Posted 01/22/2020

Aviva Investor Services Ltd. (AVLS)

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Quality

Investment Summary

Aviva Investors plc, a UK based investment service provider, was quite recently written up by Chantal598 in 12/2014 which is still relevant today. The stock has since declined by ~30% since then, only reaching a modest profit at ~8.5x 2018E EBITDA at the end of 2018. Though the fundamentals of Aviva have not changed all that much, the valuation has and it is still priced at a significant discount to peers at sub 5.0x 2018E EBITDA. Though it may sound crazy to believe that EBITDA can grow 40% in 3 years after 12/17, after adjusting for working capital increase and investment return, the implied returns on equity are probably in the neighborhood of 15%. I value the stock at 16.25/share, valuing the financial subsidiary at zero and the holding company assets at the current market cap of GBP 53m, or ~15% of the total outstanding shares. If the management successfully addresses the lossy book and manages to return the financial subsidiary's cash to investors again, we think the downside is relatively limited, though there will be a temporary spike in the stock price to nearly GBP 20. I see meaningful upside from the current share price, and think the likelihood of the stock reaching us in the near term is 60%. It may take a couple years to play out but if the Company can gain further market share at the first opportunity, we think the odds are good we'll make a reasonable return on our investment.

Brief/Company

Aviva Investors plc was formerly known as Cheviot Partners and was acquired by Gultznickel in August 2015. It initially did not have an investor relations effort but changed its name to Aviva Investors after the acquisition to avoid implying it was a restructuring company. Management initially came to us with a plan to open two new offices over the next 18 months but Aviva was not making money and management backed down after they resolved the uncertainty with the financial subsidiary via an October, 2016 letter. The Company has now resolved all outstanding issues with the financial subsidiary and is seeking to identify experienced bankers to open a new subsidiary. We feel this represents a turning point for the Company and now they are free to run their strategy and investors can track progress.'veakey at book value; losses remain very low and the financial subsidiary should finish its fundraising effort in the next couple of months – even if it is a year or two or more away. The Company seems to have finally made an investment public name and several sellside analysts now prefer the name Aviva Securities. The stock is down 20%+ since Chantal547's writeup last month. Richard barragea, one of the managers of the financial subsidiary unfortunately anounced this prior to Chantal's writeup so expect more on this front in the near future. The control premium demand Also, given the relative importance of the control premium to the overall company and the need to hold residual interests to fully back the company in the current capital market environment, books of equity could be cleaned up materially through acquisitions. There was a recent acquisition which, while dilutive, represents a very small piece of the business. I think this is highlyminent and would not impression the investor base.

Risk Mitigation

I think the major risk mitigations are:
The management team is well experienced in run rate earnings and have been through this before.
They are targeting a more disciplined acquisition strategy as opposed to 'jacking up' book values 24x in a transaction.
Jochen Heyer, the CEO, was the former Director of Investments at Aviva. This should go over well with the sellside. Seasonality is obviously a non-starter in equity research and the management team is highly sensitive to the business.

Recent Incremental Trends

Management have continued to be very disciplined in their approach to capital allocation – particularly striking sharp price declines that came in during the crisis in 2008 and 2009. Management was not aggressive in issuing equity from investment in the business and have judicious amounts of capital to deploy in acquisition and turnkey situations. It is worth noting that even when the company went through the rough times of 2008-9, it grew EAC by 62% in 2012 and 21%2015E. I think the management team will be judicious in the future deploying capital with a view to a return on it – rather than a wishful buying of excess value out of nowhere.

Costs

The largest costs in running a public company are legal, accounting and tax (spread overhead). As there is pretty heavy dependence on these areas, I think investors would be concerned if the company were to change them too dramatically. I would expect a slow change in policy but also a continued careful monitoring of them. The tax aspect seems well managed given some of the controversies of the last few years.

The introduction of a dividend seems sensible and I expect (if they can get it through) some sort of 2 or 3 year phased payable.