ABG Sundal Collier Holding ASA (ABG) Earnings Call Transcript & Summary

Good morning all, and a warm welcome to ABG Sundal Collier's Q3 results presentation this morning. Before we kick off, I would like to introduce my co-presenter, Peter Straume, our CEO and Managing Partner for our Norwegian operations, and we're also joined by Geir Olsen, our CFO. I'd also like to mention that you may ask questions during or after the presentation using the Teams Q&A function. So let me start with some initial reflections on the quarter and the conditions in the quarter. The negative sentiment obviously continued or even escalated for all the same reasons we unfortunately have gotten used to as of late, rising inflation, rising interest rates and the continued tense geopolitical situation. As a consequence, the equity capital markets more or less closed in Q3. And importantly, compared to previous periods with similar market conditions, we have improved our revenue level and relative position. Cyclicality is nothing new for us. And as always, we instead focus on what we can do with the conditions served to us by the market. Instead of worrying of things we cannot control, we are focusing yet again on aiming for higher highs and higher lows. And from that point of view, I am especially pleased with the fact that we managed to close several high-yield bond issues during what was a very difficult quarter also in debt capital markets, providing evidence of our superior investor access and continued increase in market shares. Also, our secondary brokerage activity held up well, as well as our activity within the less volatile but not immune M&A market. In this space, I would especially like to mention our performance in the public to private segment, a record number of transactions in recent months for us, cementing our superior market share in this segment. And finally, before looking deeper into the numbers, I'd like to make it crystal clear that we are staying committed to our long-term growth ambition and to our determination to continue to improve our service offering and our market shares. We are, at the same time, almost obsessed by continued profitability, keeping our historical track record of operational profitability not only on a yearly, but in fact a quarterly basis since inception of our firm as we know it today. As such, we are constantly reviewing our cost base to fight inflation and optimize spending. Next slide, please, and a deeper look into the numbers. We delivered revenues in Q3, specifically of NOK 303 million, once again in what was a very quiet quarter, resulting in 9-month revenues of NOK 1.2 billion. Yes, it's down a bit compared to the extreme bull market last year, but the longer-term trend annualized is, in fact, still positive for us. Our operating margin for the first 9 months ended up at 23%, which in absolute terms isn't that far from our average level. Clearly, our revenue and profitability driven compensation model mitigates some of the negative effect on our operating margin from the decrease in revenues. Fully diluted earnings per share ended up at NOK 0.03 in the quarter, NOK 0.33 for the first 9 months of this year and NOK 0.69 on a rolling 12-month basis. Next slide, please. Okay. Macro and market backdrop. Well, once again, the quick summary is really more of the same. After what turned out to be a very brief summer rally in equities, markets have again started to worry about high inflation, not least on the back of the very clear message from central banks, they are determined to fight the inflation at any cost. That resulted in a very weak September for most asset classes, in fact, not only equities. And with the markets in clear risk off mode, IPO activity has almost gone from low to almost nonexistent. What we're looking for, as I guess all market participants, are some signs of interest rates coming near the peak and/or inflation coming close to the peak. Until then, we'd expect -- we're humble for that volatility is likely to be name of the game. And we stay committed meanwhile to continue to serve our clients with all their needs in some cases in other forms than anticipated going into a specific project. That is why we are so focused on having leading positions in all relevant product areas for our clients, not only being an equity capital markets or debt capital markets or M&A house, but in fact, all of it, making us able to help our clients to execute transactions in all sort of conditions. So with that, I'll leave the word over to Peter. Peter, please go ahead.

Thank you, Jonas. Taking a look at the Nordic market on Page 5. The deal volumes are down in line with the global trends. Year-to-date, estimated banking fees across the markets in Nordics are down close to 40%. The largest reduction is found within the equity capital market, which Jonas also talked about, which basically have been closed, down close to 50% in the third quarter. The debt capital markets have been better so far this year, but still down close to 40% last quarter. M&A, however, has been more robust, down from last year, but more in line with previous years. If we then move to Page 6 for a closer look at ABG's financing activities, equity volumes definitely at low levels. But some transactions, including Borr Drilling, ZEG Power and greenely were concluded. On the debt side, however, ABG were leading the way in Q3 and gained significant market shares. ABG arranged and completed 5 bond transactions, 4 of them for repeat issuers and 1 very important NOK 300 million transaction for a first-time issuer and that's Fircroft. In the Nordic high-yield bond market, ABG were the #1 arranger in Q3 with a market share above 25%, which is very good. On Page 7, we see ABG's M&A and Advisory business is up by 5% first 9 months, but a little bit behind on Q3 compared to last year. As Jonas mentioned, we did a total of 4 public to private transactions in the quarter, and we expect to see more of these transactions in the coming quarters. We advised in transactions in all our markets with Voff in Sweden and Apoteka in Denmark in addition to Norwegian transactions. Ongoing transactions also include Frontline's Euronav tanker combination as well as TGS's offer on Magseis in oil service. By that, Jonas, over to you again.

Thank you, Peter. And let's move to the next slide and talk a bit about our brokerage and research that I would say has continued to deliver what I think is a very solid performance in this challenging environment. Activity level, as we talked about, in the primary market has gone down, but the high volatility and unclear direction has also led to lower activity on the secondary market. And that, combined with asset prices falling makes the decline of 8% in the first 9 months in revenues, quite impressive, I think. Even though we're slightly behind on what was a very strong Q3 last year, we continue to stay close to the companies and maybe even closer these days to be able to offer insight and quality advice, which is even more important and appreciated by our clients on the investor side in times like these. We have been especially focused on finding liquidity in illiquid securities, and this is always important for us, but of course it increases in importance in times of high uncertainty and volatility. Next slide, please. When it comes to costs, our operational costs in the first 9 months of the year are down by 31% to NOK 925 million, mainly reflecting, as previously mentioned, our revenue and profitability driven compensation model. Looking at headcount, which is a driver for cost, of course, but mainly for revenues longer term, that number is up by 7% year-to-date as we have strengthened our teams mostly with junior hires, but also selectively on the senior side. Other cost increases in the non-compensation bucket are mainly a function -- the cost increases there are mainly a function of, to some extent, the increase in headcount, which drives other costs, infrastructure costs -- more normalized traveling infrastructure costs such as rent utilities increasing. And we are unfortunately not immune to general cost inflation elsewhere. We are keeping tabs on all cost items and are working on a daily basis to trim noncompensation costs and always making sure we are as efficient as possible. As such, we are now starting to see clear signs that underlying costs are leveling out and not increasing anymore, which is very important or as important to us as driving revenues for us short term. Okay. Next slide, please, summarizing what we think are the key takeaways here today. We talked about the slow quarter. But in spite of having a September month where basically normally everything is happening. September month with closed capital markets, we did well in relative terms. Especially, I would once again like to highlight our high-yield debt operations and the M&A side, especially on the public to private side. M&A and brokerage are becoming increasingly important for us as these activities normally are less impacted by short-term fluctuations. Therefore, it's very pleasing to see we are holding up so well in brokerage and cementing our strong market shares in M&A. We are not waiting for markets to improve. We are doing the deals that are possible to do, given the market conditions, and we are continuing to add high quality corporate finance mandates to our pipeline to be executed depending on what type of mandate it is once market allows. And finally, we remain focused on continuing to improve our position and gain market shares by strengthening and broadening our service offerings. Okay. So I guess that covers what we wanted to highlight this morning, and let's open up the floor for any potential questions.

We have a question here. It reads, the equity market is the segment that really has fallen off a cliff. Can you please reflect on how you foresee the equity's secondary offering/IPO and M&A market in 2023?

That is a million-dollar question that would require a crystal ball that I don't have. But having said that, let me try. The secondary market, to some extent, is in our control. And by that, I mean, what we can do is to continue to offer the extra services that our clients tend to appreciate and us gaining market shares, such as walking the extra mile to find liquidity in an illiquid market, which is important for our revenues. We are focusing on providing high-quality research products and quality advice and insights, which further contributes to us cementing and improved market share as of late. So that is what we're doing and we'll continue to do on the secondary side. Primary side in equity capital markets, to get that market going again needs some clarity on where we are heading, not necessarily an equity market going back through the roof again, but rather less volatility and more sort of consensus on where we are ending up in terms of interest rates, inflation, and hopefully, thank god, at some point in time also less geopolitical tension. M&A, as we have shown, our revenues are actually up by 5% in the space year-to-date, even though we're slightly behind in Q3 and we have M&A pipe filling up as we speak. So M&A, from an ABG point of view, makes me very confident we will continue to deliver in 2023.

We have a few more questions here. Could you elaborate on the dynamic in terms of market share when the number of opportunities goes down? Does it concentrate to bigger players or about the same competitive landscape as other times? How is ABG experiencing that?

In absolute terms, it's a dreadful market. But in relative terms, it is really the market where ABG tends to shine. We tend to take market shares in more difficult markets. We're seeing it now, we've seen it before, and it will make us in a stronger position once the cycle turns. I think it has to do with -- we're offering services as many of our competitors. But the big exception is that this is the only thing we do. We don't have balance sheet lending activities or any other type of kind of recurring revenues or other revenue streams. This is what we do. And hence, we have no other options than perform and help our clients. And that is the main reason, I think, why we are in a relatively strong position in these markets.