BLA Overpriced?, page-19

Short version: There are plenty of downside risks there. But none of them individually or collectively are too concerning for a long term investor, and without going into details there is plenty of upside opportunities that more warrant these and other risks.


Long version:
I've held BLA for a number of years and plan to continue to hold for a number of years (unless I'm convinced otherwise by their business activity). So from a long term investor's perspective, a comment on each item in turn:

1. "The founder has retired and no one can sell the stock." As a long term investor, the share price in a few years time will depend on AUM and investment returns. If the company can reach $5.0b by 30 June 2019 as guided in their 18/11/16 presentation, and the company has maintained their investment returns of above 15% per annum, then the share price will follow. I don't really care whether he is out there selling the stock. I would prefer my MD focus on leading a team that grows AUM and maintains a strong investment record.

2. "Extremely overweight in property especially Brisbane and Melbourne." As a long term investor, I hope BLA hasn't put all their eggs ($2.4b at 30 September 2016) in the Brisbane and Melbourne property basket. So I took a look at their BAF asset allocation as reported for 30 November 2016 and saw they had 31% in Private Real Estate and of that 10% in Residential Development Projects, 14% in Student Accommodation Projects and 8% in Other Real Estate. I agree that their 10% in residential property is higher than I'd like but not necessarily "extremely overweight". In recent media reports, the Brisbane and Melbourne apartments may be unprofitable for developers ("This has smashed many developers' return on investment. What was profitable is now borderline." AFR 2/12/16) or they're forced to leave more on the table ("It's not uncommon to see deals with one or two-year rental guarantees but this is the first time I have seen 25-year guarantees being offered. It's working" AFR 14/12/16). I don't know how much of total AUM are invested in Residential Development Projects as BAF is a selection from all of their funds, but if it is of the order of 10% and they sell at a 25% (50%) discount to invest capital, the total impact would be -2.5% (-5.0%) to total AUM.

3. "Private equity doesn't address needs." If their private equity investments address wants and not needs, does this automatically make them less profitable? In their BAF net tangible assets update as reported for 30 November 2016, they list out some of their private equity investments including bread, childcare, pharmacy, education, hotel, fashion and outdoor media businesses. At a portfolio level they could deliver satisfactory returns, even if individual investments may prove highly profitable or unprofitable.

4. "Internal valuations." The valuation process is summarised on slide 13 of their 18/11/16 presentation: independent valuation experts used, independent audit review and Board sign-off. There are further details on slide 12 including "Institutional investors also review and provide sign-off for the funds where they have invested (e.g. First State Super sign-off water entitlement values". There are three possibilities when it comes to their reported valuations: they are either conservatively estimated, aggressively estimated or about right. On slide 12, they have stated that “Realised returns are superior to unrealised returns” and specifically: 18.2% vs 17.7% for Private Equity/Venture Capital and 18.5% vs 16.3% for Private Real Estate. I can't automatically assume their valuations are aggressive based on their track record. There could even be some upside relative in their unrealised returns.

5. "No institutional investment." At 30 September 2016, institutional investors account for 24% of AUM, based on slide 17 of their 18/11/16 presentation. 24% of 2.4b of AUM equates to $0.6b, which is not "significant money to manage". I agree at this time i.e. $0.6b doesn't mean anything to the institutions. Another way of looking at it is: if they have managed to grow AUM without institutional support, imagine the possibilities with institutional support. I think this is where they are going to be able to grow AUM over the next three years and easily beat their own guidance. The 12/12/16 announcement about institutional funding for property acquisition by Cove is an example of institution sourced AUM.

6. "Accruals have spiked." This is the nature of alternative fund managers that are growing and performing. This is in contrast to a fund manager of listed assets who can simply liquidate parts of their holdings.

7. "Brokers are covering BLA and the founder didn't like them." If the company can reach $5.0b by 30 June 2019 as guided in their 18/11/16 presentation, and the company has maintained their investment returns of above 15% per annum, then the share price will follow. As a long term shareholder, I don't care that brokers are covering BLA. I didn't know that the founder didn't like brokers and don't have any way of verifying your claim. As a long term shareholder, I don't know how (if at all) this changes the long term value of BLA as an investment specifically in terms of AUM or investment returns.

8. "Capital raising." As a long term shareholder, I'm supportive of the company when they require capital to grow and can see a long runway for them.

9. "BLA sold down their BAF shares." Are you suggesting those that purchased BAF shares from BLA will be worse off? If BAF can grow net tangible assets (NTA) by 10% per annum, those that purchased BAF shares will do well in the current low interest and return environment. I have no reason to believe they can't grow NTA meaningfully over time.


10. "There are a couple of AFR articles." So some hedge funds and/or short sellers have provided AFR reporters with material to publish. This will have the desired effect of scaring people out of their positions, allowing short sellers to close their positions for a profit. I have long wanted to build a larger position and missed my opportunity at $5 in February 2016, so I would prefer these articles to be more effective and misinformation less obvious than they have been to date.