Considering what has happened to financial markets since the Great Financial Crisis, it is no wonder many investors hang up the phone when their advisors begin talking about possible value plays in the investment and financial services group.

With a constant barrage of worry over Tier 1 capital ratios, Basel II ratios, sovereign debt exposure, and credit default swaps, who can blame them.  Yet there remain stalwart investors from the value school who see opportunity where others see mayhem.

Those who know long term share market history are well aware that recovery follows ruin, albeit sometimes at a snail’s pace.  With the explosion or resolution of the European debt crisis inching along towards some kind of conclusion, banks and financial services companies of all types are feeling the pain.

Meanwhile, value investors are looking for market valuations and fundamental performance indicators that hint at possible bargain buys.  Three such hints that are sure to attract investors are low Price to Earnings Ratios, high Dividend Yields, and high Return on Equity.

Searching the ASX non-banking investment and financial services sector we find three shares with P/E under 10, ROE above 15%, and Dividend Yield over 2%.  The three companies we are going to look at are CAB (Cabcharge Australia Limited), CGF (Challenger Limited), and TRG (Treasury Group Limited).  First, let us introduce our three contestants, looking at their market caps, current share price, and 52 week highs and lows.  Then we will talk about what they do.

Stock Market Cap Share Price 52 Wk High 52 Wk Low
CAB $538m $4.47 $6.38 $3.95
CGF $2,458m $4.45 $5.21 $3.92
TRG $86m $3.74 $5.19 $3.15


TRG is the smallest of the group and also suffered the worst Year over Year share price decline – 25%.  CAB was down about 20% and CGF fared the best of the three with only a 5% drop.  Here are brief summaries of the business of each of the three companies.

CAB (Cabcharge Limited)


Chart: Share price over the year versus ASX200 (XJO)

Share Price: $4.47

Price target: $5.80 (Credit Suisse)

Broker Calls: Outperform – Credit Suisse, Macquarie

P/E: 11.67

Market Cap:  $538 million


Cabcharge is a bit of an odd duck in the group, since their principal link to a financial service is an impressive payment and fare processing system for taxis and buses.  The company traces its roots back to 1976 and was born strictly to provide a way for taxicab operators to handle non-cash fares.  Since then, the company has acquired its own cab company, Black Cabs, as well as Westbus Group.

Since listing on the ASX in 1999 they have had double digit growth in every year and are now in the ASX 200.  The company claims that today Cabcharge payment processing systems are found in 97% of the land-based and water cabs in Australia.  They are now operating in the UK with plans for further expansion in Europe.

While the casual investor might view that near-monopoly market share as a blessing, it could be a curse in disguise as regulators are looking to increase competition through new entrants into the market.

CGF (Challenger Limited)

Chart: Share price over the year versus ASX200 (XJO)

Share Price: $4.45

Price target: $5.80 (Macquarie)

Broker Calls: Buy – UBS, Deutsche, RBS, Macquarie

P/E: 8.17

Market Cap:  $2,459 million


Challenger Limited (CGF) provides a variety of financial services to both retail and institutional customers.  The Challenger Life Company sells annuities as well as other fixed rate investment products.  The Funds Management operation sells fixed interest and mortgage funds, ASX share funds, property funds, and international share funds.  

CGF is the largest provider of annuities in Australia and as such they enjoy a significant competitive advantage, another favoured measure for value investors.  

However, that advantage is somewhat at risk as the government tinkers with superannuation rules.  With the coming wave of retirees, competition for fixed income investments should increase.  The Funds Management arm of the business, which is growing, consists of 10 separate boutiques, or specialised, fund managers.

TRG (Treasury Group Limited)

Chart: Share price over the year versus ASX200 (XJO)

Share Price: $3.74

Price target: $5.20 (Credit Suisse)

Broker Calls: Outperform – Credit Suisse

P/E: 8.62

Market Cap:  $86 million

Treasury Group Limited (TRG) is an Australian investment and funds management company with a business model that is somewhat unique.  They partner with specialist equity boutique investment firms and provide them with administrative and other business support services.  They hold significant (30 to 40%) interest in the following firms:

•    Investors Mutual

•    Orion Asset Management

•    Global Value Investors

•    Treasury Asia Asset Management

•    RARE Infrastructure

•    AR Capital

•    Celeste Funds Management

What they do best is provide support services that allow each partnering firm to concentrate exclusively on serving the investment product needs of their customers.  As we will see in a moment, this business model books revenue from sales of investment products at the partner level while Treasury Group shares in the profits.

Now let’s look at some of those favourite value investing indicators that often spot a company trading below its real value:

Stock P/E Dividend Yield ROE
CAB 8.43 7.6% 19.9%
CGF 8.75 3.8% 16.7%
TRG 8.62 9.1% 16.9%
Sector 10.04 4.7% 7.71%


All three are worthy of further research into their fundamentals to determine which represents the best value at the current share price.  From what we see above, it appears that tiny Treasury Group has an attractive combination of numbers – a lower P/E and the highest dividend yield.  Its ROE is impressive, although a shade behind that of Cabcharge.

In fact, Treasury Group may be a “hidden gem” – a solid share that few are noticing. There are only two analysts covering the company, compared to 12 for Challenger and 10 for Cabcharge.  Considering the global flight of share market investors out of equity investments, it would be no surprise if Treasury Group’s profitability was suffering.  Challenger is protected by its substantial annuity business.  Indeed, that is their principal focus with the boutique investment business a source of anticipated future growth.  So let’s see how the three companies fared on profit and margins along with some debt figures.

Stock Revenue/NPAT ($m) Net Profit Margin (%) Long Term Debt ($m) Gearing (%)
CAB 184.4/46.1 33.2% 59.5 47.8%
CGF 376.1/261.4 65.9 8,081 275.9%
TRG 3.4/10 290% 0 0


One can expect higher profit margins from financial services providers since their capital expenditures are low.  One would further expect Cabcharge to show lower margins due to the fact they operate a fleet of taxicabs and buses in addition to providing financial payment processing services.

The debt and gearing picture at Challenger appear to be of concern and bear further research. This reveals that the high debt figure actually consists of policyholder liabilities. Challenger points out in an announcement to the ASX dated 22 August 2011, “Challenger has nil group recourse debt, having repaid all facilities in fiscal 2009.”

“As a financial intermediary Challenger’s liabilities to policy holders are debts which are recourse to the underlying assets,” Challenger wrote to TheBull.  “As an annuity provider Challenger Life is a capital-intensive business which by nature is leveraged – but far less so that other APRA-regulated financial institutions like banks. Bank balance sheets are geared 17-20x compared with Challenger at 5x, so we are actually a very modestly geared intermediary.”

But the number that jumps off the page at you is the 290% profit margin returned by TRG.   How can you realise 10 million in profit on only 3.4 million in revenue?

With its business model, the revenue comes from the administrative and other operational services they provide to the boutique investment companies in which they have an interest.  And the profit and the resultant lofty margins come from their return on their equity investment in those partnering companies.

The trading volume for Treasury GRoup – 22,426 shares traded per day over the last 3 months on average – tells us few investors are interested in this company right now.  In contrast, Cabcharge’s average trading volume is over 300,000 shares per day and for Challenger the volume is over 3 million.

Is Treasury a gem hidden among the rubble of wildly gyrating markets or is it just a flawed company?  As you know, value investors believe in the test of time so let’s take a look at some key measures over the last ten years:

TRG NPAT ($m) Net Profit Margin (%) EPS (cents) Dividends per Share (cents)
2002 .3 4.8 1.7 1
2003 1.2 10.2 6.0 3
2004 6.3 21 31.8 28
2005 12.5 27.7 57.7 40
2006 14.4 28.6 63.7 50
2007 18 32.2 79.4 60
2008 17.2 29.6 75 60
2009 7.1 150.5 30.9 20
2010 11.7 282.3 50.6 26
2011 10 290% 43.4 34


The numbers tell the tale.  You see steady increases in every category going into the GFC followed by a modest recovery.  Like many of us, the fortunes of Treasury Group rests with the hoped for return of some sense of stability to the financial markets. 

Note: this article referred to Challenger as a life insurance company, when it is a “life company”. Challenger has also pointed out that its debt figures in fact consist of policyholder liabilities and that Challenger has nil group recourse debt. 

More articles from this week’s newsletter

3 non-bank financials to watch

18 Share Tips – 16 January 2012

Does the debt crisis signal the end of the mining boom?

Outlook: A Bullish Start To 2012

A History Of Wall Street Profitability

Rolling year highs on the ASX

Rolling year lows on the ASX

Top 10 shorted stocks on the ASX

Breaking News – all the latest Australian stockmarket news

Market Data: Check out TheBull’s market data for charts, quotes and company information


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