Australia | Feb 14 2017
Confidence in the near-term prospects for Blue Sky Alternative Investments is supported by strong growth in institutional clients.
-Targeted assets under management increased to $3.1-3.3bn for FY17
-Despite fee compression, expected to leverage cost base and expand margins
-Further strength in the share price expected, although volatility anticipated
By Eva Brocklehurst
Blue Sky Alternative Investments ((BLA)) produced a stellar first half, driven by institutional investment across several classes. Confidence in the near-term growth prospects for growth assets under management (AUM) is supported by existing mandates, with the company offering an attractive proposition for institutional clients.
The business is still relatively immature but Morgans believes, despite this, it is delivering on some ambitious targets. Management/transaction fee growth of 37% lagged growth in average AUM of 57%, probably because institutional fees increased to 37% of the base from 11% in the prior corresponding half.
Management fees also fell versus the second half of FY16, which Morgans believes was mostly driven by the type of deal transacted over the half year. Performance fees were up 13% and the broker estimates $6m in cash was realised from prior performance fees in the half year.
Management has clear visibility on its outlook, based on deal flow and current mandates, and has increased its targeted AUM for FY17 to $3.1-3.3bn. Morgans expects growth in institutional AUM to continue to outpace retail/wholesale growth in the near term. This is leading to further fee compression but the company can leverage its cost base and achieve margin expansion over FY17-19. The broker's price target is $8.50 with an Add rating.
After factoring in a lower revenue margin, option issue and higher costs, Ord Minnett downgrades FY17 and FY18 forecasts for earnings per share by 6% and 7% respectively. The broker upgrades FY19 forecast for AUM to $4.8bn, closer to the company's target of $5bn.
Management Fee Margin May Fall
The broker notes the implied management fee margin for the half year was 23 basis points lower than the prior corresponding half because of higher institutional money in the mix and also because of the recognition of the company's 38% interest in the New York property venture, Cove, for which management fees are not recognised in the accounts.
Ord Minnett concurs that management fee margins may come down as the institutional mix increases but operating leveraged should provide continued profit growth and expansion of the earnings margin. The broker upgrades to Buy from Hold, noting the stock is trading on a price/earnings ratio for FY18, ex cash and investments, of 14.4x and is growing earnings per share by around 40%. The broker's target is $7.87.
Canaccord Genuity believes the company is in a sound position to deliver on FY17 guidance for net profit of $24-26m. The broker takes into account some decline in reported margins but acknowledges higher levels of AUM, which are up $1bn over the past 12 months.
In terms of performance fees, the broker notes these tend to be skewed to the second half, where valuations are more prevalent leading into the end of the financial year and the deal flow is greater. The broker, not one of the eight stockbrokers monitored daily on the FNArena database, has a Buy rating and $9.45 target.
Despite marginally missing estimates for the half year, Shaw and Partners retains a bullish view. The main aspect for the broker was the upgraded guidance in AUM. Performance fees of $9.3m exceeded the broker's expectations.
Although absolute returns have been down on historical levels, the broker believes investors need to be aware that performance fees are generated on an asset-by-asset basis, which differs with a typical asset management business, which generates fees at the fund level,
The broker notes the company invests in a number of income assets with risk/return profiles which are different to that of private equity investments, hence the 10-year track record of 16.4% masks a divergence in the performance of underlying assets.
Long-term performance across the units is still at lofty levels, although private equity returns have been relatively subdued while the private real estate business remains hot. Shaw and Partners believes the current share prices further to run although volatility is anticipated along the way. The broker, not one of the eight monitored on the database, retains a Buy rating and $10 target.
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