Austock was an
investment I made in late 2011/early 2012. At the time it was a diversified
financial services business and the shares were sitting at all time lows having
been floated at $1.70 in the market froth that was 2007. On the surface Austock
looked cheap and appeared to have a sufficient margin of safety to protect me
on the downside. The real issue was the lack of any apparent catalyst to rerate
the shares.
While I bought in
too early (paid too much), looking back my reasoning seemed correct. The post is my thoughts at the time of
purchase eg late 2011/early 2012.
History
Austock floated in
2007 on the back on being corporate advisor to some of the larger success
stories at the time. It helped raise millions of dollars for the likes of
Timbercorp and ABC learning centres and was then known as the “Mini Macquarie”.
Unfortunately this name didn’t stick and Austock’s boardroom room was renamed “the
graveyard” as its high profile clients went under. Austock’s share price
subsequently fell off a cliff and by 2011 was trading at ~15 cents. At this
price i thought it offered a good risk reward scenario and bought in.
Overview
Austock is a diversified financial services
business consisting of 3 individual subsidiaries. They are as follows:
-
Stockbroking
and Corporate Finance – Austock Securities
-
Property
Funds Management – Austock Property
-
Insurance
bonds – Austock Life
To value Austock I roughly
valued each subsidiary then summed the parts. Luckily for me Austock is no
Wesfarmers and each of the subsidiaries was fairly straight forward and easy to
understand.
Corporate finance and securities – Austock
Securities
This division of
Austock is a typical stockbroking/corporate finance business offering financial
advice to clients and organising capital raising for companies. The table
below shows the historical profitability of this division. Given the lack of
profits, I associated no value to the division.
Property funds management – Austock Property
Austock Property is a real estate funds management business. It’s the responsible entity of
four different real estate trusts with over $550m in assets under
management. This includes two ASX listed
trusts (ASX codes: AZF and AEU) and two unlisted trusts. The table below
details each of the trusts.
Source:
Austock 2011 Annual report
Like the rest of
Austock’s businesses, Property Funds Management suffered through the GFC. The
largest tenant of its largest fund, the Australian Education Trust (AET), entered
administration, causing the unit price to drop significantly. While this was a
major setback, the management team did an excellent job of steadying the ship
and was able to re lease majority of the properties which allowed the share
price to recover.
The table above
details the underlying profitability of Austock’s funds management businesses
(figures are from annual published financial statements). Unfortunately the
numbers include both Austock Life and Austock Property. Given that Austock Life
was not profitable during the period (according to management) it is safe to
assume that the underlying profitability of the property funds management
business is at least equivalent to the figures in the table. Using a
conservative annual profit of $1m pa and factoring in the annuity style revenue
stream the business generates, I have placed a conservative value of $10m for
the property funds management arm.
Life investments – Austock Life
Austock Life’s
main focus is the creation of financial products for retail investors. Its main
product, insurance bonds, offers investors a tax effective method of investing
for the long term. The investor chooses
from a menu of different investment options from some of Australia’s leading
fund managers and can actively alter the asset allocation as they see fit.
After a ten year lock up period the investor is able to withdraw their funds
including any capital gains tax free.
As shown in the above
table, funds invested in Austock Life’s insurance bond business have grown
substantially over the past few years. Austock Life receives a percentage of
total funds under management as revenue meaning the more funds under
management, the higher revenue is.
Two things work very
much in Austock’s favour here:
- Most deposits into the insurance bond platform are relatively large amounts of money, usually $100k+
- The funds are sticky and left in the platform for the longer term as the tax benefit is only gained after a certain period of time.
The above factors
create a strong annuity revenue stream for the business. Given the historical
growth level in the business, current level of funds under management and near term breakeven profitability, I
placed a value of $5m on this business.
Value v Market Price
The table below shows
the overall value I placed on Austock. In calculating the net asset figures I
only valued cash on hand and debtors and took away all liabilities.
The table below shows
Austock’s market capitalisation at the range of prices its shares were trading
at during 2011/early 2012. The final column compares the market capitalisation
to my estimate of value as at 31 December 2012. As shown, Austock was trading
at a significant discount to my estimate of valuation. I originally purchased
shares for 15 cents – at this price there was only a 10% discount to the
valuation meaning there was little room for error. The share price subsequently
fell down to a low of 8 cents. At this price Austock was trading at less than
50% of my estimate of value and the margin of safety was much higher. I
purchased more shares at 10 cents.
Subsequent events
Subsequent to my
purchases Austock sold its securities business to Intersuisse for nominal consideration.
While the sale price wasn’t disclosed i assume Intersuisse didn’t pay anything
for the business but rather took on its obligations eg employee entitlements, lease
obligations etc. Austock then sold its property management business to
Folkstone for $14.7m in cash. While these events could not have been forecast,
buying Austock when there was a sufficient margin of safety available was a
good move.
