Paul Masi, head of Austock Group, says the stockbroking industry is about human capital. Picture: Jane Dempster
Source: The Australian
WHEN three mid-sized broking houses listed in a rush in late 2007, the bourse’s more cynical exponents scoffed that the move marked the bull market peak more clearly than any metaphorical bell.
Cynics have a habit of being right: history shows the local market hit its zenith on November 11, leaving the listed brokers — a clean proxy for the deepening mayhem — exposed to the brutality of transparent pricing.
“At the time of listing, the market was clearly very strong and paying full valuation for things,” reflects Austock Group chief executive Paul Masi. “It suited owners at the time.”
Four years on, the brokers — Bell Financial Group, Austock and Wilson HTM — are trying to make amends in a trading climate that is souring again. The Perth-based Euroz, listed since the early 1990s, has fared better on its parochial model of supporting local capital raisings.
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But its eastern seaboard peers labour with market valuations well below their listing price — radically so in the case of Austock, still weighed by the baggage of an unhealthy symbiotic relationship with Eddie Groves and his failed ABC Learning group.
For Bell Financial, which listed in December 2007 at $2 a share, there’s been salient lessons in taking an intrinsically private business public. Owned 65 per cent by partners and staff, Bell shares briefly peaked at $2.50 shortly after listing.
“But then to everyone’s mortal embarrassment, they crapped out during the GFC,” executive chairman Colin Bell says. But he doesn’t buy the conspiracy line that broker principals intended to use the listings as parachutes to bale out ahead of the slump.
“Our timing was spot on the top of the market,” Bell says. “People said we knew, but we had no idea. At the time it looked like (the market) was onwards and ever upwards.”
Still, the listed brokers’ off-key record raises broader questions about the suitability of the model, given the inherent volatility of the game. Brokerages are not so much a body corporate as a loose affiliation of deal-makers who will head for the lifts if they perceive bonuses not to be commensurate with their efforts.
It doesn’t help that brokers are frequently eccentric or colourful characters who are difficult to corral into a corporate structure.
Another key motivation for listing — the ability to offer staff easily tradable scrip as bonuses — has also not been as useful as expected.
With one exception — Bell Financial’s acquisition of Southern Cross Equities — the firms haven’t leveraged their listed shares to buy brokerages as part of a long expected (but yet to be seen) sector shake-out.
(Conversely, in early 2009 the unlisted Patersons Securities bought the listed Tolhurst Noall — itself a product of the 2001 merger of William Noall and DD Tolhurst — for a derisory $1.9 million.)
And despite the dire experience of the global financial crisis, the firms carry little or no debt and have little need for equity raisings in their own right.
“It’s a very good question,” Austock’s Masi says of the worth of the listed model. “The industry is about human capital. By the nature of the beast they are rainmakers and create transactions. They are not a firm as such, they are individuals.”
Austock, he says, has no need to raise share capital itself.
“We don’t have high capital requirements. We have no debt in the business. We can do a little bit of underwriting, but most deals are sub-underwritten as a matter of course.”
As a rule of thumb, he says, security houses trade on a lowly ratio of 0.8 to 1.2 times their net tangible assets. “That’s because the human capital goes out of the elevator every day.” Or, Masi might add, to a rival firm or new boutique house if they feel they’re not being rewarded for their efforts.
Last month, three of the brokers reported subdued results, but with no shortage of trademark optimism about better conditions ahead.
Bell Financial, in which UBS has a 17 per cent stake, reported a $21.5m profit for the full year to December 2010, 21 per cent lower despite equity trading volumes rebounding in the last quarter.
Bell remains confident of a turnaround and a key reason is the Southern Cross integration, effective from July 1.
As it turned out, the purchase — which bolsters the merged group’s presence in the institutional sector — will cost $80m, much cheaper than the “headline” $150m price tag when the deal was announced in July 2008.
According to Bell, the $150m was based on “lofty market conditions” and was always subject to adjustment in the ensuing — and more subdued — interim period.
“We will have a fantastic offering to our clients across institutions, retail, corporate finance and research,” Bell says. “We will be under the same roof, singing from the same song sheet.”
Brisbane-based Wilson HTM, which listed on June 15, 2007, at $2 a share, is now trading at 97c and this month was ejected from the All Ordinaries index.
Blaming a drop in wealth management and capital markets activity, Wilson HTM reported a 67 per cent interim profit decline to $2.7m, an improvement on the second-half loss of $15.7m.
The firm, 19.5 per cent owned by Deutsche Bank, endured a “difficult” first quarter, but then experienced the faint rumblings of a turnaround — at least until last week’s market shudders.
Wilson says all listed financial service organisations — not just the brokers — have been doing it tough. Wilson HTM is not a pure broker: over five years it has developed a managed fund business, Pinnacle, which now handles $9.5bn of wholesale funds.
Wilson, the firm’s executive chairman for seven years, recently assumed a more hands-on managing director role, with the broking business targeted for special attention. “We have moved to simplify the business,” Wilson says. “It’s gone along reasonably well — not brilliantly — but it’s a case of keep going with what we were doing.”
Wilson is heartened by the strength of mid-cap capital raising activity — or at least the firm’s ability to win a bigger slice of the work.
This includes handling the initial public offerings for Dampier Gold, Hillgrove, Dart Energy Bulletin Resources and Renaissance Uranium. The firm raised eyebrows among its larger brethren by winning a co-lead manager role for last year’s huge QR National float. “Things have picked up in terms of capital raising,” Wilson says. “There’s certainly momentum there, primarily in the resources sector and the companies that service the sector.”
Austock shares — which listed on December 11, 2007, at $1.80 — languish at 14c.
Under Masi, Merrill Lynch’s local chief bought in to revive the firm last July, Austock managed a net $3.9m profit in the December half, reversing a $900,000 loss. But the bottom line was flattered by a $6.6m windfall on the sale of a registries business. “I think we have been travelling OK,” Masi says.
He describes a tale of two quarters. “The first was very tough — July was very difficult — and we need to have a good solid five months to make a good return.”
Austock’s restructuring also stresses capital raising engagements and he hopes to “push a few buttons” on new mandates in the next six months. “The deal pipeline is positive, but outcomes are binary,” he says. “You either get them or you don’t.”
Over in the untroubled west, the low-key Euroz doubled first-half profit to $18.45m on revenue of $45m, helped along by work on 12 capital raisings totalling $750m.
Speaking from Rottnest Island, chairman Peter Diamond says the firm has no plans to change its unashamedly parochial model.
“We do what we do. Our model is our model,” he says. “Our strategy is a focus on shareholder returns. We aim to maximise our returns and pay a good dividend to shareholders.”
For the others, the dividends have been scarce, but being in the public gaze has its upside as well.
Bell says the listing has been an “excellent” way to instil management and compliance disciplines. “The management process wasn’t particularly formal,” Bell says.
“The requirement for a properly formulated board meant the firm was able to attract some fantastic directors.” These include former Lazard chief Brian Wilson and former Etrade director Malcolm Spry. “We haven’t got people to just make up the numbers,” Bell says.
He laments one purported advantage of listing — liquid scrip incentives for staff — “bit us on the leg a bit. Our staff took up a lot of shares and then five minutes later they were down a hole”, he says.
“What was meant to be a terrific incentive turned out to be a pain in the neck.”
Austock’s Masi concurs that brokers already work in a highly scrutinised sector anyway. “There’s some cost (of listing) from a reporting point of view, but our compliance requirements are pretty high anyway.”
Masi says Austock’s “number one and number two” strategy is to work on the broking business. “If we can return to profitability there, the share price will take care of itself,” he says.
Euroz’s Diamond crows that his firm — 50 per cent owned by principals and staff — has paid out $105m in dividends over the decade. Along the way, no one has ever been issued with free shares, which would have been a sure-fire way to dilute returns. “It’s been a wonderful journey.”
Despite the travails, Colin Bell harbours no regrets about his firm’s mis-timed listed foray: “A lot of people said we would really regret it, but I think it’s been very good. It has been excellent.”