Significant Fair Value Hike for Greenhill
We've boosted our fair value estimate of the narrow-moat investment bank by nearly 20%.
We are increasing our fair value estimate for narrow-moat financial-advisory-focused investment bank Greenhill (GHL) 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.
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Michael Wong does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.