top 10 Shareholders: The top 10 shareholders together form around 31.18% of the total shareholding, while the top 4 constitute the maximum holding. Australian Foundation Investment Company Ltd and Paradice Investment Management Pty. Ltd. are holding a maximum stake in the company at 6.32% and 6.21%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: The company delivered an improved net margin performance to 19.5% in H1FY21, compared to 15.7% in the previous half. There was also a corresponding increase in the ROE to 3.6% from 2.9% during the same period under consideration. The liquidity improved with the current ratio at 12.34x in H1FY21, compared to 8.51x in H2FY20. There was a slight uptick in the debt-to-equity ratio to 0.14x during the period. The borrowings of the company stood at $39.3 million as on 31 December 2020.

Growth and Profitability Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Key Risks: The onset of the COVID-19 pandemic has resulted in the elevation of Equity Trustees’ risk profile of the company. While some of the immediate business risks have been successfully mitigated in the short-term, the impact of the pandemic still lingers, and the risk profile is expected to remain elevated in the near term. EQT operates in a sector where it has to prudently manage the operational risks, otherwise, which may give rise to financial losses, fines, penalties, damage in reputation, etc. It is also exposed to financial risks, including liquidity, foreign exchange, interest rate and credit risks. The company is dependent on the expertise and know-how of its employees for the performance of the funds, which translates to an impact on its profitability. Any adverse scenario of employee attrition might pose a challenge to the company in the near term.

Outlook: The main objective of the company is to safeguard the wealth of people and support the broader community. It aims to build capacity and empower the indigenous Aboriginal communities and increase their participation in the management of their wealth. The decent increase in the FUMAS position reflects its investments in growth strategies. The management believes that the industry trend towards outsourcing the fiduciary role will continue to benefit the company. With the recovery and stabilisation in the equity markets, it expects decent growth in corporate trust and related products. The company is also focused on technology enhancements for improving productivity and enrich the customer experience. It plans to increase its investment by ~$1.5 million per annum in technology in FY21.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:  The company has a decent cash position of $92.2 million as on 31 December 2020, to pursue on its growth strategy and make investments on its people and technology. As per ASX, the stock of EQT is trading above its average 52-weeks’ levels of $16.180-$29.680. The stock of EQT gave a positive return of ~1.64% in the past nine months and a negative return of ~8.97% in the past three months. On a technical analysis front, the stock of EQT has a support level of ~$23.64 and a resistance level of ~$25.027. We have valued the stock using an P/E multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe the company can trade at a slight premium to its peer average P/E (NTM Trading multiple), considering the uptick in recovery of equity markets and the stable balance sheet of the company. For the purpose, we have taken peers such as Perpetual Limited (ASX: PPT), Magellan Financial Group Limited (ASX: MFG), Platinum Asset Management Limited (ASX: PTM), to name a few. Considering the expected upside in valuation, improved financial performance in H1FY21 on H2FY20, strong cash position of the company and positive long-term outlook with the stabilisation of equity markets, we recommend a ‘Buy’ rating on the stock at the current market price of $24.150, up by 0.625% as on March 15, 2021.

EQT Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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