NZF

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

NZF is an investment holding company focused primarily on owning and managing financial services businesses, including asset management, investment administration and advisory, and other adjacent services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

NZF’s core business model centers around acquiring, developing, and managing various financial services operations. Its revenue sources are generally fees generated from asset management, performance fees, administration fees, and fees from their advisory businesses. However, they are in the process of shifting from transaction based revenue to recurring revenue by increasing its client base and increasing retention.

Business Overview

NZF has expanded rapidly over the last few years. This is thanks to strategic acquisitions as they have acquired 9 companies since 2019. Its investments are primarily focused in New Zealand, where it is a well-known brand.

The company has 3 main core pillars of operation that it generates its revenue from:

  1. Wealth Management: This is their largest segment, offering asset management, financial planning, and investment advisory services.
  2. Investment Administration: This part of the business primarily offers registry services and investment administration software solutions to financial service providers.
  3. Technology: The companies are focused on modernizing the platform that all of its different pillars function on, with plans to launch new apps, improve user experience and implement modern technology in its operations.

Moat Analysis

NZF’s competitive advantage, or “moat”, rests on several pillars, though they might be considered narrow rather than a wide, impenetrable fortress.

  • Switching Costs: NZF’s investment administration platform is deeply integrated into client operations, creating a high switching costs due to the burden of migrating data, retraining employees, and ensuring consistency of their operations. This also applies to the clients under their advisory businesses as clients are typically reluctant to swap services due to the pain of rebuilding a relationship. This does not necessarily apply to all of the other aspects of their services, which means their moat is not that wide.
    • Brand Recognition and Reputation: In New Zealand, NZF is a well-recognized name in financial services and its long-standing history can serve as a soft moat, because for most people, the financial sector needs trust more than anything else.
    • Scale and Cost Advantages: Having consolidated a range of service offerings in-house, NZF has some scale and cost advantages in the New Zealand market. These do not act as a wide moat as they are not too significant and easy for a competitor to replicate.

Moat Rating: 3/5 NZF possesses a narrow but recognizable moat thanks to high switching costs, brand recognition and some cost advantages due to scale. However, it is important to consider that these advantages are not wide enough to withstand competitors entering the market with similar or new business models.

Risks to the Moat and Business Resilience

Despite its advantages, NZF faces notable threats:

  1. Increased Competition: NZF operates in a competitive space, with other large financial institutions, new Fintech companies, and international companies trying to compete within their industry. Increased competition can erode their profits and force down prices.
  2. Technological Disruption: Fintech companies and new technologies can easily disrupt traditional business models. If NZF cannot keep up with changing technology, their software solutions will become obsolete.
  3. Regulatory Changes: Financial services are heavily regulated, any shift in regulations could impact their profitability and strategic direction. Also, new legislations can put restraints on their capital allocation, making it difficult to grow at a pace they would desire.
  4. Client Volatility: Client’s can reduce investment and cancel service contracts due to their financial issues or the desire to move their business elsewhere. This reduces the predictability of their revenue stream and makes business decisions harder.
  5. Key Management Departures: If key decision makers leave the company, that can damage the morale of their current employees, as well as introduce changes to their strategy.

These risks highlight the need for NZF to be agile and adaptable. The reliance on a few core business pillars, particularly wealth management and investment administration and the geographic concentration in New Zealand also makes it vulnerable to local downturns.

Business Resilience: Overall, NZF has a relatively resilient business model because it has diverse sources of revenue from multiple different business pillars. Also, it has high retention rates due to the switching costs discussed above. Also, the company is well funded and should be able to weather any downturns.

Financial Analysis

Financial results for the six months ending in September 2023, demonstrate strong growth across all financial pillars of the company. However, they are still trying to reduce costs after the recent acquisitions. Here’s an in-depth breakdown:

Revenue: - The revenue was up by 40% to NZD $120 million from the same period in 2022, as result of strategic growth in revenue generating divisions. - However, this was a slower rate of increase as compared to the full-year 2023 results. - The majority of revenue growth stemmed from its wealth management and technology divisions. The wealth management division contributed the most to overall group revenues. - Acquisitions boosted revenues as well, however, the integration of recently acquired companies is still being done.

A shift from transactional to recurring revenue has been a key driver of growth, contributing to more stable and predictable financials.

Profitability & Margins: - Net profit after tax rose to NZD $13.4 million - The company’s operating margin remained largely stable as it was 27%, indicating efficient core operations.

Even though revenues increased, the company is facing difficulties in reducing costs, which means the operating margin has stayed similar to the same time period of 2022. - Operating expenses increased by 42%, reflecting the expenses incurred due to recent acquisitions and also the need to scale up their business operations. - The company’s costs have increased due to one time adjustments for the acquisition of some companies.

Balance Sheet: - Cash levels were strong at NZD $117 million - Total assets amounted to $1.8 Billion, while liabilities were at $1.6 Billion. - The Debt-to-equity ratio was 42%, which is healthy, but needs monitoring for a while. - The Net Assets were at NZD $257 million.

Debt & Capital Expenditure: - They currently have long term debt of approximately 400 million, which needs to be addressed soon, since there were no reductions in it this year. - Capital expenditures have risen in the last 6 months due to the company’s aim to improve its current technology stack and also the integration of newly acquired companies into its portfolio.

Key Takeaways: - The results are positive and highlight growth in their revenue-generating operations. - The company needs to focus on reducing expenses and maintaining margins at the level they were before their expansionary years.

The balance sheet is relatively healthy, but needs more cash generated from operations in order to repay debt in the short term. - Overall, growth is trending in a positive direction.

Understandability Rating: 2/5

NZF’s business model is not straightforward, and requires good understanding of financial accounting and investment management. The company itself seems to have issues with managing the integration of the various businesses it is acquiring. The complexity of the sector, coupled with their recent acquisitions and the technical aspects of their operations make it slightly difficult to grasp from an outside perspective.

Balance Sheet Health: 3/5

NZF’s balance sheet shows the company’s ability to raise enough capital and maintain some operational flexibility, however, they need to be careful about the debt situation and continue to strive for positive operational cash flow generation. Cash is still reasonably high, but it is a point that needs monitoring. This is the result of a few things:

  • The high debt levels need to be brought under control. - The negative cash from investing activities could put some strain on their balance sheet and make them more dependent on lenders for funding acquisitions.

The current balance sheet is healthy, but future growth prospects and shareholder value depend on improving efficiency and increasing the gap between revenue and costs of operations.

Recent Concerns and Management Discussion

NZF recently addressed two major controversies in its annual report and its earnings calls:

  1. Share Price Volatility: The company’s stock has been particularly volatile in the last year. As such, management has been focusing on generating a more sustainable return on equity and cash flow in order to attract long term investors.
  2. Acquisition integration: Investors have often raised concerns on how the company will effectively integrate newly acquired businesses. Management has emphasized that their aim is to use their resources more effectively and ensure that each new company is running on its platform with its unique culture intact.

Management has acknowledged the above points and is addressing them. They are focusing on growing revenue while maintaining operational efficiency.

In conclusion, NZF is a company with promising prospects, a developing but not fully sustainable moat, and the challenges associated with managing multiple companies in a fast-evolving sector. Its unique approach and the recent focus on revenue generation should be a sign of optimism for the future of the company and its shareholders. However, it is essential to continue to monitor the key drivers that affect its success and also the areas of risk.