This is not investment advice and is general in nature. Do your own research before taking any positions in the securities listed below
Why are there relatively few retail players like FIIG/$IAM in Aus
Retail fixed income is a funny space in Australia where unlike in other countries of our size, there are fewer independent specialty players. This is really for two reasons:
Fixed-income offerings are less tax-friendly vs franked dividends for individual investors
Big 4 banks have dominated both the deposit and fixed-income market meaning that retail investors have only chased yield within the banking ecosystem (e.g. via term deposits or worse hybrids)
That sounds highly unappealing – why look at it?
There has not been a ‘silver bullet’ moment making this space attractive, however, there are a few general tailwinds
Basel III further penalises investment banks for holding too much Tier II capital (i.e. NCDs, TCDs etc)
Rise in non-bank lenders use these brokers as a source of capital
General pricing of yield from other asset classes makes this credit appealing
Of course, interest rates are another favourable factor for operators. However, even in a market of complete interest rate stability, there is a growing level of base demand for retail fixed-income
What does $IAM do in retail fixed-income
Previously called Cashwerkz, $IAM started out as a money-markets provider and it has slowly expanded into
Capital markets: underwriting high-yield issuances (e.g. Corporates and bigger non-banks) with a big focus on investment grade credit in USD
Investing into other fund managers (i.e. Fort Lake and TGM) which is c.33% of their asset base
Trustee services & Treasury services: via a legacy product called TA, however, this business is yet to really scale
The personnel running $IAM are predominantly ex-FIIG; one of the biggest players in this space. So, like all things funds management; generally, when a winning team is brought together in a new firm they are successful (albeit the question is whether investors or employees will take the spoils).
What are the financial returns for $IAM
Unlike the ASX companies I generally cover, delving into traditional financials here is not very meaningful. The primary things that matter are how $IAM are progressing with operational metrics, the likelihood of a capital raise in <12 months and operational leverage (i.e. compensation vs. income).
Operational metrics
As you would expect - they are in a purple patch for bond trading with a) First-time profit ($0.9m EBITDA) b) 10% growth in AuA c) 5x lift in bond trading and d) 31% growth in clients
Whilst these are exciting metrics; bond trading volumes are really just a by-product of good marketing & underwriting (e.g. NCIG $170m underwrite).
For me the most promising things are:
Total customer account & AuA is a momentum play and they are certainly growing
Strong performance of Fort Lake
Flow on impact to cash runway.
Cash runway
In 12mnths to Jun'22 - operating cash costs were $13m ($7m salaries, $3m Product & running costs and $3m corporate costs).
Being aggressive, cash costs now are probably c.$15-17m and they have $11m in funding capacity (inclusive of $5m debt).
The obvious competing factor is around if they need to make any Funds Management (eg Fort Lake type ) investments or big hires which will increase cash burn
Operational leverage
There are early signs of operational leverage in some of their business:
$IAM gets a disproportionate amount of P&L from underwriting vs. typical bond trades
Excluding Performance Rights, $IAM has shown some cost management despite rise in AuA, however, the truly concerning thing is the amount of performance rights and options granted (even if they are long dated and almost all out of the money)
Conclusion - It is a no for now due to dilution risk & my lack of certainty in PRs &
Positive factors to note
In terms of personnel & AuA momentum - $IAM ticks this box
Whilst it would be generous to draw parallels between $PNI or Fidante, $IAM's expanded into FUM-strategy which has higher operational leverage
Their customer acquisition in recent quarters has been really impressive, however, it is a cyclically favourable environment of large underwriting
Deal breakers
Fort Lake and TGM are only just break-even & 33% of their asset base so there is some impairment risk
It is highly likely that a fundraise occurs in <12months (on pre-Q2'23 run-rate) for one of the following reasons
Placement volumes are not always as strong as Q2'23
Even though they have the $5m of debt headroom at the $IAM-level, covenants may prevent this being the sole cash source
Alignment is key for this business and I expect a lot more performance rights to be issued to staff because the current suite are OTM
Yorumlar