BLA is, at the moment and in my opinion, over-earning for two reasons:
1) We are in the late stages (or perhaps already past the peak of) a virtuous cycle in which asset prices have risen; this leads to BLA's funds generating returns higher than what i'd imagine they'd generate through a full financial cycle, and because BLA's fees are tied to the returns the funds make, BLA is over-earning. Simply put, i don't believe they'll continue to earn 15% in the underlying funds net of fees through the cycle - a 15% post fees translates to roughly 18% pre fees, and they won't deliver that through the cycle.
2) BLA's fee structure will change as its capital base changes from HNWI/retail money (high fee), to institutional money - in short, the latter demand lower fees in return for cutting larger cheques. What i do is assume tomorrow that the entire business switches over to a more institutional fee regime.
In terms of valuation, because i think BLA is over-earning, i basically ignore the $34-36m FY18 NPAT outlook they've provided - capitalising a given earnings number at a multiple only makes sense if you think those earnings are sustainable based on where the business is today. What i do instead is ask myself the question: "what should BLA earn based on where it is today?", and to that end i build a basic Excel model with a few key inputs to flex:
- AUM ($5-$7bn)
- Unlevered through-the-cycle returns generated at the fund level (i estimate 10-12%)
- Leverage employed within funds (30-50%, at 5-6%)
- The above provides estimated through-the-cycle pre-fee equity returns at the fund level (~12-18%)
- Overlay fee regime - i estimate 80-100bps AUM base fee and simple 20/8% performance fee
- This outputs BLA's base and performance fees, and i sense-check that against outputted post-fee fund-level returns (10.5-14.4%)
- Assume BLA has to coinvest 5% of equity into funds, feed that income to BLA
- ~$50m cost base to operate
Doing the above, i get a wide range of potential EBITs - at the low end ($5bn AUM, 12% pre-fee levered fund returns) the EBIT is ~$27m, and at the high end ($7bn AUM, 18% pre-fee levered fund returns) the EBIT is $88m. I probability-weight a number of scenarios to derive a probability-weighted EBIT of ~$50m, say a fair value on that is perhaps 10x, but i want to buy at a discount to fair value which might be 9x, pro forma the net cash for assumed 5% coinvest, and i roughly get to a ~$500m market cap as a point i'd be happy to commence buying - which works out to ~$6.40 per share.
To be honest, what i think Glaucus has done is identify the fact that BLA was at $12+ trading at very lofty valuations hence made a good short target, then they've written a 65-page report with some interesting stuff and a whole bunch of garbage to justify their short position. Glaucus will make money here as i think BLA was objectively overpriced (it unquestionably was when it was trading at >30x PE), but it's not a fraudulent business model as was made out.
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