Sequoia Financial remains optimistic despite flagging underperformance

The first half of FY23 has not gone to plan so far for financial services group Sequoia Financial (ASX: SEQ) having advised that its Half Year earnings has been negatively impacted by several abnormal items affecting short term performance accumulated across four divisions. The impending results have been flagged as falling below budget expectations and as a result, the Group’s EBITDA is now expected to be around $3.2 million, approximately 25% short of the initial EBITDA forecast of $4.3m.

The Licensee Services division has been flagged to incur the biggest underperformance. As mentioned in Sequoia’s investor briefing in November 2022, FY23 will see a reporting of an abnormal item in the accounts relating to client remediation payments from a 2019 remediation matter against an adviser terminated in 2019. The remediation has recently settled for an amount of approximately $2.5m, that will be disbursed from the Licensee Services division’s pocket. Sequoia has commenced an action to seek recovery from the insurer but has conservatively determined to fully expense the matter for now.

Moreover, the Company decided to reduce new structured investment product offers between May and September 2022. This contributed to about a $3m reduction of business revenue in the first half of the financial year.

Similar to the Licensees Service division, the Direct Investment division has fallen short of EBITDA budget by approximately $500k. Sequoia acquired investor media businesses Share Café, Informed Investor, Yield Report and Corporate Connect Research in FY22 with the initial idea of enhancing long-term opportunity across the various media, research, and education spheres. However, it took the Direct Investment Division longer than expected to integrate with these companies, and it caused short term pain to the Company’s bottom line. However, Sequoia is still optimistic that it can rectify this situation in the second half of the financial year by improving the division’s services.

The Equity Markets Division, which consists of Specialist Investments business and the Morrison Securities clearing business, is expecting more than $500k of EBITDA reduction as the result of an unanticipated reduction in marketing of new specialist investment products. Even with this decline, Morrison Securities continues to win market share and add additional services and is performing in line with budget.

The best news may be coming from the Professional Services division. Primarily running Superannuation, Financial Planning, ASX Clearing, General Advice and General Insurance, as well as white label technology solutions to provide branded legal documents. With the division continuing to perform well, Sequoia sees the potential for further consolidation and acquisition in the sector.

Whilst Sequoia’s short-term result is below expectations, they confirmed that the interim dividend increased by 40% from 0.5 cents per share in H1 FY22 to 0.7 cents per share in H1 FY23. The company will provide a more detailed update when their official half year results are published on 16 February 2023, including future investment and integration plans that can hopefully make up a significant amount of the Half Year shortfall.