I’ve been noticeably slower on making new investments in the past few months which is to be expected as I am not looking to increase our number of holdings and instead replace when investments play out or do not go according to plan. In recent weeks the latter has occurred with Kulcs-Soft announced its delisting. With this, Euroz was potentially intended to replace this being the trust’s first investment since June.
Euroz was founded in 2000 and subsequently listed in the same year with Mr Andrew Mckenzie as managing director, who is still managing director. Euroz is a financial services business based in Western Australia and is known for its focus on resources and is predominately in the activity of showcasing opportunities to institutions and HNW individuals through its stockbroking and corporate finance business. Euroz also has an investment of about $2m in the Westoz resources fund. Lastly, the group seeks a growing proportion of recurring revenue from its private wealth management division to provide support the group in periods of less transactional activity.
It is worth shining light on the remuneration structure which is predominately variable in nature via. the application of a ‘profit share pool’ up to 45% of the profit before tax in the 12 preceding months through to May, available for Wholesale staff, whereas operational staff receive a discretionary bonus. In the past 4 years this variable remuneration averaged c.60% of Key management wages and has peaked as high as 73% in 2021. In the resources boom of 2008 this plan was in effect but with a lower 30% profit share, but management still booked 86% of their KMP wage in profit share.
Given the foundations of the business it has been highly cyclical over time, but normalising over 24 years of data the group has generated a median ROE of c.20%. For all this time the group has operated with most of its balance sheet in cash and equivalents with no debt, understandably given its high degree of cyclicality. Today, the group has a market capitalisation of $135m, tangible equity of $76m, and net cash of $92m. In the past 4 years since acquiring Hartleys, the group has net operating profit after tax (NOPAT) of $15m, $14m, $9m, and $7m when backing out the impacts of mark-to-market accounting, performance fees, interest income, and impairments to get a like-for-like comparison between years.
Currently the market for ECM/M&A activity is in a slump and Euroz’ performance has reflected that. Pleasingly, the company had a strong tail end to the year which represents just how much operational gearing they have setting them up to profit from a recovery in equity finance. To show you the figures the company released a trading update in the middle of May saying they had generated $2.2m in NPAT through to April and subsequently ended up reporting $5.5m after a strong finish to the year. When looking at NOPAT the group reported $2m in the 1st half and $5.2m in the 2nd half (Euroz helped companies raise $500m in the 1st half and $900m in the 2nd half).
I estimate that Euroz has generated $10.5m in underwriting fees in the first quarter of the year, after cross-checking with all deals it acted as lead manager on. This includes a $1.4m allotment of $0.20/share June 2027 options from the recent Raptor Resources listing. Considering that the group generated $34m and $39m in fees for the entirety of 2024 and 2023 respectively, the group has started the year reasonably well, at least in this part of their business.
With enterprise value of $44m there is a lot of torque to see a real chance of net cash larger than a market cap after a few good years. The company is likely to continue to generate a mid-high single digit earnings yield and have most returned to us in the form of a fully franked dividend. Euroz trades at 6x EV/NOPAT and 14x P/E noting that these are trough multiples. Despite this, It is something that I feel doesn’t quite make it to an ‘investible stage for myself as the company has carried a significant net cash balance for it’s entire history, making the EV multiple relatively redundant and a P/E multiple more important. Therefore, even in a good year such as the 2021 year it would still trade at a 8x P/E multiple, with not much by way of consistent growth expected outside of the offshoots you might expect from their financial assets or what is frankly luck (or atleast something i’m not qualified to have an opinion on) in the form of a resources boom.
Loved this write up. I have also been tempted fir about a year but reached the same conclusion that it has not heen/ is not the optimal time to invest. While they have returned cash via capital returns, my concern is that the optimal time to invest in a firm of this type is when the market has a major downturn as if zooming out it appears like a procyclical business- when liquidity and sentiment I'd abundant then lots of (mining) companies will be raising and people seeking advice for their money chasing higher returns, conversely when liquidity and sentiment are low then the reverse. Right now liquidity seems okay while sentiment for WA resources companies (bar a few) is weak, so for me not quite right time to invest.