|Shares Out. (in M):||26||P/E||0||0|
|Market Cap (in $M):||26||P/FCF||0||0|
|Net Debt (in $M):||-17||EBIT||0||0|
|TEV (in $M):||9||TEV/EBIT||0||0|
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This idea is for an illiquid microcap (C$26m capitalization) and as such is only applicable for PAs. Others should stop reading now rather than call it non-actionable later.
Thesis is quite simple:
The company is cheap as its profitability and growth potential is obscured by declining AUM (due to divestures) and lumpy earnings (due to performance fees). Superficial look at financials shows quite a bleak picture. Low capitalization, illiquidity and absence of coverage add to the story.
The company was founded in 1998 by Victor Koloshuk (who still runs the company today and owns 37% of its stock). In the next few years IAM acquired various asset/property management businesses and had peak AUM of C$3.1bn in 2008. During the crisis IAM decided to re-focus the business and sold down property management operations 2009 and then BluMont Capital (retail asset management) in 2013, after which the company became pure play institutional asset manager offering alternative investment strategies. AUM in currently retained businesses has grown from C$1.38bn in 2005 to C$1.83bn now. Operations are split in:
Full details on individual fund performance and etc. can be found on IAM website, but key take-away is that AIMs funds (both debt and RE) have generated very attractive historical results and have very attractive fee structure. This should keep the doors open for further growth in AUM.
The table above indicates quarterly performance since the sale of the retail division (BluMont) with only institutional side of the business remaining. For longer term performance please refer to annual reports - these have 10 year charts for all key metrics. Financial year ends on Sep 30.
|All figures in C$k||Q1 2015||Q4 2014||Q3 2014||Q2 2014||Q1 2014||Q4 2013||Q3 2013||Q2 2013||Q1 2013|
|Fees as % of AUM (annualized)||0.62%||0.59%||0.52%||0.59%||0.44%||0.61%||0.91%||0.52%||0.51%|
|Performance fee related expenses||28||896|
|EBITDA (excl. net performance fees)||190||-135||-174||240||-318||277||810||157||20|
Lumpiness of IAM earnings are driven by a few factors:
When considering the recurring profitability, I ignore the first two and count in the third – this leaves me with management fees that average c. 0.6% of AUM per annum. Excluding net performance fees and investment gains and counting in full opex, the business operates around EBITDA break-even (EBITDA is roughly equivalent to pre-tax cash earnings as capex is negligible). So there is no cash burn within the recurring business at current levels of AUM and any performance fees or investment gains come in as a bonus. AUM in the existing funds is unlikely to see sharp decline due to sticky institutional investor base as well as long holding periods for RE and debt funds.
Recurring business – growth
EBITDA breakeven for the recurring business obviously does not sound very attractive, however AUM is expected to increase materially over the coming couple of years and this will add directly to the bottom line. The whole idea behind selling down property management and retail asset management businesses was to refocus on institutional investors and grow this part of the business aiming to have higher recurring revenue base. Management seems to be on track with its growth strategy:
Recurring business – valuation
I consider the additional AUM from committed-but-not-yet-invested funds to be a sure thing (barring force majeure) rather than a likely expectation. These C$285m of further AUM will translate into C$1.7m of recurring management fees and C$0.9m-C$1.3m of EBITDA (assuming 50%-75% flow-through to the bottom line). Attaching 10xEBITDA multiple gives valuation of C$9m-C$13m for the recurring part of the business. Adding back cash and equivalents results in C$26m-C$30m valuation for the company vs C$26m current market cap – or 0%-20% upside. Thus, additional EBITDA from already secured AUM as well as cash on the balance sheet more than supports the current market valuation. This gives a strong downside protection for my long thesis.
Now for a more optimistic view I add the expected AUM from the to-be-launched funds resulting in a combined C$1.1bn - C$1.3bn AUM increase during the upcoming couple of years. This should translate into C$6.6m – C$8m of additional management fees and C$3.5m – C$6m of EBITDA (50%-75% flow-through rates). Using the same 10xEBITDA multiple and adding $17m in cash results in C$51m-C$77m valuation vs C$26m current market cap – 100%-200% upside.
Thoughts on non-recurring revenue
My investment thesis does not rely on non-recurring revenue but rather considers it as a free option when paying for the recurring management fees. Non-recurring revenue can be divided into three parts:
Management and shareholders
The key person within IAM is Viktor Koloshuk who founded the company in 1998 together with the current CFO Stephen Johnson (5.5% holder). He still runs it as Executive Chairman and owns 37% of the stock. There is not much information to be found about him. Viktor made his name in the investment world back in 1990s with the successful activist role in Poplar vs Crownx (more info here). Apparently, he was one of the first activist investors, at least in Canada. Quite insightful interview with his thoughts on the IAM business can be found here.
The second largest shareholder is Veronika Hirch with 19% holding. She is CIO of BluMont Capital, the retail division that was divested (together with Veronika herself) in 2013 after being part of IAM for 15 years. So far she has not sold a single share even though management confirmed that there are no restrictions on her stake. So it’s a positive sign for now, but could become an overhang in the future.
Since May 2013 the company has repurchased c. 10% of the outstanding shares (the latest purchase for 1m shares was in Dec 2014), and is likely to renew the buybacks program as long as the share price remains at current levels. Insiders have also been buying stock quite actively in the range of C$0.7-C$0.9/share during 2014. Company pays regular dividends yielding 6%.
There is still a large cash pile on the balance sheet and at current rate of buybacks and dividends it will take another 5-7 years before all of it is fully distributed to shareholders. Management started talking about bolt-on acquisitions that would help to grow the business. I would much rather prefer large special dividend and focus on organic growth, but in any case the value is unlikely to be destroyed keeping in mind high insider ownership and management’s track record.
AIM as acquisition target (random thoughts)
Currently the company is selling (after deducting cash and equivalents) for c. 0.5% of AUM. This is low by any standards and especially low for a recently streamlined institutional investor focused business that is positioned for further growth. Valuations in the range of 1%-2% of AUM are more in line with other Canadian asset managers, but there are no direct comparables due to specialized/niche nature of IAM.
I do not believe acquirer could achieve material cost synergies. Even though salaries for top 6 executives amounted to $3.3m during 2014, their roles are likely essential for superior IAM fund performance and thus could hardly be eliminated or replaced with cheaper investment professionals. And the business is already streamlined after recent divestures. IAM is cheap on stand alone basis, but there are no clear material financial benefits of having it as part of bigger asset management organization.
- Continued growth of AUM
- Launch of new funds
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