Is this small cap in the fast lane to the ASX 300?

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Generation Development Group (ASX:GDG) is a company you may not be familiar with: it’s only just in the ASX Top 500 and often flies under the radar of the mainstream financial press.

However, you have probably heard of its main brand GenLife, would definitely know GenLife’s CEO Grant Hackett and may have seen it in the media lately as it pursues the final piece of ratings and investment house Lonsec.

In our latest podcast Lucas Goode, IML Portfolio Manager and Equities Analyst, highlights why GDG is IML’s stock of the month, shedding light on:

• GDG’s unique and differentiated product offerings
• The potential Lonsec acquisition
• Recent share price appreciation and future growth potential

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Lightly edited transcript

Jason Guthrie: Hello and welcome to Navigating the Noise, a podcast by Natixis Investment Managers Australia where we bring you insights from our global collective of experts to help you make better investment decisions. I’m Jason Guthrie, head of Wholesale Distribution, and today I’m joined by Lucas Goode, one of IML’s young gun portfolio managers.

Now, Lucas has 15 years of experience in markets. He spends the majority of his time focused on small caps. Those are the companies sitting outside the top 100 by market capitalisation both here in Australia and New Zealand. He’s sharp, he’s confident, and he’s a passionate investor. Please enjoy the session where we will be honing in on IML’s stock of the month, GDG.

Lucas, welcome to the podcast.

Lucas Goode: Thanks, Jase. Cheers for that intro.

Jason: You’re welcome. We’ll see how we go.

Lucas: Always appreciate being referred to as a young gun.

Jason: Look, we’re going to be talking through Generation Development Group today, ASX code GDG. Now, I think it’s a company many of our listeners probably aren’t that familiar with, Lucas, but on the other hand they’re probably quite familiar with the CEO Grant Hackett.

I’d say many will also know one of their key brands being Generation Life or GenLife given the strong offering they have in investment bonds and annuities in the market. But I know there is a lot more to this business. Can you maybe run us through the company, its heritage and the different revenue streams coming from the group?

Lucas: Yeah, absolutely Jase, and as you rightly point out, the main business unit within GDG is GenLife. GenLife is a provider of tax-efficient investment solutions. I know that’s a little bit of a catchall maybe for a number of products, but the main one are what is called investment bonds.

And now that name is a bit misleading because the underlying assets don’t actually need to be bonds at all. So Gen Life’s offering actually spans a variety of asset classes, including actually some IML funds across its investment menu. And this large investment menu is one of the major reasons and innovations as to why Gen Life’s been able to increase its market share of new flows to more than 50% from really a starting position of a single digit percentage market share before the current team came in.

So their execution’s been really fantastic and the market opportunity for these investment bonds is actually really exciting, Jase. So the effective tax rate on generalised investment bonds is a lot lower than the holder’s marginal tax rate usually, in the 12% to 15% range, and that’s if the bond is not drawn upon for the entire 10-year term.

And this makes investment bonds one of the most tax-efficient alternatives to super. And so we therefore foresee, given the government can never resist the temptation to tinker with super, recently brought the cap on super down from, I believe it was $5 million down to $3 million, investment bonds are the next most tax-efficient product available to a lot of those potential end users. And as a result we think there’s going to be significant underlying growth in that business in the coming years.

The company’s also got a nascent annuities business where, similar to investment bonds, their investment-linked offering should in time be an attractive alternative to existing incumbents, because you’ve seen those products from the likes of Challenger that are almost solely fixed income in nature. So it’s pretty small at the moment, but we do think there’s a fair bit of upside potentially in annuities that you’re not really paying for at the moment. And then of course, there’s the stake in Lonsec, which no doubt we’ll get to very shortly. So hopefully that gives us a bit of a start in understanding what the company does, Jason.

Jason: Yeah, great. So, I understand it’s a top 10 holding now within the fund you manage, the Smaller Companies fund. It looks like the share price, it’s had a pretty decent run over the past five or so years, but in particular over the last 12 or so months. What is the current investment case for the team there at IML and how have you been trading the company and the portfolios?

Lucas: Yeah, Jase, so as you pointed out, we’ve done pretty well out of GDG. We first invested in September 2020, which was actually when the company raised money to buy the initial Lonsec stake, raising money at 70 cents a share.

That’s more than tripled to $2.25 as of the last close. The stock is still in a trading halt for the capital raising to buy the rest of Lonsec as we record this podcast. And the value of Lonsec’s actually quintupled from that initial stake. So, it’s been a really good investment for us.

We have continued to increase our weight over the past year and that’s really just as we’ve gained more confidence in the company, you’ve had those changes to the tax treatment of superannuation that I referred to earlier, which do make the outlook for investment bonds as a category all the more appealing. We’ve gained greater confidence in GDG’s superior product offering and the strength of its management led as you touched upon in your introduction, by former Olympian Grant Hackett, who really is an exceptional leader for the company and also the phenomenal growth within Lonsec and the potential for GDG to increase their ownership in Lonsec.

Overall, I’d say it’s one of the highest quality and best run companies within our portfolio. Grant and Chairman Rob Coombe, exceptional leaders with a clearly articulated strategic vision for where they’re taking the company and that’s why we’ve been increasing our weight and very happy shareholders.

Jason: Fantastic. So obviously that’s a pretty big deal, purchasing the remaining part of Lonsec. Lonsec’s a well-known business, they’ve had significant growth and they’ve really got a strong foothold in not only research, but the consulting and investment solutions. So, the team really quite supportive of this acquisition. I’m not sure what price it’s being done at, but 70 cents a share five years ago, what’s it looking like today?

Lucas: Yeah, as you said, Jase, that investment in Lonsec’s been a home run with a five-fold increase in valuation since the initial investment. The research and consulting business within Lonsec is a high-quality recurring revenue business that continues to scale nicely.

But the real exciting part of Lonsec is investment solutions, which has grown its FUM [Funds Under Management] from less than a billion four years ago to around $10 billion today. To say we’re supportive of the move to take full ownership of Lonsec would be an understatement. It’s an exceptional business in a fast-growing market that GDG already knows very well and pretty reasonable valuation on 20 times next year’s projected net profit. What’s not to like?

Jason: Given the significance of that transaction, do you think this is actually going to broaden the support and interest in the stock and the liquidity available to shareholders? Surely this fast-tracks the group into the ASX 300 maybe?

Lucas: Yeah, look, obviously given the share price performance, you can’t really say that liquidity’s been holding it back too much, but you’re 100% right, it’s a transformative acquisition that not only improves the overall quality of the group, but also gives it additional scale and liquidity that can really only benefit in terms of share market rating and anticipated index inclusion at the next rebal [rebalance] would only be a further shot in the arm for the company.

Jason: Yeah, certainly with the investment bonds as well, annuities, that tailwind, structural tailwind from regulation changes with super and the caps there makes sense. Is there anything else the group is looking at that you’re aware of?

Lucas: Look, there’s no doubt that I think they’ve got their eyes on a number of potential things that they could bolt on or tuck in. There’s no debt at the company level because until recently they had a pool development fund status. So there is plenty they could look to do to bring in and with that exceptional sales team that they’ve got within the business, there’s a lot that they could do with assets that others might not be able to fully make use of. But really, there’s more than enough to get excited about just within GenLife and the investment bonds and Lonsec. We think that both parts of the company can continue to grow at that 20% to 30% rate for quite some years.
Look, as we discussed today, Jason, it is one of the highest quality companies in our portfolio. There’s genuine secular tailwinds in both businesses. Both GenLife and Lonsec have got dominant market positions in their respective markets driven by truly differentiated product offerings. They’ve got superior sales execution and there’s excellent leadership at both board and management level.

The stock’s not optically cheap at around 25 times next year’s EPS [earnings per share], but that is a big discount to larger peers like Netwealth and Hub. And given the significant growth runway, we’ve got a lot of confidence in GDG shares to continue to have plenty of upside.

Jason: All right, fantastic. Well, thank you Lucas. We might wrap it up there. It’s been fascinating to get a better understanding of Generation Development Group. As I said, not a company everyone talks about and knows, but I’m sure there’ll be plenty of listeners today looking it up in the near future.

Before we do wrap up, I just wanted to quickly recognise Lucas and the team there recently being nominated as a finalist in the Money Management Fund Manager of the Year Award. So well done, Lucas. Well done to the team. There’s some great recognition.

Thank you to everyone listening into today’s podcast. If you enjoyed the episode, please rate it and follow and you’ll get notified of future episodes, and tune in again very soon to hear more from our global collective of experts.

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