Company Overview: Mainstream Group Holdings Ltd, formerly MainstreamBPO Limited, is an independent fund administrator. The Company provides services for a client base of fund managers and superannuation trustees. The Company operates approximately three business lines, such as FundBPO, SuperBPO and ShareBPO. FundBPO provides investment administration, fund accounting, unit registry and middle office services to a range of investment managers. SuperBPO provides outsourcing services for superannuation funds, including member administration and communications, fund accounting and client reporting. ShareBPO provides share registry services for listed companies and exchange-traded funds. SuperBPO's clients include industry funds, corporate funds and master trusts. SuperBPO is involved in administering a range of superannuation products, including complex defined benefits schemes and pension and income streams. FundBPO operates in approximately three geographies, such as Australia, Hong Kong and Singapore.

MAI Details

Growth in FUM and Revenue Witnessed: Mainstream Group Holdings Limited (ASX: MAI) is primarily engaged in the business of providing global outsourced fund administration and custody services to a range of wealth management sector participants. As per ASX, the market capitalisation of Mainstream Group Holdings Limited stood at ~A$61.97 million. Recently, the company released its annual report for the year ended June 30, 2019,  wherein revenue grew by 21% on Y-o-Y basis and amounted to $50 Mn while EBITDA was up by 17% in FY19 as compared to the prior year and stood at $7.4 Mn. Funds under Administration (FuA) witnessed a rise of 24% in FY19 against the prior year and closed at $173 Bn. The $34 billion rise encountered in FuA was because of the market movements and net inflows.The number of funds administered witnessed a rise and stood at 1,012 as compared to FY18 figure of 815 in the variable market conditions.

The company has achieved another year of growth and improved financial results, which might help it gaining traction among the market participants. In the month of May 2019, the company has made an announcement about the strategic review of Superannuation business after structural changes in Australia’s superannuation industry. Therefore, the review confirmed that the company could deliver better value for its shareholders by investing towards growth and development of core Fund Services businesses. The Board has elected to absorb Superannuation business into Fund Services business and focus towards growing public sector superannuation fund as a complementary offering to SMA (or Separately Managed Account). The company has announced final dividend amounting to 0.50 cents per share, which was franked at 50% out of profit reserve account. When it gets combined with an interim dividend amounting to 0.75 cents per share, which was franked at 100%, total dividends declared for the year comes out to be 1.25 cents per share. The company added that, historically, all the dividends which were paid were fully franked. The move to partial franking implies the growing success of international businesses.

There are expectations that attractive industry fundamentals, respectable capabilities to garner revenues and build cash levels and less leveraged balance sheet as compared to the broader industry might act as tailwinds for future growth. 
 
 
Key Numbers (Source: Company Reports)

Top 10 Shareholders: The following picture provides a brief overview of the top 10 shareholders in Mainstream Group Holdings Limited:


Top 10 Shareholders (Source: Thomson Reuters)

Decent Liquidity Levels: The company’s current ratio stood at 2.89x in FY19, which is higher than the industry median of 1.46x and, therefore, it can be said that the company is in a better position to meet its short-term obligations. Additionally, the decent standing in terms of liquidity might help the overall company to make deployments towards strategic growth objectives, which could support long-term growth. The company’s Debt/Equity ratio stood at 0.20x in FY19, which is lower than the industry median of 0.44x and, therefore, it can be said that MAI’s balance sheet is less leveraged as compared to the broader industry. The lower debt on the balance sheet generally reflects stability, and the company can focus on its growth prospects. The percentage of long-term debt to total capital stood at 13.9% in FY19, which reflects a fall from FY18 figure of 19.7% and, therefore, it can be said that MAI has reduced its exposure towards long-term debt component.


Key Metrics (Source: Thomson Reuters)

Implementation of Global Operating Model: With respect to the business update, the company stated that 28% of the annual revenue was garnered outside of Mainstream’s traditional Asia-Pacific market that implies successful implementation of the company’s global operating model and diversified service offering throughout different markets and asset classes. Additionally, 66% of EBITDA was derived from offshore businesses. The capital raising amounting to $10.3 million during FY19 was utilised towards funding the custody regulatory capital, expansion of the US sales operations and upgrades to the Mainstream’s digital presence.
The company has deployed $8.3 million towards technology, data and automation in FY19 as compared to FY18 figure of $8.2 million. The additions included IT expenditure on the new product for a key client, along with the technology upgrades in order to improve the processing efficiency and comply with legislative changes. 

Update on Strategic Review: As per the company’s press release, Mainstream Fund Services, that include fund administration and custody, made a contribution of 92% to the company’s FY19 revenue and Board has a robust outlook for the business. Mainstream Superannuation Services has made a contribution of 8% to Mainstream’s FY19 revenues. This underperformed during the period due to client losses through fund mergers and regulatory changes. It is anticipated to contribute less than 2% of revenue in FY20.

Considering the ongoing consolidation and disruption in superannuation industry, the company’s Board conducted the strategic review of the Superannuation Services and has decided to integrate operations into Fund Services and change its strategy from focusing on industry fund member administration to growing the Mainstream’s public offer superannuation fund as a complementary service to Mainstream’s SMA fund. The company has recognised a non-cash impairment amounting to $2.8 million, which reflects a reduction in value of the Superannuation business. The company added that the impact of the one-off non-cash impairment had been reflected in financial statements.

Capital Raise Supported Balance Sheet: The company stated that its balance sheet has been strengthened by capital raising and it is now holding $10 million additional regulatory capital in order to help the Custody business. Additionally, ANZ three-year debt facility has been reduced from $9 million to $7 million. The following picture provides an overview of the balance sheet:


Balance Sheet (Source: Company Reports)

There has been robust cash generation in the underlying business, which could be beneficial moving forward.The company’s cash and short-term investments have witnessed a significant improvement from FY15- FY19, which might help the overall company in getting traction among the market participants. During the same time span, the total current assets have witnessed a CAGR growth of 62.73%.

What to Expect from MAI Moving Forward: The company added that the organic growth happens to be a driver behind the growth in revenue and earnings and the company has been deploying towards new growth opportunities and digital capability. Coming to the guidance for FY20, there are expectations that the revenue would be around $55 million. However, EBITDA is expected to be around $8 million (before application of the AASB 16 Leases).


EBITDA Guidance Breakdown (Source: Company Reports)

The company expects to continue with the capex on key client projects for future products as well as technology upgrades in order to improve the processing efficiency and comply with the legislative changes. The company’s key personnel have stated optimistic views with respect to the growth of core fund services business, especially in the private equity and custody operations. It was stated that the non-cash impairment in accounts implies actions that have been taken to address challenges in the superannuation business and shouldn’t overshadow robust underlying performance as well as growth outlook. The company is well-placed for further organic growth and it would continue to deploy towards global business development, key client projects, technology upgrades as well as compliance. With respect to the outlook for dividends, the company stated that it would continue to reward shareholders with dividends.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodologies:
Method 1: Price to Cash Flow based Valuation

Price to Cash Flow based Valuation (Source: Thomson Reuters), *NTM: Next Twelve Months

Method 2: EV/EBITDA Multiple Approach

EV/EBITDA Based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM: Next Twelve Months

Stock Recommendation: The company’s stock has witnessed a fall of 21.67% in the time span of the previous six months, while in the past one month, the stock has fallen 6%. As per ASX, the company’s share price is trading lower than the average of 52-week high low levels and, therefore, it can be said that the current trading levels are offering a decent opportunity to make an entry. The company has witnessed a CAGR growth of 35.78% in its total revenues in the time span of FY15- FY19 and, therefore, it can be said that the company has decent capabilities to garner revenues. There has been a CAGR growth of 33.84% in the same period and, thus, it looks like that MAI has decent capabilities to build the cash levels. There are expectations that the decent capabilities to garner revenues and build cash levels might support the overall company in achieving long-term growth objectives. Based on the foregoing, we have valued the stock using two relative valuation methods, i.e., Price to Cash Flow multiple and EV/EBITDA multiple and arrived at a target price upside of lower double-digit growth (in percentage term). Hence in view of aforesaid facts, valuation, and current trading levels, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.445, down 5.319% on 18 October 2019.

 
 MAI Daily Technical Chart (Source: Thomson Reuters)

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