JOVIAN CAPITAL CORP JOV
October 05, 2011 - 11:35pm EST by
mpk391
2011 2012
Price: 11.00 EPS $0.00 $0.00
Shares Out. (in M): 9 P/E 0.0x 0.0x
Market Cap (in $M): 94 P/FCF 0.0x 0.0x
Net Debt (in $M): -89 EBIT 0 0
TEV ($): 5 TEV/EBIT 0.0x 0.0x

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Description

Buying companies controlled by Murray Edwards for cash on the books is a pretty safe strategy, and you might just make some money while you're at it.   Jovian is basically a collection of asset managers which, proforma for two recent divestitures has about $10.40 in net cash versus a share price of $11.  Conservatively speaking, the remaining business is worth about $6.50 to $10.  Eventually, I think Edwards will push them to realize this value as I suspect he did with those two recent sales.

Jovian had remarkable success with its Horizons ETF business, but management's (wise) decision to continually plow FCF into growing it masked the considerable value that was being created.  Jovian was largely ignored by institutional investors in Canada, and the mostly retail investor base was grew impatient with the lack of profits/dividends, causing the shares to trade at a wide discount to fair value. 

I could be wrong, but I suspect Edwards pushed them to sell their stake in Horizons along with a smaller business,  as CEOs don't usually like to part with their crown jewels.  FYI, he owns 29.3% today, plus some convertible debt that could up his stake to 33.9%.  If you don't know, Edwards is one of Canada's best investors.  Bruce Berkowitz called him "the Warren Buffett of the oil patch," but obviously he dabbles in other sectors as well. 

Putting some modest EV/AUM multiples on the remainder, I get an NAV as follows:

 

Business AUM Stake EV/AUM Proceeds
      Low High Low High
Leon Frazer 1,850 84% 1.2% 2.0% 18.6 31.1
T.E. Wealth 2,300 100% 2.0% 3.0% 46.0 69.0
Jovian funds 582 100% 2.0% 3.0% 11.6 17.5
MGI Securities 1,500 85% 1.5% 2.0% 19.1 25.5
Pretax value         95.4 143.0
             
less taxes and fees (30%)         -28.6 -42.9
Aftertax value       66.8 100.1
             
Aftertax proceeds of recent 2 sales         88.9 88.9
Proforma other net cash         11.2 11.2
NAV         166.9 200.2
             
Proforma shares outstanding         9.9 9.9
NAV/share         $16.85 $20.21

Note:  I am assuming that just about all potentially dilutive securities are eventually converted / exercised, which affects "proforma other net cash" as well as "proforma shares outstanding." 

The smaller sale (MGI Financial) was slated to close 9/30/11, so it's probably a done deal.  The larger ETF biz sale should close mid-November.  That deal has a contingency escrow of 10% of proceeds for two years.  There's also a $5M break-fee.  I'm not too worried about the deal falling apart - Jovian would pocket the $5M and could shop it again in a market that still likes ETF managers.  The current deal valued Horizons at 3.75% of AUM.  Even now, Wisdom Tree (the only public pure-play) sells at 6.0% of AUM despite being currently unprofitable (Horizons was profitable).


The remaining businesses:

Leon Frazer - founded 1939.  Manages money for HNW clients, as well as being sub-advisor on numerous mutual funds (e.g. the IA Clarington Canadian Conservative Equity Fund, which has a 50+ year track record).

T.E. Wealth - founded 1972.  Provides fee-only financial planning for employees of large international corporations, as well as to private individuals, endowments, pension plans, and Aboriginal Communities.  Basically, they help these folks pick managers for their portfolios.

Jovian funds - mostly refers to Jovian's 50% stake in Hahn Investment Stewards, which is an ETF manager founded in 2001.

MGI Securities - founded 2000.  Investment bank focusing on Canadian small caps in mining, oil & gas, and tech. 


(CAD Billions) 2004 2005 2006 2007 2008 2009 2010 2011 2012
Leon Frazer AUM 0.70 0.90 1.50 1.80 1.70 1.20 1.45 1.65 1.85
T.E. Wealth AUM 1.00 1.40 2.00 2.20 2.40 2.00 2.20 2.50 2.30
Jovian Funds AUM 0.10 0.20 0.20 0.80 0.58 0.55 0.65 0.58 0.58
MGI Securities AUA na na na na 1.65 0.93 1.19 1.42 1.50

Notes: AUA = Assets Under Administration.  FYE March 31st


Apparently Leon Frazer lost very few clients during the turmoil of late 2008-early 2009, which is nice to know considering the recent selloff in the markets.  The ETF biz is a secular grower, thus did not see much AUM loss.

Now what will they do with all that cash?  Per management, "we're looking for opportunities to incubate, and we're also looking for potential acquisitions ... we would definitely be focused on asset managers."  Management also plans to use some of that cash to reinvest in the remaining businesses.  Obviously, Edwards' involvement should help prevent any stupid spending.  Also, the CEO owns about $3.4M of stock, which is nearly 10X his annual comp.

 

 

 

Catalyst

Murray Edwards eventually pushes them to sell the rest of it (note that M&A is quite active in the Canadian investment biz)
    sort by    

    Description

    Buying companies controlled by Murray Edwards for cash on the books is a pretty safe strategy, and you might just make some money while you're at it.   Jovian is basically a collection of asset managers which, proforma for two recent divestitures has about $10.40 in net cash versus a share price of $11.  Conservatively speaking, the remaining business is worth about $6.50 to $10.  Eventually, I think Edwards will push them to realize this value as I suspect he did with those two recent sales.

    Jovian had remarkable success with its Horizons ETF business, but management's (wise) decision to continually plow FCF into growing it masked the considerable value that was being created.  Jovian was largely ignored by institutional investors in Canada, and the mostly retail investor base was grew impatient with the lack of profits/dividends, causing the shares to trade at a wide discount to fair value. 

    I could be wrong, but I suspect Edwards pushed them to sell their stake in Horizons along with a smaller business,  as CEOs don't usually like to part with their crown jewels.  FYI, he owns 29.3% today, plus some convertible debt that could up his stake to 33.9%.  If you don't know, Edwards is one of Canada's best investors.  Bruce Berkowitz called him "the Warren Buffett of the oil patch," but obviously he dabbles in other sectors as well. 

    Putting some modest EV/AUM multiples on the remainder, I get an NAV as follows:

     

    Business AUM Stake EV/AUM Proceeds
          Low High Low High
    Leon Frazer 1,850 84% 1.2% 2.0% 18.6 31.1
    T.E. Wealth 2,300 100% 2.0% 3.0% 46.0 69.0
    Jovian funds 582 100% 2.0% 3.0% 11.6 17.5
    MGI Securities 1,500 85% 1.5% 2.0% 19.1 25.5
    Pretax value         95.4 143.0
                 
    less taxes and fees (30%)         -28.6 -42.9
    Aftertax value       66.8 100.1
                 
    Aftertax proceeds of recent 2 sales         88.9 88.9
    Proforma other net cash         11.2 11.2
    NAV         166.9 200.2
                 
    Proforma shares outstanding         9.9 9.9
    NAV/share         $16.85 $20.21

    Note:  I am assuming that just about all potentially dilutive securities are eventually converted / exercised, which affects "proforma other net cash" as well as "proforma shares outstanding." 

    The smaller sale (MGI Financial) was slated to close 9/30/11, so it's probably a done deal.  The larger ETF biz sale should close mid-November.  That deal has a contingency escrow of 10% of proceeds for two years.  There's also a $5M break-fee.  I'm not too worried about the deal falling apart - Jovian would pocket the $5M and could shop it again in a market that still likes ETF managers.  The current deal valued Horizons at 3.75% of AUM.  Even now, Wisdom Tree (the only public pure-play) sells at 6.0% of AUM despite being currently unprofitable (Horizons was profitable).


    The remaining businesses:

    Leon Frazer - founded 1939.  Manages money for HNW clients, as well as being sub-advisor on numerous mutual funds (e.g. the IA Clarington Canadian Conservative Equity Fund, which has a 50+ year track record).

    T.E. Wealth - founded 1972.  Provides fee-only financial planning for employees of large international corporations, as well as to private individuals, endowments, pension plans, and Aboriginal Communities.  Basically, they help these folks pick managers for their portfolios.

    Jovian funds - mostly refers to Jovian's 50% stake in Hahn Investment Stewards, which is an ETF manager founded in 2001.

    MGI Securities - founded 2000.  Investment bank focusing on Canadian small caps in mining, oil & gas, and tech. 


    (CAD Billions) 2004 2005 2006 2007 2008 2009 2010 2011 2012
    Leon Frazer AUM 0.70 0.90 1.50 1.80 1.70 1.20 1.45 1.65 1.85
    T.E. Wealth AUM 1.00 1.40 2.00 2.20 2.40 2.00 2.20 2.50 2.30
    Jovian Funds AUM 0.10 0.20 0.20 0.80 0.58 0.55 0.65 0.58 0.58
    MGI Securities AUA na na na na 1.65 0.93 1.19 1.42 1.50

    Notes: AUA = Assets Under Administration.  FYE March 31st


    Apparently Leon Frazer lost very few clients during the turmoil of late 2008-early 2009, which is nice to know considering the recent selloff in the markets.  The ETF biz is a secular grower, thus did not see much AUM loss.

    Now what will they do with all that cash?  Per management, "we're looking for opportunities to incubate, and we're also looking for potential acquisitions ... we would definitely be focused on asset managers."  Management also plans to use some of that cash to reinvest in the remaining businesses.  Obviously, Edwards' involvement should help prevent any stupid spending.  Also, the CEO owns about $3.4M of stock, which is nearly 10X his annual comp.

     

     

     

    Catalyst

    Murray Edwards eventually pushes them to sell the rest of it (note that M&A is quite active in the Canadian investment biz)

    Messages


    SubjectCatalyst
    Entry10/06/2011 12:48 AM
    MemberJetsFan
    I looked at this stock when the MGI deal was announced and came to roughly the same value range as you.
     
    So the stock is clearly undervalued.  My only issue is, what catalyst do you envision will unlock that value?  Historically Murray isn't a liquidator and he holds for a very long time (he has been in CNQ for 20+ years).  He is not concerned about short term value creation - he's a long term builder of businesses.  The other thing is, I think his cost base is around $15 (he got in pre-consolidation), so he is underwater and a liquidation would get him back to flat / slight gain.  Judging by what he's said in interviews, he likes the financial services sector as it provides good diversifiction from his oil and aerospace investments.  I don't think he's looking for an exit.
     
    My main concern is that management takes the cash and spends it on a poor acquisition...
    What do you think they'll do with the cash? I think we can agree that Leon Frazer and TE Wealth are not strong franchises deserving of a growth capital injection.
     
     
     

    Subjectstupid question
    Entry10/08/2011 11:47 PM
    MemberSpocksBrainX
    know next to zilch here, but with Horizon gone will this company actually post profits?  Being dumb and all, I'm used to seeing virtually every asset manager I've ever seen - at least here in US - being profitable right off the bat, so it seems doubly perplexing (doesn't help that at least on the website I can't even grab JOV's Q1 report due to issues with downloading so I finally went directly to sedar) to see anything with a negative number.  I'm just using dumb logic here - the latest shows a loss in the wealth management group and an nominal gain in the traditional asset managers segment and a big drain in corporate.  Plus, when I glance and see numbers like 60-75% devoted to compensation and benefits in some sections I being to wonder what in the world I'm actually seeing...

    SubjectRE: Catalyst
    Entry10/21/2011 11:50 AM
    Membermpk391
    JetsFan,
     
    good points.  I probably erred in saying that another sale or effective liquidation is likely any time soon, particularly in light of the fact that management has plans to reinvest some of the cash.  At the same time, I'm not too concerned about any gross stupidity with acquisitions given that Edwards has two representatives on the board.
     
    Please also see my reply to paul118 regarding Leon Frazer and TE Wealth
     
    M

    SubjectRE: RE: Catalyst
    Entry10/21/2011 11:54 AM
    Membermpk391
    paul,
     
    first, sorry for the delay.  I can sympathize with your frustration.  I was hoping to have some extra scuttlebutt to give you in response to your question, but that's taking too long to get so here's what I can say for now:
     
    Regarding the remaining businesses, I understand that the senior mgmt (founders) at these firms is still top heavy & this exacts a toll on the op/admin costs of these businesses. The goal will be to eliminate these costs (retirement), grow assets or merge with a business that can eliminate much of these costs that are most likely duplicate.
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