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ASX:COG
COG Financial Services Ltd
Investment Summary
The fund managers believe that COG Financial Services Ltd has showcased a unique resilience, even amidst market challenges, primarily due to its diversified operations. The core divisions, Finance Broking & Aggregation and Asset Management, have performed robustly, contributing to an impressive annualized finance volume exceeding $9 billion. In their opinion, the recent acquisition of Paywise could enhance NPATA growth significantly, while the entry into financial planning via a stake in Centrepoint Alliance opens new organic growth avenues. They express optimism about COG's potential to achieve an NPATA exceeding $30 million in FY25 due to these strategic moves. However, there are concerns regarding valuation complexities linked to minority investments and underperforming segments, leading to market skepticism. As COG seeks to simplify its operations and effectively communicate its strategy under new leadership, the fund managers suggest that a focused approach to capital management could facilitate a much-needed re-rating of its share price, revealing inherent value.
Commentary From The Managers
Naos Asset Management
31 Mar 2025
$1.13
- Naos Asset Management believes that COG Financial Services Ltd requires significant change to improve shareholder outcomes and simplify its business.
- The first critical step occurred at the end of Q3 FY25, with the resignation of three directors and one director transitioning to a non-executive role.
- Tony Robinson is appointed as Non-Executive Chairman, and John Dwyer joins as a Non-Executive Director; both bring experience from their time at PSC Insurance.
- COG is exploring restructuring options, including potential divestments of minority investments that do not significantly contribute to its core operations.
- The refreshed board may adapt successful strategies from PSC Insurance, focusing on business structure simplification.
- COG has an opportunity in insurance broking, leveraging its 792 member broker firms to provide insurance for high-value equipment acquisitions.
- The FB&A Division, as the largest owner and aggregator of finance brokers in Australia with over 20% market share, faces challenges but has growth potential through organic strategies and strategic acquisitions.
- Improving earnings in the FB&A Division may lead to a higher market valuation for COG, similar to the growth experienced by PSC Insurance.
- Naos Asset Management continues to hold the investment, believing COG possesses the fundamentals needed for a simplified strategy to grow earnings consistently.
Naos Asset Management
30 Sept 2024
$0.94
- COG delivered a satisfactory FY24 result with NPATA remaining flat, but increased by 12% when excluding non-core earnings from TL Rentals.
- EPS growth was flat due to an increase in shares on issue.
- Naos Asset Management is attracted to COG's low working capital requirements and excellent cash flow generation from three aggregation businesses.
- Cash results support a strong dividend profile.
- ~40% of Naos's investment in COG was sold following FY24 results.
- COG's market valuation has significantly declined over the last 12 months, with a current P/E below 8 times based on FY24 earnings.
- The decline in valuation is attributed to the complexity of COG’s structure and capital management decisions.
- Naos believes COG shares are undervalued and suggests divesting divisions to realize value.
- Potential divestitures include COG’s FB&A division to a larger mortgage broking group, and novated leasing business.
- Naos recommends selling minority investments in Earlypay and Centrepoint Alliance, and divesting Westlawn.
- Proceeds from divestitures could be used to scale COG’s FB&A and novated leasing divisions.
- Simplifying COG’s business and adopting a focused capital management strategy could lead to a significant re-rate in share price.
Naos Asset Management
31 Mar 2024
$1.44
- Naos Asset Management has held an investment in COG Financial Services for over 10 years.
- COG has transformed from a commercial lease book in run-off to Australia’s largest asset finance broker and aggregator.
- COG originates over $9 billion in loans annually through its network.
- Executive Director Cameron McCullagh is a significant shareholder and contributed to the growth in the finance broking market.
- COG has acquired numerous brokers and aggregators, establishing itself as the largest aggregator in the finance broking market.
- Recently, COG diversified into novated leasing and asset management, enhancing its business model.
- COG operates a capital-light model, mitigating credit risk while generating revenue.
- COG has access to over 40 funders, providing brokers with diverse funding options.
- COG has developed an in-house IT system, enhancing data management and cybersecurity for broker members.
- COG facilitates succession planning for brokers, allowing older owners to monetize equity effectively.
- COG hosts industry events and provides training solutions, fostering community among its broker members.
- The acquisition of Paywise has strengthened COG's position in the novated leasing sector.
- COG can leverage its network to cross-sell novated leasing services to new clients.
- COG’s asset management division capitalizes on investor funds for lending opportunities, enhancing profit potential.
- COG aims for an NPATA of >$30m in FY25, driven by its diversified segments.
- Naos Asset Management believes COG's capital-light approach and focus on growth will drive re-rating of its valuation.
Naos Asset Management
31 Dec 2023
$1.45
- Naos Asset Management notes Q1 FY24 results indicate robust growth in COG Financial Services’ newly formed Novated Leasing division, despite flat performance in the Finance Broking & Aggregation division.
- The Novated Leasing division’s NPATA surged from $900,000 to $2.4 million over the last 12 months, showcasing significant potential.
- Naos Asset Management believes that the collaboration with EML Group positions COG as a potential top-3 player in the Australian market for Novated Leasing.
- COG’s recent acquisition of a 19.99% stake in Centrepoint Alliance (ASX: CAF) aligns with their strategic focus on financial planning services.
- With 500 licensed financial planners, CAF complements COG’s service offerings and expands its customer base.
- COG is targeting the fragmented financial planning sector for growth, leveraging its existing customer relationships with SMEs.
- Naos Asset Management emphasizes the importance of COG’s management effectively communicating their growth strategy and the synergies between divisions.
- Despite consistent profit results, COG has not yet experienced a valuation re-rating, suggesting potential upside.
- COG's entry into financial planning could enhance organic growth opportunities in a capital light manner.
- In FY24, COG is expected to settle >$10 billion in equipment loans, compared to Australian Finance Group's (ASX: AFG) $2.5 billion, highlighting significant market potential.
Naos Asset Management
30 Sept 2023
$1.38
- Naos Asset Management notes that FY23 was affected by Earlypay's performance, impacting COG's earnings.
- COG reported EPSA of 12.55cps, down from 13.87cps.
- The Finance Broking & Aggregation (FB&A) division performed well, with finance volumes increasing to $7.7 billion, leading to ~12% NPATA growth.
- The Funds Management (FM) division saw a ~13% fall in NPAT, but the quality of results improved due to a smaller contribution from the TL Rentals loan book.
- COG incurred one-off expenses related to establishing their first warehouse financing facility with a big-4 bank.
- Improved disclosure on the Fleet Network novated leasing and salary packaging business was provided.
- In April 2023, COG acquired WA-based Paywise for $30 million, projected to increase NPATA by ~$2 million if growth continues.
- COG also acquired finance aggregation businesses United Financial Services (UFS) and National Finance Choice (NFC), potentially increasing annualised NAF to ~$9 billion.
- Consolidation in the industry will benefit COG, enhancing its competitive position.
- Naos Asset Management anticipates a higher growth year with a potential NPATA target of $30 million for FY24.
- COG could benefit from EPY's guidance, potentially a $3 million NPATA increase.
- Additional NPATA from UFS and NFC acquisitions is estimated at a minimum of $1 million.
- The extra 10 months of the Paywise acquisition could add at least $2 million to NPATA.
- COG continues to trade at a discount compared to peers, with expectations for a positive Q1 trading update.
Please note: The completeness, accuracy or current status of the investments referenced are not guaranteed.
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