Craigs 2014 profit falls 14% as costs rise; vote on Australian acquisition looms

Craigs Investment Partners, the brokerage planning to export its business model to Australia, posted a 14% decline in full-year profit as rising costs for wages, IT and rentals offset higher revenue from its private wealth, or retail business.

Profit fell to $15.2 million in calendar 2014, from $17.8 million in 2013, when share sales of government-owned companies helped drive activity in the stock market. Operating income climbed to $112 million from $109.5 million. Revenue from fees, which it garners from private wealth, climbed 12% to $61 million and brokerage declined 7.4% to $37 million. Commission income was down slightly at $13.1 million.

Craigs will know this month whether its push into Australia has been successful, with shareholders of ASX-listed Wilson HTM Investment Group set to vote on June 26 to sell its securities unit to managers, Craigs and Deutsche Bank. Craigs chairman Neil Craig says ownership of the securities business will be similar to his own company, which is 50.1% owned by key managers and 49.9% by Deutsche, and there was scope to add value to the underperforming stockbroker.

"It's opportunistic to the extent it became available and we've always had designs on wanting to open a business in Australia similar to what we have here," Mr Craig said. "We think we can add significant value to make it more profitable. And, from a client point of view, we think greater involvement in Australia will unearth lots of investment opportunities we would not find being a broker here."

Deutsche was an existing investor in Wilson HTM and had facilitated the proposal, he said. The purchase is to be funded with $A5 million upfront, including cash and $A1 million of vendor financing. It also includes a share of pre-tax earnings from the securities business in 2016 and 2017 capped at a maximum $A1 million in each year.

Craigs would own 40% of the business, managers would own another 40% and Deutsche would hold the remaining 20%.

Mr Craig said increased operating expenses in 2014 weren't the result of any extraordinary items and tended to fluctuate year to year, reflecting the cost structure of its private wealth, institutional and investment banking businesses. It paid $12.6 million in dividends, or $15.75 a share, up from $12.3 million, or $15.41, a year earlier.

Employee benefits climbed to $63.9 million in 2014, from $60.9 million a year earlier. Communication and IT expenses rose to $5.1 million from $4.6 million and rental and operating lease costs rose to $4.2 million from $3.6 million.

"2013 had the tailwind of three large SOE IPOs – Meridian, MightyRiverPower and Air New Zealand. Last year we only had Genesis Energy and it was smaller," he said.

Higher fee revenue reflected "continued growth in funds under management within Craigs, which now exceed $10 billion," he said. "The business is a very dependable operating business these days because private wealth is so significant relative to the rest of the business."

Craigs was named Infinz sharebroking firm of the year in 2014.

(BusinessDesk)