Banking Day

CBA finds plus-side in Count exit

08 July 2019 6:43am

In selling out of its compromised Count Financial Planning advisory business for next to nix, Commonwealth Bank may find it’s able to minimise the expected write-down, thanks to the upside for the buyer, CountPlus.
The share price of ASX-listed CountPlus has more or less doubled since CBA and its associated entity informed the market in the second week of June that CountPlus would buy the advisory business that bears its name from the bank that is also its largest shareholder.

CountPlus will acquire an 85 per cent interest in Count Financial for A$2.125 million. CBA bought the business eight years ago for $370 million, when industry legend Barry Lambert ran the show.

The CUP share price has soared from 44 cents to 94 cents since its low point on June 6, and its current value is only two-thirds of the target price of CUP’s one and only (though aligned) equity analyst.

The gain is 92 per cent since CBA and CountPlus surprised the market with the news (on June 13) of this deal. The bank will in time sell down its 36 per cent holding in CountPlus.

Appreciation of this unusual deal, for the buyer above all, has been growing since the release last week of an independent expert’s report by Lonergan Edwards.

Liam Cummins, the sell-side analyst at house broker Wilsons Advisory and Stockbroking found plenty of reasons to add to his acclaim for the CUP value story in CBA selling out cheaply.

“Beyond simply suggesting to shareholders that the Count Financial transaction is positive for shareholders, the numbers suggest it is a sensational deal,” Cummins chirped.

“As flagged, the deal comes with strong protections -$200 million of indemnities from Commonwealth Bank - and scope for significant earnings accretion. There is work to be done, but CUP management have shown they can turn businesses around.”

Already labelled Count’s “Alan Bond moment” in some quarters, Lonergan Edwards “assessed the value of 100 per cent of Count Financial at between $9.0 million and $20.0 million” and thus CountPlus’ 85 per cent interest has a value ranging from $7.7 million to $17.0 million.

Cummins, the Wilsons analyst, adds a few more assumptions and “determined a $40 million value for Count Financial.

“Adjusting this value for the $12 million net cash (debt free) position implies the business trades on a 2021 price/earnings ratio of 14.4 times,” Cummins said.

“On that basis, CUP’s $2.5m consideration was struck at just 1.3 times earnings.”

Count Financial has generated operating losses as part of CBA over recent years, Lonergan Edwards point out and CBA had estimated Count Financial will have incurred a loss of $13 million in 2018/19.

By contrast CountPlus - an entity now at the back end of a two-year “turnaround initiative” – produced a profit of only $850,000 last financial year, though it managed a net profit of $2.6 million for the half year to December 2018.

In his shareholder letter at the time, the still newish CEO Matthew Rowe assured readers that “the turnaround strategy for the company is almost complete.

“The improvement in financial results derives in large part from the adherence by our member firms to shared values and non-negotiable team rules, among them taking care of our clients, our people and making a positive difference in our community.”

More negotiable in the period ahead may be precisely who at CBA and CountPlus does what and pays for what to complete the mitigation of years of crummy bank oversight of the advice and fees charged for clients of Count Financial.

As recently as March, ASIC, in an “update on further reviews into fees-for-no-service failures” revealed that in December last year CBA worked out it needed “to conduct another review of whether customers of Count Financial [and two other CBA planning entities] paid fees for no service in the past.”

Answering its own question “Is an offer of an annual review sufficient?” ASIC said then it was “not satisfied with the approach taken by Count Financial” and the other two CBA  licensees.

ASIC also made plain that it “strongly disagreed” the Count Financial approach to gathering evidence, at least as CBA proposed at the time.

For now, CountPlus has said in the notice of a general meeting last week that it “assessed the adequacy of the $200 million monetary cap and considers that it provides a prudent buffer for unforeseen remediation related costs above the anticipated amounts in that regard.”

Supplying a detail previously unknown to investors in CBA, CountPlus explained “this conclusion has been drawn on the basis of the remediation provision recognised by CBA in its financial statements as at March 2019 is $144 million.

“The Company has interrogated CBA with respect to this provision insofar it relates specifically to Count Financial.”

Shareholders in CountPlus will meet in Sydney on Tuesday, 6 August to vote on whether to grab the value, or leave this legacy to rot within CBA.

Article by: Ian Rogers

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