In conversations we have had with other investors about Moelis Australia Limited (ASX: MOE), it is common to hear the response “Corporate advisory businesses are lumpy and unpredictable”. Whilst that can sometimes be the case, it represents a fundamental misunderstanding of the earning drivers that we believe should propel Moelis forward.
I recently read Blackstone founder Steve Schwarzman’s new book, titled ‘What It Takes.’ Little did I know that Blackstone was originally founded as a corporate advisory business, which used its profits to seed one of the largest alternative asset managers globally. The story sounded familiar, because in my view this is exactly the playbook for Moelis Australia.
In 2013 Moelis had zero funds under management, whereas today they have almost $5bn. Back then, the Moelis corporate advisory business generated $40m of revenue, with the asset management business contributing only $200,000 in fees. Fast forward six years to today and the asset management business has delivered $96.7m in revenue which represents compound annual growth of ~180% per annum. Contrast that to the corporate advisory business which this year has delivered $61.7m revenue and represents compound annual growth of ~7.5%.
A quick glance at the Moelis prospectus from their IPO highlights that the EBIT margin in 2014 was 7%, compared to the 38% EBIT margin they have delivered in 2019. Whilst admittedly the margin in the advisory business has improved since then, it is the asset management business that has been the big driver of that growth, as the margin is now almost double that of the advisory business.
Focusing on today’s result, there are a couple of aspects worth highlighting;
- With the business continuing to grow at a rapid rate, Moelis need to invest ahead of the curve to support that growth. Ultimately, this requires them to hire key employees who in their initial tenure with the business may not initially contribute incrementally to earnings but are expected to do so in the future. The payoff on this investment should be realised in the following years as assets under management continue to grow, the business attracts further advisory fees, costs are recovered and every incremental dollar of revenue falls to the bottom line.
- Moelis currently have $325m of cash and investments on the balance sheet which makes up over 40% of their market cap. This provides them with a strong war chest to seed new strategies and support future growth whilst also giving them the capacity to co-invest in any future funds, which increases their alignment to their investor base.
- Ultimately the value of an asset management business is mainly made up of people. Moelis staff own a significant portion of the business, the management team in our view are first class and are capable of growing Moelis into a much bigger business than it is today.
Guidance provided to the market prior to the earnings release was for $60m in EBITDA. However, the market anticipated them beating this so the final number of $63.5m was roughly in line with consensus expectations. The business in our view continues to provide an attractive long-term proposition with a cost base and a balance sheet that has been set up for growth. With the asset management business having had considerable success in its first 6 years of operations, we think this success will continue to significantly enhance the earnings quality of the business going forward.
Disclosure: At the time of writing this article NAOS Ex-50 Opportunities Company Limited (ASX: NAC) holds a position in Moelis Australia Limited (ASX: MOE).
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Did you consider the founder Ken Moelis selling out into your thesis? That was a huge sign for me on not adding MOE to the portfolio.
Stan, you need to dig a little deeper on that one. The sell down from Moelis & Company (US) was at the behest of Moelis Aust. By reducing their ownership to below 20% MOE removed the need to get FIRB approvals on asset purchases and also reduced stamp duty payable etc. As a fund manager constantly buying assets to seed new funds that is a massive positive, not a negative. Great note and great call so far Ben.
Hi Stan. Yes I did and it's a good point as insider selling is not normally a positive sign. In the case of MOE they had numerous restrictions on them with having a US parent owning so much of the company. Moelis Australia was set up as a 50:50 JV with the parent co not as a subsidiary. The Moelis Australia management team are heavily aligned with investors. I viewed the sale as a positive catalyst for the stock. Ben
How much of that cash can be readily upstreamed out of subsidiaries for acquisitions (ie, is unrestricted cash)? We’ve seen thus business model before and it’s never as clear-cut as we might assume.
Good note. Imsiders still own 70%. Cash adjusted PE still low 9x