Morningstar | Increasing Our FVE for Greenhill to $23.50
We are increasing our fair value estimate for narrow-moat financial-advisory-focused investment bank Greenhill to $23.50, as there are signs that its recapitalization is going well, but we also reiterate our very high uncertainty rating, owing to both the upside potential and downside risk. First-half 2018 results showed that Greenhill's recapitalization is playing out according to plan, with revenue up 42% from the previous year. Reasons for the large increase include a rebound in its European advisory business, which had historically been as high as 52% of total revenue but was only 20% in 2017, and stabilization of the company's platform from the recapitalization carried out late last year. Given the long-tailed potential outcomes and that we're likely in the latter part of the mergers and acquisitions cycle, we don't believe there's significant margin of safety in the share price.We believe a reasonable upside scenario would put our fair value estimate at $32.50 per share. This includes the assumption of managing director productivity being around $4.5 million over a cycle. This compares with a trailing five-year average of $4.2 million but revenue productivity that frequently exceeded $7 million from 2004 through 2008.
A reasonable downside case would place our fair value estimate at $10.10. This includes an over-a-cycle managing director productivity forecast of $3.75 million. In 2017, managing director revenue productivity fell to a low of $3.4 million, while 2014 and 2015 had revenue productivity of $4.1 million. If we were to enter a period of low acquisition activity, the company's over $150 million of net debt, no tangible equity, and potential for losing managing director headcount would be concerns.
Greenhill & Co is an investment bank that provides financial advice on domestic and cross-border mergers and acquisitions, divestitures, restructurings, financings, capital raising and other transactions to corporations, partnerships, institutions and governments. The company serves as an advisor to its clients throughout the world on a collaborative integrated basis from its offices located in the U.S., Australia, Brazil, Canada, Germany, Hong Kong, Japan, Spain, Sweden, and the U.K. The company provides corporate advisory services related to mergers and acquisitions and financings and restructurings and capital advisory services related to sales or capital raises pertaining to alternative assets.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
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