Simply Super Growth Prospects for Diversa
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Diversa's future looks bright, given that it provides products and services across the superannuation value chain to super funds, boutique investors, intermediaries and individuals.
Financial services company Diversa Limited (DVA) has an interesting market opportunity, but has yet to convert that to profitability. Integration costs of a slew of acquisitions and putting its infrastructure in place have seen the operating cash outflows pile up. But the current financial year is expected to see Diversa break through for a maiden profit.
The Brisbane-based Diversa is a superannuation, insurance and investment company, established in March 2009 and listed on the Australian Securities Exchange (ASX) the following month (through the shell of delisted biotech firm Ambri.) The company provides essential superannuation, risk and investment management products and services to wholesale clients, including superannuation funds, financial advisers, accountants and fund managers. Diversa is organised in two business units: Trustee Services, which includes investment management services, and Superannuation Services, which comprises superannuation administration, insurance administration and promotional services.
Diversa’s market niche is to enable specialist, niche superannuation funds, financial advisers and fund managers to compete effectively with larger industry peers, by gaining the benefits of scale through collaboration, and to deliver these specialist clients with business solutions that allow them to focus on what they do best – servicing their own clients, members and investors. Diversa also provides superannuation and insurance products directly to its retail clients.
Smaller, niche super funds which are challenged by the costs of offering a competitive suite of superannuation services can get access to Diversa’s menu of services, including trusteeship under Diversa’s licences, administration, product management, insurance, marketing services (to employers and members), internet technology services, member services, employer services, investment management and consulting services. Customers can take whichever combination of these services they want.
Diversa’s funds management arm provides investment management and consulting services to the group’s partner superannuation funds. The division also looks to partner with boutique investment firms, to take an equity stake in the managers in return for business support, capital, access to funds to manage, and operating support.
Diversa’s partners gain the scale and support benefits of partnering with a larger group: they may also take an equity position in the company, enabling them to participate in the growth of Diversa’s wider business, and ensuring an alignment of interests. Central to the Diversa business model is that as more partners join the network and utilise more services, the group builds further capability and scale.
Diversa has acquired a range of service provider companies to the superannuation industry and put them together to benefit from the combined scale. In 2013 it bought the LESF trustee and administration business, which had about $80 billion in its care, and the Melbourne-based CCSL third-party trustee and advice business, which operates within Diversa as a stand-alone business-to-business trustee company, specialising in superannuation and pension funds.
LESF also came with a MySuper licence, introduced by the government as part of the “Stronger Super” reform package to encourage every super fund to offer a simple, low cost default option: from 1 January 2014, employers have had to pay default super contributions to a MySuper product for employees who have not chosen a super fund. The MySuper product must offer a diversified investment strategy and simple automatic life and TPD (total and permanent disablement) insurance. Diversa has white-labelled that fund for other advisors to use.
Diversa also benefited from the 2013 decision by the Australian Prudential Regulation Authority (APRA) to make operators of eligible rollover funds (ERFs) reapply for their licence last year, with several such operators deciding to get out of that business. Diversa was able to pick up some large clients, including Praemium, ING, Virgin, Hub 24 and Power Wrap. The group also provides administration, investment and insurance services to self-managed super funds (SMSFs).
In 2014, Diversa’s growth gathered steam, with the purchase of diversified financial services boutique Tranzact Financial Services, and the superannuation trustee business of The Trust Company, which had been taken over by Perpetual. This business provides third-party superannuation trustee services to 15 super funds with around $3.1 billion in assets.
On its own, The Trust Company acquisition almost quadrupled Diversa’s funds under trusteeship, management and administration (FUTMA), to $4.2 billion: at 30 June 2015, that amount had grown to $6.7 billion. Since the acquisition of The Trust Company’s superannuation business, FUTMA has grown at an annualised rate of about 35%. There are currently 34 trusteeship clients and two in-house investment clients.
For the year ended 30 June 2015, the Trustee Services business (including investment services) generated $4.44 million in revenue, up 150 per cent. At the EBITDA (earnings before interest, tax, depreciation and amortisation) level, the Trustee Services business earned $707,876, up from a loss of $797,482 in FY14. Revenue for the Superannuation Services business was up 12 per cent, to $2,million, but the division returned an EBITDA loss of $30,720.
Diversa’s future looks bright, given that it provides products and services across the superannuation value chain to super funds, boutique investors, intermediaries and individuals – in both the retail and wholesale channels – and the industry’s growth is locked in over the coming years, as the superannuation guarantee (SG) charge (the compulsory super savings rate) continues its rise to the legislated 12 per cent of salaries by 2019. The business model is perfectly suited to the new and emerging regulatory environment under the FoFA (Future of Financial Advice) and the Stronger Super reforms. All players have to adjust their business models to embrace these reforms and Diversa is well-placed to offer solutions to those without the appropriate scale or product/service offerings – solutions that offer both immediate access and are far cheaper than attempting to build these products/services themselves.
Ongoing demand for Diversa’s core services from smaller superannuation funds, independent financial adviser groups and investment managers, self-managed super funds, employer groups and fund promoters seems assured. Now the company needs to turn its strong market position into profitability.
Diversa made a net loss of $2.16 million in FY15, an improvement on the $4.78 million loss recorded in FY14. On a per-share basis, the loss improved from 18.7 cents in FY14 to 4.6 cents in FY15. A full FY16 contribution from The Trust Company superannuation business and Tranzact, on top of growth in other parts of the business, should be able to deliver profitability.
The share price has increased steadily from 26 cents at the start of 2013 to 52.5 cents at present – helped by an 18 per cent surge in April, when Equity Trustees Limited (EQT) made an unsolicited takeover proposal for Diversa, at 53 cents a share. Diversa did not enter into discussions, and the bid went nowhere: since then, the shares have slid a little, from 55 cents to the present level, which values the company at $31 million. There are no analysts’ forecasts to go on, but Diversa should be able to break through into the black this year. No competitor offers an equivalent range of products and services to the multitude of third-parties in the super and financial services world that need precisely what Diversa has to sell – it should be a recipe for sustained profitability growth, and a much larger market capitalisation than $31 million.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au