Bellevue Group is a Swiss holding company with two wholly owned subsidiaries: Bellevue Asset Management and Bank am Bellevue. A cursory glance at valuation metrics reveals a group generating a combined 7.5% RoE in 2014 with the share price trading at book value and a 13x trailing PE ratio based on a current share price of CHF 14. In the pages to come I will peel back the layers and explain why I believe Bellevue Group is worth around CHF 25 per share.
Introduction to Bellevue Asset Management
Bellevue Asset Management (BAM) is an investment boutique focusing on the equity management mostly in the healthcare, but also in the small cap and emerging market sector. Their largest mandate concerns BB Biotech AG (63% of total AuM) a listed investment company which owns a concentrated portfolio of biotech companies. BAM has been managing BB Biotech since its foundation in 1993. From the chart below you can see the performance since inception:
Influence of BB Biotech’s share price increase on BAM’s revenue
From the beginning of 2014 the remuneration paid from BB Biotech to BAM has been adjusted to account for BB Biotech’s increasing market value. The annual fee was slightly reduced to 1.1% on the average market cap. However, at the same time the fee cap on the average market cap of CHF 1 bn was removed. From BAM’s perspective, this step was urgently required as BB Biotech’s market cap has more than tripled to CHF 3.3 bn over the last years. As a consequence of the change in the remuneration policy, a bull market in the biotech sector provides substantial upside to BAM’s fee income.
This became evident in 2014, when fee income from BB Biotech increased by 87% y-o-y to CHF 22.4 m. A further sharp increase can be expected for 2015. For the first half of 2015 the average market cap is roughly CHF 3.3 bn (CHF 283 per share). Assuming that the current share price level of CHF 285 will persist throughout 2015 (market cap of roughly CHF 3.3 bn) the expected fee income for the whole year will sum up to CHF 37.0 m. This translates into a y-o-y increase of 65%.
BAM’s other mandates
Apart from BB Biotech, BAM manages a number of smaller public equity and private equity funds. On a combined basis, they sum up to CHF 1.1 bn (21% of total AuM). Fee income from these funds has been more or less stable over the last years.
In September of 2014, BAM acquired Adamant Biomedical Investments (ABI) from Zürcher Kantonalbank. ABI manages CHF 0.8 bn of assets (16% of total AuM) and complements BAM’s healthcare strategies. According to BG’s 2014 annual report, the purchase price was CHF 20.3 m or 2.4% of AuM.
In the annual report, management does also provide information about ABI’s income generation and profitability:
“The Group consolidates the Adamant Biomedical Investments AG since September 30, 2014, which is the date of the acquisition (control/transfer). The recorded operating income in financial year since the acquisition of Adamant Biomedical Investments AG is CHF 2.3 m. Adamant Biomedical Investment AG contributed CHF 0.9 m to the group net profit. Had Adamant Biomedical Investments AG been consolidated from 1 January 2014, the consolidated statement of income would show increased pro-forma revenues by CHF 7.9 million and an increased profit by CHF 3.4 million.”
Hence, BAM paid less than 5 times net profit for ABI (=CHF 20.3 m / (CHF 0.9 m + CHF 3.4 m)). In addition, ABI’s 2014 net profit margin of 42% (= (CHF 0.9 m + CHF 3.4 m) / (CHF 2.3 m + CHF 7.9 m)) makes a sound impression. I am not sure why BAM was able to buy ABI at a relatively low valuation. Overall, the acquisition looks like a good deal for Bellevue Group’s shareholders.
BAM’s historic operating performance and 2015 outlook
The following table provides an overview of BAM’s operating performance from 2009 until 2014. In addition to that, I prepared a forecast for 2015. The outlook includes the assumption that current AuM will be unchanged for the remainder of 2015. Obviously, this forecast provides only one scenario and is therefore subject to change:
A couple of notes:
Assets under Management: The first part of the table reveals the development of AuM over time. With the acquisition of ABI in 2014, management is trying to diversify the fee generating asset base given BB Biotech’s large share of AuM. At the end of March 2015, management reported that total AuM were CHF 5.5 bn including ABI contributing CHF 0.8 m of new money to the company. Using that knowledge and taking into account BB Biotech’s market cap at that point in time (taking into account that BB Biotech’s share price has declined by roughly 4% since the end of March), I estimate BAM ex BB Biotech’s AuM.
Fee income: Looking at fee income, BB Biotech’s importance to BAM becomes even more obvious. BB Biotech’s share in total fee income increased from 29% in 2009 to 64% in 2014. This is not only caused by performance, but also by two subsequent changes in BAM’s remuneration for managing BB Biotech. Until 2011, BAM received 0.4% on the average market cap plus a variable component. Afterwards, the fee was increased to 1.2% on average market cap with fee cap on the average market cap of CHF 1 bn. As I have mentioned before, this fee cap was removed from the beginning of 2014 and the fee was reduced to 1.1% on average market cap.
2015 fee income: For BB Biotech’s 2015 fee income, I assume that the market cap will remain stable throughout the remaining six months of the year. For BAM ex BB Biotech I suppose that income increases in proportion to AuM. For ABI, I assume that fee income will decrease by 10% due to a slightly smaller asset base after the acquisition.
2015 other income: Other income mostly consists of gains from the seed capital invested in BAM’s managed funds. Management does not inform shareholders about the allocation of the seed capital to the different products. Under the scenario outlined above, it is highly likely that other income will add a positive contribution to operating profit in 2015. However, the absolute amount is difficult to predict. Therefore, I keep this variable out of the equation. Apart from that, it is important to point out that BAM substantially reduced the seed capital invested over the last years and returned the net proceeds to shareholders.
Fixed expenses: For 2015, I assume that other operating expenses and D&A will increase by CHF 2 m and CHF 0.5 m due to the acquisition of Adamant and the opening of an office in London. I also include group expenses at BG level (same as last year) which are not part of the BAM segment.
Personal expenses containing a fixed and a variable component: In my model the fixed component steadily increases by 3% per annum. In addition, I take into account a one time increase of CHF 4.5 m (CHF 3 m due to Adamant acquisition, CHF 1.5 m due to London and New York headcount additions).
For the determination of the variable component, I use 2013 as a base year assuming that the 2014 increase is fully related to an increase in the variable component (except from the 3% annual increase in the fixed component). I also assume that the variable component is a function of the net fee income.
This brings me to the following estimate: in 2014, roughly 14% of the total increase in fee income was paid to employees in the form of a variable component
= (CHF 14.1 m – (CHF 11.8 m x 1.03)) / (CHF 35.0 m – CHF 21.1 m).
Taking the same factor for the variable component in 2015, total employee expenses are expected to increase to CHF 22.2 m
= (CHF 12.1 m + CHF 4.5 m) x 1.03 + CHF 1.9 m + 0.14 * (CHF 58.1 m – CHF 35.0 m).
Valuing BAM based on 2015 operating profit
Under the scenario outlined above, I expect BAM to generate an operating income of CHF 21.8 m.
Currently, BG has a market cap of CHF 147 m (current share price is CHF 14). Hence, on a stand alone basis valuing BAM with a 10 times multiple, Bellevue Group’s (BG) asset management segment should be worth CHF 218 m or roughly 48% more than BG’s current total market value.
Put it differently, BG’s current market cap translates into a 6.7x 2015 multiple for BAM. On top of that, an investor receives Bank am Bellevue for free (which will be discussed later).
Why is the market discounting BAM’s 2015 earnings potential at such a high rate?
1) BB Biotech is by far BAM’s most important mandate
A change in the market’s assessment of the biotech sector could negatively influence BAM’s fee income. The following sensitivity analysis gives a rough idea of BG’s share price upside/downside potential relative to BG’s current market cap (ignoring Bank am Bellevue). On the upper side, I modelled the percentage change in BB Biotech’s share price from the current level (keeping BAM’s other AuM stable). On the left hand side I included annual other operating income which is at least partly related to BB Biotech’s share price movement.
BG’s share price upside/downside potential based on a 10 times multiple on leading twelve months operating profit depending on (1) BB Biotech’s share price movement and (2) other operating income looks as follows:
A 30% fall in the share price of BB Biotech combined with a CHF 6 m loss in other operating income will lead to a potential downside of 61% in BG’s share price. However, this will be a one time effect as most of the downside will be a result of other operating losses stemming from seed capital.
After a drop in BB Biotech’s share price / BAM’s other seed capital investments, the influence of other operating income on BAM’s earnings should play a minor role going forward as (1) the price of seed capital might not trend further down, (2) the absolute amount of seed capital has been reduced. Hence, on a normalized basis excluding the impact of other operating income, BB Biotech’s share price could fall by more than 20% before an investor should face a permanent loss of capital. Again it is important to point out that this analysis ascribes zero value to BG’s other segment, namely Bank am Bellevue.
Apart from that, there is a risk that BAM as BB Biotech’s asset manager will be replaced at some point in the future. I believe that this is unlikely due to the long lasting relationship between BAM and BB Biotech and due to BB Biotech active and concentrated investment style within the biotech sector which requires a highly specified management team that cannot be easily substituted.
In 2012, Vontobel made a proposal to restructure BB Biotech from its current status as a listed investment company into an unlisted investment fund. The proposal was rejected by BB Biotech’s board at that time. Later, Vontobel decided to step back due to a change in Swiss tax law making the proposed transaction unattractive to existing shareholders.
2) Bank am Bellevue: An overcapitalized bank with a declining revenue base
Bank am Bellevue (BaB) offers corporate finance, brokerage and research services to clients. The bank is very well capitalized (Common Equity Tier 1 ratio of 22%) and suffers from low profitability. With CHF 338 m in assets and CHF 101 m in equity BaB operates with a low financial leverage. The bank’s total income fell from CHF 38.3 m in 2009 to CHF 19.0 m in 2014. In addition, impairments on goodwill had contributed to operating losses in 2011 and 2014. Despite restructuring efforts and shifting the focus to a steady income stream (e.g. asset management), the bank was just about breaking even in recent years (the best year was 2013 when the bank generated a modest 3% return on equity).
Brokerage seems to be the most problematic part of the business as market share has been lost. Moreover, overall trading volume has continuously declined in the Swiss equity markets over the last years. While the total Swiss equities trading volume decreased by 9% in 2014, BaB’s turnover from trading Swiss equities for clients declined by 19%.
In addition, it seems that the bank’s business model faces disadvantages from stricter regulation. For instance, the bank had a number of reputational issues in the past. In 2011, the Swiss banking regulator FINMA accused BaB of not disclosing to the market the accumulation of a substantial position in the listed equity of Sia Abrasavis on behalf of a client. As a consequence, the regulator banned the bank from acquiring new clients in the areas of asset management and investment advisory services until the beginning of 2012. In addition, the regulator threatened BaB with the withdrawal of the banking license in case of recurrence.
On a positive note, the bank receives annual dividend income of roughly CHF 1.8 m from SIX AG in which BG holds a 1.1% interest. SIX AG is the operator of the Swiss stock exchange and provides clearing/settlement and financial information to clients. In 2014, the company generated net income of CHF 245 m and an 11% RoE. Hence, from a sum of the parts perspective BaB’s share in SIX AG should be worth at least CHF 27 m (=1.1% x CHF 245 m x 10) or CHF 2.6 per BG share.
After the implementation of a cost cutting programme and with the impairments on goodwill mostly done, I expect BaB to be able to return to profitability generating a low single digit RoE.
3) CEO and Chairman left BG after a dispute over the future of BaB
According to this article, the former CEO Urs Baumann and the chairman Walter Knabenhans planned to accept CHF 180 m from an US-investor consortium via a capital increase to let BaB grow its business. However, the largest shareholder and founder of BG, Martin Bisang, stopped the well advanced transaction in a last minute move in February 2015. As a consequence, Urs Baumann and Walter Knabenhans left the company/board in April 2015.
From a corporate governance perspective it looks like a step back what followed to the board’s composition afterwards: Thomas von Planta, who seems to be a close ally of Martin Bisang, took over the role of the chairman. Martin Bisang’s wife Mirjam Staub-Bisang, who owns her own asset management firm, was appointed to the board.
Andre Rüegg was appointed CEO ad interim. He was head of BAM over the last six years. According to the company, the board is currently looking for a new CEO.
4) Strategy of the majority owners remains unclear
As of year end 2014, roughly 39% of outstanding shares were held by insiders:
After the departure of Urs Baumann as CEO, it is highly likely that he will sell his shares. Martin Bisang, Jürg Schäppi and Daniel Schlatter used to be involved in BG’s operating business. Their interests should be aligned. Hence, together they de facto control the company.
Before Urs Baumann took over, Martin Bisang was the long term CEO and co-founder of BG. He resigned from his office after a disastrous operating performance in 2011 and after a number of questionable business practices within the bank became public.
At the moment, uncertainty exists where the company will be directed. There is a risk that without the leadership of an assertive and capable new CEO, the majority shareholders are going to repeat already made mistakes. In particular the question remains what will happen to the unprofitable banking segment. Overall, I believe that the controlling shareholders might be willing to cash out at the right price. Both segments, the asset management and the bank might be attractive supplements to potential buyers.
BG’s intrinsic value estimation
Based on current assets under management, I came up with an equity value for BAM of CHF 218 m.
For BaB I use a 0.5x price-to-book multiple resulting in an equity value of CHF 51 m. This seems to be a conservative approach when taking into account BaB’s holding in SIX AG.
Consequently, BG should be worth CHF 269 m or roughly CHF 25 per share, which provides an upside of 80% based on the current market value.
Uncertainty about BaB’s future, mistrust towards major shareholders, the dependency on one product and the former CEO potentially selling his shares are weighing on the share price.
The asset management business is cyclical. This is even more the case for the biotech sector which has been very volatile over the last decades. On the other hand it seems that many biotech companies are grown ups now and that they have entered a phase where they have become what they promised for a long period of time: being the major source for new medication coming to the market. So while valuations throughout the sector are ambitious, they are now covered by stable cash flow generation for the first time. Nevertheless, I believe that the upcoming interest hikes of the Federal Reserve will at least stop the current momentum, as the biotech sector seems to be one of the main beneficiaries from cheap money over the last years.
Nevertheless, from my perspective the market is significantly underestimating BG’s earnings potential. For me, BG is an investment where I can profit after the facts. While BAM’s AuM have been constantly growing over the last two years, BG’s share price barely moved. As a consequence, due to BG’s low valuation I am partially protected against a bear market in the healthcare/biotech sector, while I should profit nicely if the status-quo is maintained.
The content contained on this site represents only the opinions of its author(s). I may hold a position in securities mentioned on this site. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. As always please do your own research!