Overview
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.
IPO details
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.
CEO
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 Mcguire than 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.
Expansion plans.
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.
Valuation
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.
Verdict
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.
