While much speculation has surrounded the future of Tricom, the listed Austock, another mid-tier local investment house, has been shunned by investors. The newly-floated Austock grew from obscurity in the early 1990s to be one of the larger local investment houses. When the company floated in December it listed at a strong premium to its $1.80 float price (hitting the boards at $2.09 per share and peaking at $2.20).
Unfortunately, it has been downhill ever since, with Austock recently trading at $1.60 – more than 10% below the float price.
Austock has built its reputation on guiding small niche companies into market leaders. Its finest prodigy remains ABC Learning Centres, the Eddie Groves-run monolith which seems intent on taking over the world, one toddler at a time. ABC has struggled recently, making the mistake of plunging into a huge, unhedged acquisition of US assets just before the US dollar was dumped (Austock arranged the financing for the move). ABC shares have halved from a high of more than $8.50 to around $4.20 as investors query Groves’ growth ambitions.
Austock chairman, Bill Bessemer, was until recently a long-time director of ABC. Such is ABC’s importance to Austock, that the bank noted in its prospectus that one of its “excellent growth prospects” was the “provision of property acquisition and management services to ABC’s growing childcare business in the US.” In 2006, ABC paid Austock more than $24 million in fees.
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Aside from corporate finance, Austock also has a property fund management business. The bulk of the funds under management are held within a listed fund called AET. AET’s assets consist of 388 childcare centres which are leased to none other than ABC Learning Centres. Another fund, called Austock Childcare Fund, is an “unlisted closed end property trust” whose sole investment also appears to be childcare centres leased to ABC.
Another close member of the Austock stable is the embattled Timbercorp. The investment scheme manager has had an even tougher time than ABC, with its scrip slumping from $4.00 in 2006 to around $1.00, courtesy of an adverse tax ruling and a debt-laden balance sheet. Austock chairman, Bill Bessemer, was previously a director of Timbercorp. Timbercorp paid Austock more than $2 million in fees during 2007.
Austock’s reliance on a limited number of clients (like ABC and Austock) was borne out in its 2007 Financial Report. In 2007, Austock’s revenues from brokerage skyrocketed, increasing from $19 million to $36.5 million, however, underwriting revenues plummeted from $28.8 million to only $7 million. Austock’s prop trading desk had a poor year, with revenues dropping from $1.1 million to $82,000.
Traditionally, investment banks such as Goldman Sachs, who derive a significant amount of revenue from volatile areas like prop trading, are afforded relatively low (often single digit) price-earnings ratios. Trading banks are generally offered a higher multiple, of around 12-15 times earnings. By contrast, Austock is trading on a historical earnings ratio of around 18 (compared with a PE of 10 for Macquarie Bank or 11.6 for Babcock & Brown). The market is effectively pricing Austock at a 75 percent premium to the established and market leading Macquarie Bank.
An investment in Austock seems to be somewhat of a proxy for an investment in the struggling ABC Learning Centres, as much as admitted in Austock’ prospectus, where it noted that “any loss of business from a key client (such as ABC) could adversely impact the Company’s operating results and prospects.”
Rarely a truer word has been written.