Another oneNuix share price collapse hurts Macquarie’s brand...

Another one

Nuix share price collapse hurts Macquarie’s brand http://www.copyright link/technology/nuix-collapse-hurts-macquarie-s-brand-20210517-p57so6?btis

It is a bit rich for investors to blame Macquarie Group for the debacle that is the Nuix initial public offering.

The highly paid institutional fundies who cried out for the stock in December should have gone into the deal with their eyes wide open.

After all, every investment banker is paid to spruik stocks to the maximum degree possible within the law. That’s their job, and they revel in it.

But that does not free Macquarie’s chief executive, Shemara Wikramanayake, from asking her key bankers and technology experts what went wrong with the Nuix initial public offering.

There are questions to be asked about the sale process for the data analytics company.

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Are there lessons to be gained from examining a situation where Macquarie was the controlling shareholder, a long-standing adviser to Nuix, and joint lead manager of the IPO?

Were the lawyers, accountants and other advisers to the IPO made aware of the issues raised on Monday when The Australian Financial Review, The Sydney Morning Herald and The Age published revelations about the deep involvement in the business of co-founder Tony Castagna?

The prospectus mentioned Castagna in two footnotes. It described his shareholding in the company was through Blackall Ltd, a company ultimately owned by Delrick Ltd, “a company limited by guarantee incorporated in Vanuatu which maintains a retirement fund for Nuix co-founder Dr Anthony Castagna”.

The 40 per cent collapse in the value of Nuix since Macquarie sold the business in December has left a sour taste in the mouths of many investors, notwithstanding the concept of buyer beware.

Macquarie’s reputation is bound up with the performance of companies it sells through IPOs and trade sales. It has no legal obligation to look after investors who buy the businesses it sells.

But its ability to keep coming back to the same group of fundies who bought Nuix will be much harder if they feel Macquarie is not standing behind what it is selling.

Nuix was meant to be another one of the long list of successful technology spin-offs from Macquarie’s legendary technology team led by Dan Phillips.

In pure financial terms, it was a stonking great success. A chunk of Macquarie’s 66 per cent shareholding was sold for $564 million at the time of the IPO. This contributed to the record Macquarie profit announced earlier this month.

But in terms of brand and reputation, the Nuix deal has been quite damaging.

Throughout the Nuix sale process, Macquarie managed a range of conflict of interests, including owning the company, jointly managing the IPO process, and having the Macquarie equity capital markets people provide a valuation without a recommendation.

What has intrigued outsiders and, Chanticleer understands, the Nuix board is the decision by Macquarie not to initiate research on the company following the IPO.

This sort of broker document is always greeted with a high level of scepticism, given the analyst is working for the bank that sold the stock. But it is an important symbol of support by the joint lead managers for the business they are selling, because it forces an analyst concerned with their own reputation to come up with a valuation.

Macquarie says it did not initiate coverage of the stock because it retained a 30 per cent shareholding and was therefore conflicted from providing research coverage.

The bank says this management of conflict of interest is all about Macquarie’s shareholding in the business and has nothing to do with the fact that its lead technology banker, Dan Phillips, is a non-executive director of Nuix.

Morgan Stanley was the other joint lead manager of the Nuix IPO. Its analyst, Andrew McLeod, initiated coverage of Nuix in January with a bullish share price target of $11 a share when the stock was trading at $8.75.

McLeod said he had a base case for compound annual revenue growth of 21 per cent between 2021 and 2024, and about 19 per cent growth out to 2030.

His “bull case” had even faster revenue growth numbers thanks to Nuix’s access to increased capital and increased opportunities as a public company.

McLeod has since changed his price target to $7.50 and downgraded his enterprise value to sales ratio from 15.6 times to between six and seven times, which is a significant discount to the prevailing EV to sales of Australian tech companies of 15 to 20 times.

An alluring growth story

When Macquarie brought Nuix to market late last year it had most of what the market was demanding.

Nuix was presented as a growth story. A chance to ride the global demand for software analytics used in the forensic analysis of data by police, intelligence agencies, law firms and financial regulators.

The non-deal roadshow showed the names of prominent clients, such as the Australian Federal Police, the Federal Bureau of Investigation and the Australian Taxation Office.

This gave some added allure to a business heavily reliant for its revenue on selling its suite of products to government agencies.

The non-deal roadshow presentation highlighted the 16 per cent compound annual growth in revenue between 2018 and 2020, the 110 per cent revenue retention over the same period, the less than 5 per cent customer churn, and its history of positive profit margins and strong cash flow generation.

The prospectus had a relatively modest 10 per cent growth forecast for Nuix’s 2021 revenue. The big number in the prospectus was the forecast for annualised contract value (ACV), which was tipped to rise by 18 per cent to $200 million in 2021.

These forecasts were dumped in a two-step process that started in February when the company said its half-year revenue was less than expected.

The second step of the downgrade to earnings was in April when the company said its revenue would be up to 7 per cent below what was forecast. The revision in ACV was much worse – it was cut from $200 million to a possible lower forecast of $168 million.

Chanticleer was one of many investors who backed the company and purchased shares following the IPO with eyes wide open. In hindsight, the Chook super fund’s stock was purchased from the smart fundies who exited the stock at a premium to the $5.31-a-share IPO price.

Since then the stock has fallen further, partly because the fickle winds of change have blown through the market and investors have turned increasingly bearish towards growth stocks.

The trick with any IPO is to leave enough on the table for the investors. But when a company misses its half-year prospectus forecasts within two months of being floated and issues an earnings downgrade two months later, it is bound to rub off on the former owners and joint lead managers of the IPO.

There are many in the market who believe Macquarie led investors to believe the forecasts published by Nuix in its prospectus were conservative.

Jeff Bleich, the former US ambassador to Australia and chairman of Nuix, will be hosting an investor day on Tuesday. It will be his first public outing as chairman of the company.

It sounds a little cynical, but there is good reason for him to “kitchen sink” everything he can while the company is in the sin bin. Its share price is going to remain in the doldrums for months.

He might as well re-base the company’s revenue and ACV so Nuix can have a positive story to tell over the next few years. Either way, Bleich has to get the Nuix team to deliver on whatever promises the company makes.

Disclosure: The author’s self-managed super fund bought Nuix shares on the market in January, and sold them in May.