Company Overview: EQT Holdings Limited (ASX: EQT) is engaged in the provision of trustee and executor services to help families protect their wealth. It offers a varied range of services to individuals, families and corporate clients, which includes asset management, estate planning, philanthropic services, to name a few. The company has a presence in Melbourne, Bendigo, Sydney, Brisbane, Perth, London and Dublin.

EQT Details

Improved Revenue Performance Aided by Decent Growth in FUMAS: EQT Holdings Limited (ASX: EQT) provides trustee services, investment & wealth management services and superannuation trustee services, to name a few of its business activities. The market capitalisation of the company as on 31 May 2021, stood at ~$506.64 million. The company has witnessed a decent increase in FUMAS level along with a decent recovery in the equity markets. As per its Managing Director Mick O’ Brien, the improved performance has been a result of Group’s core business activities and encouraging FUMAS growth.

EQT expects to continue to benefit from the industry trend to outsource the fiduciary role. It anticipates ongoing funds growth with an expected uptick in the equity markets going forward.

In H1FY21, the company reported an increase in revenue by 3.7% to $48.3 million when compared to the previous half. The net profit improved by 27.4% to $9.8 million on the previous half. There was also an increase of 8.7% on the underlying NPAT to $10.7 million. The management declared an interim dividend of 44 cents per share during the period. There was a substantial improvement in the FUMAS position to ~$128 billion in H1FY21, up by ~27% on the previous half. It ended the period with a cash position of $92.2 million as of 31 December 2020, reflecting a significant rise from the level of $72.6 million as of 31 December 2019.

Steady Increase in Cash and Short Term Investments (Source: Analysis by Kalkine Group)

Decent Rise in Revenue: There has been improved performance in the revenue during H1FY21, with an increase of 3.7% on the previous half. The growth was driven by a decent rise in organic revenues, especially in TWS – Superannuation and also the positive impact of equity market towards FUMAS growth. The revenue from Trustee & Wealth Services (TWS) stood at $31.8 million during the period, basically driven by the improved FUMAS position. Moreover, the pipeline in the Corporate Trustee Services (CTS) business segment remains strong, with 30-40 new funds expected within the next few months.

Revenue Performance (Source: Company Reports)

Improved Momentum in UK/Ireland: The company has been building momentum in the Europe unit and has increased staffing from 6 to 12 in order to support growth and regulatory requirements. It has established the Irish Collective Asset-management Vehicle (ICAV) platform for wider distribution. There has been an increase in the number of funds in H1FY21, along with a pipeline of significant opportunities going forward. 

Decent Balance Sheet Position: The company has been maintaining a decent balance sheet with a net cash position, low gearing levels and healthy liquidity. The debt to equity ratio (excluding cash–backed ORFR Loans) stood at ~6.5%, with further substantial headroom in covenants. Moreover, the imminent consolidation of licenses has the ability to reduce capital requirements by a further ~$5 million in the medium term. It expects to make a pay-out of 70% to 90% of reported NPAT, providing headroom for growth opportunities in the future.

Change of Director’s Interest: The company’s director, Ms Anne Maree O’Donnell has undergone a change of interest in the company recently and acquired 53 ordinary shares of the company on an indirect basis.

Appointment of Company Secretary: The company has announced the resignation of Ms Jennifer Currie as Company Secretary with effect from 30 April 2021. She has been succeeded by Mr Philip Gentry, Equity Trustees’ Chief Financial Officer and Chief Operations Officer.

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:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: The company reported improved net margin performance in H1FY21 at 19.5%, compared to 15.7% in H2FY20. There was also a simultaneous increase in the ROE of the company to 3.6% during the period. The current ratio increased to 12.34x in H1FY21, from a level of 8.51x in the previous half. There has been a slight uptick in debt to equity ratio to 0.14x in H1FY21, from 0.11x in H2FY20.

Growth Profile and Profitability Metrics (Source: Analysis by Kalkine Group)

Key Risks: The onset of the COVID-19 pandemic has disrupted most of the economies, and EQT also impacted adversely owing to the disruption in the equities market. There has also been an elevation in the Equity Trustees' risk profile, including people, financial, investment, strategic and operational risks. Though the company has managed the COVID-19 risk well, but the impact of the pandemic continues to linger and remains elevated. The Group is also exposed to the risk that its strategic decisions might prove to be incorrect, or it might be too difficult or costly to execute. The company also relies on several third-party service providers for various fund administration, investment management, custody, etc. for operational needs. Any failure on the part of the service providers to fulfil its obligations might have operational and regulatory impacts on the Group.

Outlook: EQT is focused on improving the lives of people and ensures that over $100 billion in savings held by investors, beneficiaries and members are looked after securely. It manages more than 3,000 private estates and trusts as of H1FY21. It has authorised grants and distributions of over $90 million to charitable causes. The impact of the COVID-19 pandemic has highlighted the benefits of a stable and trusted fiduciary, and the company expects an increase in shift from the in-house to outsourced models in the superannuation system. It plans to invest in new technology to drive risk management activities and respond in a seamless manner to regulatory developments.

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

Source: 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:  On 29 March 2021, the company has announced the appointment of Kelly O’Dwyer as a non-executive director to its Board. She has an understanding of government and policy, including economic and tax policy, and is expected to bring new ideas to the team. As per ASX, the stock of EQT is trading below its average 52-weeks’ levels of $22.730-$29.680. The stock of EQT gave a negative return of ~3.27% in the past three months and a positive return of ~0.16% in the past one week. We have valued the stock using a P/E multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight premium to its peer average P/E (NTM trading multiple), considering the expected growth in FUMAS, stabilisation of the equity markets, shift in preference and decent cash position, etc. For this purpose, we have taken peers such as Netwealth Group Ltd (ASX: NWL), Pinnacle Investment Management Group Ltd (ASX: PNI), Centuria Capital Group (ASX: CNI), to name a few. Considering the expected upside in valuation and current trading levels, decent performance when compared to the previous half, impressive rise in FUMAS, expected shift to fiduciary players and a strong balance sheet, we recommend a ‘Buy’ rating on the stock at the current market price of $24.190, up by 0.165% as on May 31, 2021.

EQT Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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