Moelis Australia is the Australian offshoot of Moelis & Company, an American investment bank founded in 2007. Moelis and Company have made a name for themselves as one of the leading “Boutique investment banks,” smaller specialised investment banks that have become increasingly popular since the GFC largely thanks to their perceived ability to give more independent advice. In one of their most impressive wins to date, Moelis and Co was recently announced as the sole lead on what will probably be the biggest IPO in history, the giant Saudi state owned oil company Aramco.
In Australia, Moelis has been similarly successful, though not without controversy. While they have been involved in numerous successful IPO’s, they were also the lead manager for the botched Simonds Group IPO in late 2014, with shares now trading at less than a quarter of their floating price. More recently they have made the news for apparently buying up Slater and Gordon debt at significant discounts, supposedly for some debt for equity scheme they are planning.
After the IPO, Moelis & Co will retain a 40% stake in Moelis Australia and a partnership between the two entities will remain with Ken Moelis himself, the founder of Moelis and Co taking a seat on the board.
25 million of a total 125 million shares will be sold through the IPO at $2.35 per share, raising $53.8 Million once the costs of the offer have been taken into account. The Market capitalisation at listing price is $293.8 million, making it one of the biggest Australian IPO’s this year to date.
The CEO of Moelis Australia is Andrew Pridham, more famous for his role as Chairman of the Sydney Swans and his occasional spats with Eddie Mcguirethan for his career as an investment banker. Pridham’s career has been impressive; he was appointed the Managing Director of Investment Banking Australasia for UBS at only 28 and has also held senior roles at JP Morgan before helping start Moelis Australia in 2009. He has been less successful in his ventures into the art collecting world though, making headlines a couple of years back when he purchased what turned out to be a forged painting for 2.5 million dollars. When Melbourne radio hosts started making fun of him about this, Pridham’s response somehow managed to go from victimhood to snobbery in one sentence.
However, as long as Pridham doesn’t decide to turn Moelis Australia into an art gallery, his dubious taste in Australian art shouldn’t trouble potential investors, and overall he seems like a pretty capable and intelligent guy. Also, for the CEO of an investment bank worth nearly three hundred million dollars his salary is quite reasonable, at only $450,000 a year plus bonuses. That he is looking to make most of his money through performance bonuses and increases in the share price is a positive for investors, and something that other recent listings (Wattle Health anyone?) Could learn from.
One of the things that worries me about the Moelis Australia IPO is the 44.2 million of the total 58.8 million raised that will be set aside for the vague purpose of “growth capital.” This is expanded upon in another section of the Prospectus with the below statement:
"Moelis Australia is actively assessing a number of strategic asset and business acquisitions. None of these opportunities are certain of proceeding at the date of this Prospectus. Any one of, or a combination of, these acquisitions could result in Moelis Australia applying a substantial part of the Offer proceeds to fund the acquisitions of potential assets or businesses being assessed."
While some investors will see this as a growth opportunity, something about the combination of a CEO with no shortage of self-confidence, a professional services business and statements like this make me a little nervous. As any financial academic or Slate and Gordon stockholder will tell you, business acquisitions by listed companies have a tendency to destroy rather than create shareholder value, and I doubt Pridham is going to be able to sit on his hands for long with $54 million in his pocket. While it’s possible he might make the deal of the century, it’s also possible he might end up biting off more than he can chew.
Significant Investor Visa Funds Program
Another thing that concerns me with the Moelis IPO is its involvement in the Significant Investor Visa Funds Program. This is a program the federal government introduced a while back where Investors who invest over 5 million dollars in approved Australian investments are able to gain an Australian Visa.
These sorts of visa programs have come under a lot of criticism both in Australia and internationally, and in the USA in particular have become a target for fraudulent activities.
Canada cancelled their own program after finding it delivered little benefit and an Australian productivity commission report in 2015 advocated scrapping the program as well, arguing that it led to too many visas being granted to elderly people with limited English skills.
While the current Liberal government appears to be committed to the scheme, you would imagine that all it would take is a change of government or a few highly-publicised scandals for things to change. Moelis themselves appear to be well aware of the risks this would pose to their business, as evidenced by this detailed response of theirs to the 2015 productivity commissions report.
Moelis does not break down the revenue for each separate sector, though the prospectus does state that average assets under management grew from 161 million to 624 million in 2017 largely thanks to this program, so we can assume that if this program was to be cancelled it would have a significant impact on the business.
Looking around at most investment banks, they seem to cluster around a P/E of just under 15. Goldman Sachs is currently at 13.96, JP Morgan Chase is at 14.1, and Morgan Stanley is at 14.53. The big four Australian banks have similar P/E ratios. Moelis Australia are no doubt aware of this, and have presented an “adjusted” Price to Earnings ratio of 14.6 in the prospectus. On the surface this makes the valuation seem like a pretty good deal. As a relatively small player, their growth prospects are more significant than the larger banks, so to be priced at the same discount rate would represent a great opportunity. However, this is a good example of when it pays to do your own research before trusting adjusted ratios cooked up by investment bankers. When I divide Moelis Australia’s profit from the 2016 calendar year (9.8 million) by the post-listing market capitalisation of 293.8 million I get a price to earnings ratio of 29.97, more than double the ratio quoted in the prospectus. Although you might think this is because my calculator isn’t as fancy as the ones used at Moelis Australia’s head office, Moelis have actually made two rather questionable adjustments to get this lower ratio.
To start with, while P/E ratios are almost always calculated using previous earnings (trailing twelve months). in Moelis Australia’s adjusted P/E ratio, they have instead used their forecasted Pro Forma earnings for the 2017 calendar year of 16.8 million. While for a small growing company it may make sense to use forecasted earnings in a P/E ratio if the business is just starting, I fail to see how it is justified for an established investment bank with a proposed market capitalisation in the hundreds of millions. Moelis Australia are not planning to change their operations significantly in the next twelve months, so their reason to use forecasted earnings simply seems to be so they can get a more attractive P/E ratio.
The other adjustment they have made is to the price side of the P/E formula. Moelis Australia have taken the odd approach of subtracting the net offer proceeds of 57 million from the market capitalisation for the adjusted formula. This is supposedly justified because their acquisition plans are not included in their projected earnings, though as a potential shareholder, the actual market capitalisation is how the market will evaluate the stock, and the total shares outstanding will determine your share in any future earnings. While P/E ratios are based on earnings from the past and the market value today, by some odd form of wormhole accounting Moelis have ended up presenting a ratio based on future earnings and a market value from the past.
Of course, I’m sure Moelis Australia could wheel out to a batch of highly paid accountants who would explain why the adjustments they made are reasonable and their P/E ratio is accurate, but then again Goldman Sachs had maths PHDs that could explain how CDOs were a great idea in 2006 and we all know how that ended up. I would argue that any future investor would be much better served using the 29.97 figure I calculated when deciding if Moelis Australia is a good investment, as this is how P/E ratios for other companies are quoted.
When you use the actual P/E ratio of 29.97 to evaluate the deal, the Moelis Australia IPO looks reasonable, but hardly exciting. If you think that Moelis Australia is a great up and coming Corporate Investment Bank with a proven track record and that Pridham is a genius who will be given the new freedom of 50 odd million dollars in free cash to launch some amazing acquisition, then a P/E ratio double that of the larger investment banks is perhaps reasonable. From my perspective though, the Significant Investor Visa Program is not something I would want any investment of mine relying on long term, and with what I know about the track record of acquisitions, I would probably rather have the cash on the balance sheet invested in an index fund than whatever plan Pridham has cooking up.
As someone working in business development, I’m used to being called into a room by an executive or manager for a presentation of the new sales tool that is going to reduce our admin/allow us to accurately forecast sales/provide quality leads. 9 times out of 10 it’s a bit of a let down. The tools are rarely demonstrated in a live environment, the data is often inaccurate, and the supposed insights with “machine learning” seems to be nothing more complex than a couple of if arguments in an excel cell. It is for this reason that I was a little sceptical when picking up the prospectus for Bigtincan, a content platform for sales people on mobile devices.
The Bigtincan hub allows companies to selectively push sales content to the mobiles and tablets of sales staff. The idea is that instead of sales people having to hunt through different emails or folders for the presentation or collateral that they need, all content can be accessed from the one hub, with both offline and online capabilities. Bigtincan is seeking to raise 26 million for a fully diluted market capitalisation of 52.34 million once all the various options and are taken into account.
BigTinCan is currently burning through a lot of money. The total loss in 2016 was nearly 8 million, and based on their own forecast figures they will lose another 5.2 milllion in 2017. In any other sector, trying to argue a company with these sorts of losses is worth over 50 million dollars would be ridiculous but in the tech space this is pretty standard. Any successful tech company you can think of lost huge amounts of money during their growth phase, sometimes for a long time. To use the most recent example, Snapchat’s market capitalisation post listing was around 29 billion dollars, despite losing over 500 million dollars last year.
Taking a closer look at the numbers, the extent of the loses seem more strategic than involuntary. In FY 2016, BigTinCan spent just under 9.5 million on product development and marketing, or 135% of their total revenue, and they plan to spend another 12 million in FY 2017. They could have easily reduced their loses by cutting back in these areas, but as every other tech company knows, the real key to success when you are selling software is scale. It costs nearly the same amount of money to sell a product to a million-people compared to a thousand, and you only get to sell to a million people if you have a great product. The key metric for any young software company is growth, and here Bigtincan does not disappoint. Total revenue was 5.17 million in 2016 and grew 35% to 7.04 million in 2016, with projected revenues of 9.7 million for FY2017.
The one potential problem I found regarding Bigtincan’s financials is whether there is enough available cash to sustain the future losses the business might make. BigTinCan will have 14.421 million dollars cash immediately after the IPO. Given their current and projected loses, there is a reasonable risk that they may need to refinance before they get into the black, which needs to be taken into account when deciding if purchasing these shares make sense.
As someone who is often on the road presenting to customers in my day job, I get the appeal of the Bigtincan Hub. In sales, you are constantly searching through folders and emails for the right presentation or tool that suits the customer you are dealing with, and when you have to do it all on an Ipad it becomes even harder. A centralised hub that can deal with a range of different file types, allow commentary and collaboration, and let managers push files to different users has definite appeal.
What’s more, from all the research I have done, it seems the BigtinCan Hub has delivered as well. Most reviews they have received are pretty positive, and they have received some impressive testimonials from large customers.
Perhaps the most impressive write-up comes from Bowery Capital, a venture capitalist firm that publishes an exhaustive summary of all software tools for start-up sales organizations every year. In their latest piece, Bigtincan receives the best rating out of the 13 other companies in the “content sharing space.”
The only reservation I have with the Bigtincan hub is that it is targeted to address a very specific need. What happens if in a couple of years’ time, Google, Apple or Microsoft release something that can do everything that Bigtincan can do and more? Given the natural advantages these larger companies have, it would probably be the end of Bigtincan. Of course, the more palatable outcome is one of these companies deciding they want to acquire Bigtincan by buying out shareholders at a healthy premium over market price, so there is upside to this possibility as well.
Past court cases
Buried in the financial section of the prospectus is a small note that there were two court cases that had an impact on the Statutory profit and loss for the last two years. As investing in a company with a troubled legal history is an alarming prospect, I decided to do some digging to see if I could find out more about this.
The first court case was a dispute with an early director called David Ramsay. From what I can understand from Bigtincan’s version of events, David Ramsey was given money to develop software for Bigtincan which he then used instead to develop an app for his own company. It appears Bigtincan won this case and Ramsey had to pay $300,000 in damages as a result. While Ramsey has tried to appeal this, it looks like his appeal to the high court was rejected. so it seems this chapter at least is closed.
The second case was with an American Software company called Artifex, which filled a lawsuit against Bigtincan over the use of technology that let users edit Microsoft office documents on their smart phone. Bigtincan reached a confidential settlement with Artifex over this matter, so we do not know the exact outcome, but as Bigtincan has continued to grow since then we can assume that whatever concessions were made did not have a major impact on the Bigtincan business.
I don’t really see any major cause for concern with either of these court cases. Given the potential money at stake, it seems inevitable that software companies get into squabbles about proprietary technology, and most successful tech companies have a story of some estranged director or other in their past, if only to give Aaron Sorkin and Ashton Kutcher material.
Evaluating Bigtincan’s listing price is a more complex than for most companies, as I was unable to rely on a basic Price to Earnings ratio to get a feel for what would be reasonable. Instead, I decided to use price to revenue as an alternative as nearly all software companies list at a loss.
Based on these figures, the Bigtincan valuation seems pretty reasonable. Total revenue from the 2016 calendar year was 7.934 million vs a fully diluted market cap of 52.34 million, giving a Price to Revenue ration of 6.6. Linkedin’s initial listing was at a Price to Revenue ratio of 56 and Salesforce’s was around 11 (this was back in 2004 when internet companies were viewed with suspicion). Closer to home, Xero the New Zealand based accounting software company listed on the ASX in 2012 with a price to revenue ratio of 25.
In addition to comparing Bigtincan to other technology IPOs, I have modelled the next five years after 2017 to try and get an idea of where Bigtincan could end up, assigning different growth rates to their main revenue and expense areas.
Based on the assumptions I have made (and I accept that many will disagree with a lot of these) the company will have an EBITDA of 4.4 million in 2022. To me this is very compelling. I do not think I have been overly optimistic with the growth rates I have used, and you do not have to be Warren Buffett to know that a fast growing SaaS company earning 4.4 million dollars a year will be closer in market capitalisation to 150 million than 50 million.
There are significant risks with this IPO. Bigtincan is still a young company operating in a competitive environment, and all it would take is a change in industry direction or a better product from a larger tech company to end their prospects completely. However, the potential upside if things go to plan is pretty substantial, and for me the price is low enough to justify getting involved.
ReTech provides online learning and educational services to companies in China. They plan to raise 22.5 million through the prospectus by selling 20% of the company via the IPO, giving a total post IPO market capitalization of 112.5 million. The business has three main arms, an E-learning business where they provide training courses to businesses for staff, a newer e-training partnership area where they will partner with established education entities (they have a memorandum of understanding with Queensland TAFE) and a proposed e-course direct area where they intend to sell courses direct to companies and individuals. According to the prospectus, e-learning is a rapidly growing industry, with a growth rate of 32.9% between 2010 and 2015. While this seems high, service and knowledge based jobs are exploding in China, and online education is one of the fastest and cheapest ways to train staff. Having had the misfortune to complete a few work-mandated e-learning courses in my career myself, it’s not exactly an exciting industry, but the benefits they offer companies are clear. The prospectus lists a few of the courses which ReTech owns the intellectual property rights to and looking at names like “how to introduce the gear box” and “how to recommend vehicle insurance for clients,” you can almost imagine a bunch of bored car salesmen sitting in an office somewhere in China clicking through multiple choice questions.
The IPO funds will be used, amongst other things, to set up an office in Hong Kong. This means that unlike Tianmei, the IPO I reviewed most recently of another Chinese company, the final parent company isn’t located in Australia. While I’m no expert on Hong Kong company law, I think this is a mark against ReTech. With an Australian company, shareholders have the recourse of class actions or potential moves against the board if things go wrong. I’m not sure how easy those things would be to organize against a Honk Kong based company.
According to ReTech’s website, ReTech was originally founded as a website development company in 2000 by a guy called Ai Shugang while he was still a university student. Since then it has grown and expanded into several different technology and internet related areas. Instead of just listing as the original entity, the founders decided to create a newly incorporated company called ReTech Technology to list on the ASX. They injected their own capital into the business, and then sold/transferred significant amounts of the intellectual property and existing E-Learning contracts to the newly created company. To make things more complicated, at the same time the founders also created another company called Shanghai ReTech Information Technology (SHR) which as far as I can understand will remain wholly owned by Ai Shungang. SHR has also had a significant number of E-Learning contracts assigned to it from the original ReTech entity. SHR has signed an agreement with ReTech regarding these contracts where ReTech will provide the services on SHR’s behalf, in exchange for 95% of the resulting fees. If this all sounds a bit confusing you’re not the only one.
My concern with all of this is that ReTech is in the sort of industry where a founder siphoning off business is a major threat, meaning another business still operating owned by the original founder is a big risk. In the prospectus, ReTech list expertise and their existing client list as two of their four main competitive advantages, two things that would be easy for the founder Ai Shungang to poach to SHR. Although Ai Shungang does own a significant stake in ReTech, he owns 100% of SHR’s parent company, so the motivation for him to do this is there. The prospectus points out that both Ai Shungang and his companies have signed non-compete contracts, guaranteeing they will not operate in the same sector as ReTech, but I know how hard to enforce these contracts are in Australia, and can only imagine what the process would be like in China.
Finding out what exactly this separate company will be doing given they have committed to not entering the online education sector proved difficult. I eventually found a legal document on ReTech’s website that states Shaghai ReTech Information Technology is going to focus on software and technology development and technical management consulting. To make things even more confusing, they also seem to be still using identical branding to ReTech, based on what I found on a management consulting website. If you trust the founders of the company, probably none of this would bother you but for me these are considerable issues.
Before looking at any of the financial information for ReTech it is important to remember that the company was incorporated in its current form in May 2016, and the final part of the restructure was only completed in November. This means that all historical profit and loss figures are pro forma only, estimates of what the contracts, intellectual property and assets now owned by the ReTech Group earnt before the company was split. This is a massive red flag for me. I’m sceptical of pro forma figures at the best of times, and when they are used by an unknown company in a prospectus where the unadjusted figures are not even provided it’s a massive concern. To give just one example of how these figures could potentially be distorted, education software development costs could be written off as not part of the business, while the associated revenue is counted towards ReTech’s bottom line. Examining the pro forma figures doesn’t exactly assuage my concerns either. Have a look at the below table taken from the prospectus, in particular the profit before tax to revenue ratio. In 2015 off revenue of just 6.9 million the profit before tax is listed as 4.2 million, meaning for every dollar of revenue the company made 61 cents of profit. Of course, I understand that profits can be high in the technology sector, but a profit to revenue ratio of .61 is extraordinary, especially when you consider that this is a young company in a growth phase.
Most young companies with growth rates this large are running at deficits as they re-invest into the business, not earning profit margins that would be the envy of booming mining companies.
Even with these relatively major concerns put aside, the valuation appears expensive. The pro forma Net Profit after Tax for FY 2015 was only 3.6 million, which against a valuation of 112.5 million is a Price/Earnings of just over 31 (annualizing the profits from the first half of 2016 doesn’t give you much better numbers). Full year profits for FY2016 are expected to be 5.8 million, a P/E of 20, but if there is one thing I am more suspicious of than Pro forma historical accounts it’s prospectus profit forecasts, so I have little inclination to use these numbers to try and justify the valuation.
When I started digging around on the management personnel, one of the first things I noticed was the strong link to Investorlink, a Sydney based financial firm that seems to specialize in assisting Chinese companies list on the ASX. In addition to being the corporate advisors to this listing (for which they will be paid $380,000), Chris Ryan, an executive from Investorlink is one of the five board members of ReTech. I was already sceptical of this IPO at this stage, but this was the final nail in the coffin. Chris Ryan’s CV is like a checklist of bad Chinese IPOs. Ryan was and apparently continues to be the chairman of Chinese Waste Corporation Limited, a Chinese company that reverse listed in 2015 and was suspended from the ASX in mid-2016 for not having “sufficient operations to warrant the continued quotation.” He is currently the chairman of TTG Fintech Limited, a company that listed on the stock exchange at 60 cents in late 2012, inexplicably reached as high as 4 dollars in mid 2014, and is now trading at 7 cents and he has been on the board of ECargo Holdings, a company that listed at 40 cents in late 2014 and is now trading at 20 cents. I spent some time looking at the various Chinese IPO’s that Investorlink has advised on, and was unable to find a single IPO whose shares aren’t now trading significantly below their listing price. If ReTech are indeed a legitimate company, it’s hard to understand why they would seek to list through Investorlink given this track record.
To put it bluntly, I wouldn’t buy shares in ReTech if I could get them half price. Everything from the odd restructure to the lack of statutory accounting figures, the high valuation and the awful track record of the Corporate Advisor makes me want to put all my money in treasury bonds and never invest in anything speculative again. Of course, it’s possible that Ai Shungang is going to turn out to be the next Mark Zuckerberg and I’m going to end up looking like an idiot (to the handful of people who read this blog at least), but that is one risk I am happy to take.
Eildon Capital is currently a subsidiary of the publicly listed investment company CVC Limited. The company focuses on high yield debt and investments in the property sector. They plan to raise between 2 and 10 million dollars via the IPO, with a market capitalisation on completion between 24 and 32 million. In the prospectus, they state that their goal for debt yields on property are between 12 and 18 percent before management fees and taxes. As a Mezzanine finance company, security on these loans will usually be equity in the ventures themselves.
There’s a lot of things to like about this prospectus; an experienced and stable management team, a good track record and at least on the surface a reasonable price, with every one dollars’ worth of shares bought giving you $1.01 of net assets in the newly created company. I’ve got a few misgivings though, and there are three main reasons I won’t be taking part.
The property sector
As a long term believer in the idea that the housing market is overdue a downward correction, it’s hard to think of who would be more exposed to this than a company specialising in high yield property development loans. A substantial portion of their current assets are mezzanine loans to apartment developments in Melbourne, the Gold Coast and Brisbane. When I think “housing bubble,’ an apartment development in the Gold Coast is probably one of the first things that comes to mind. While Eildon stress in the prospectus that they have ways to mitigate their risk, if they are getting double digit yields on loans it’s hard to believe they are able to protect themselves that well.
Another thing that makes me a little suspicious of this listing is a controversy that has been hanging around Eildon capital’s current parent company, CVC Limited. Founded in 1985, one of CVC Limited’s founding directors and chairman for many years was a guy called Vanda Gould. Vanda Gould resigned in 2014 after becoming embroiled in a lengthy dispute over tax avoidance with the ATO. He recently lost an appeal to the high court over a tax bill of more than $300 million for companies he owns and advises, and is also facing criminal charges relating to tax avoidance that could potentially land him in jail. The guy seems like one of the real characters of Australian investing, his chairman’s letters for CVC would regularly get pretty philosophical, quoting Shakespeare and referencing interest rates from ancient Rome and Babylonia. While these days he holds no position at CVC and you won’t even find his name on the website, it’s hard to believe he is completely disentangled from all of CVC’s various affairs. To give an example of a potential continuing connection, over 10% of the shares of Eildon capital will be held by a company called Chemical Trustees Limited on listing, a company that had its assets frozen in 2010 due to alleged tax avoidance in relation to Vanda Gould. I have no idea if there is still any connection between Chemical Trustees and Vanda Gould, but if they end up having to sell their holding in a hurry or the shares are seized it could have a significant effect on the share price.
The last thing going against this prospectus is CVC Limited’s current share price. With net assets of $214 million as of the end of the last financial year, CVC’s market capitalisation has hovered around the 196 million dollar mark for the last couple of months. This means every 1 dollar you invest in CVC Limited buys you $1.09 of net equity on CVC’s balance sheet. That’s 8 cents more than you will get of Eildon Capital’s equity if you take part in the IPO. As CVC currently owns Eildon capital, this could mean that the IPO is priced above the current market price. Of course, it’s impossible to know for sure what assets exactly on CVC’s balance sheet the market is undervaluing, but it could just as well be the Eildon capital assets as anything else. If this is the case, there is a real danger the share price will drop by around 6% or 7% upon listing. If you are a long term believer in the company this may not bother you, but it does mean you may need to commit to holding these shares for quite a while if you want to make money.
Despite all these issues, the target returns will no doubt be enticing for some investors, and if you have an appetite for a bit of risk and are not currently that exposed to the housing industry taking part in this IPO could make sense. For me though, my scepticism of the housing market along with concerns about the Vanda Gould connection makes me happy to give this one a miss.
According to Gartner, there can be no effective sales and operations planning (S&OP) process without an S&OE—Sales and Operations Execution, process. In other words, why make a plan if cannot be executed accurately or cannot be translated into execution?