Doubts on Flow Traders’ IPO
Flow Traders has been telling the press their IPO is planned this year “before the summer” and at Euronext Amsterdam. The Telegraaf has been reporting this last weekend (blendle – nl).
It was also the only relevant piece of information, because the journalists have a very hard time understanding what the Flow Traders is actually doing. Not all their fault, as Flow has been posing as a true high frequency trading gem – and they are not. Comparing the business with a racing team (“the car is the IT and connections, the driver is the trader”) seems to be coming straight from Flow’s marketing department (or IPO underwriting investment bank).
Virtu valued at $2.6 bln
The journalists seem to believe the takeover of Nyenburgh by Virtu back in 2012 is a clear sign of increased competition in the ETF industry. Anyway, Virtu is about to raise as much as $314 million with their IPO this month. The stock will trade on Nasdaq with code VIRT – and the whole company would be valued as $2.6 bln.
That’s a bigger fish than Flow Traders. Flow is dreaming of a 1 billion valuation. Not a lot of people believe in such a valuation for Flow Traders. Also for Virtu such a price/earnings multiple of 13 is raising eyebrows. In 13 years most of Virtu’s assets will be worthless. Mechanical Markets estimates a lifetime of algo’s at five years (a good read anyway on the risk of investing in this kind of firms).
Back to Flow Traders. I think Flow is a great company with very skilled and reliable employees. The results in the past have been good as well. Yet I doubt I would sign up for their IPO. There are a few issues.
Flow Traders is earning profits in niche market
Lacking raw speed, the company is mainly making money in niche markets. Speed isn’t the only thing that matters, when you have alpha in the slower transactions. Flow has got alpha. An example of a strategy where speed is less relevant is the trading of ETF’s based on markets in other time zones. Trading the Greece ETF (GREK) in the USA while Greece is closed. Or a Hong Kong ETF in Amsterdam. There’s no underlying market open to hedge your risk.
A risky cash cow.
Flow Traders is a one trick pony
Citadel, KCG (Getco) and Virtu have a lot of strategies in a lot of asset classes. Zerohedge notes most of Virtu’s income these days comes from forex (“global currencies”). Flow Traders on the other hand is a one trick pony. Dangerous position as the competition is fierce. If you lose your edge on your only trick, you’re ready for the abattoir.
Founders cashing out
Virtu raises money for trading capital and eventually buying other firms in a time of consolidation. Flow Traders isn’t raising money to expand their line of business. The founders are selling their shares. No money from the IPO will end up in the balance sheet of Flow.
Flow isn’t HFT
Flow Traders isn’t active as a high frequency trader. There’s no official definition of HFT, but in the business nobody is seeing Flow as a HFT shop. Not necessarily a bad thing – but why try to sell the firm as such? Sure, they will be having fast lines. But they are too slow for competing in the most liquid US ETF’s. Flow has lost the speed race ages ago.
Valuation seems stretched at 1 bln
Without the results over 2014 it’s hard to discuss the valuation. As the firm is looking more vulnerable than many of their peers, a discount in price earnings multiple compared with Virtu and KCG is reasonable. Say a p/e ratio of 11. Would expect a net profit of 90 million over 2014 for such a valuation. Not impossible – we’ll see.
Disclaimer: This post is for discussion purposes only and nothing in this post constitutes advice to buy, sell, not buy, or not sell a security or any financial instrument.
Goed stuk. Complimenten
I think it would be best for Trader Jack to focus on trading the things (he thinks) he knows best and to let Flow Traders continue to make shitloads of money. Let’s face it, their one trick makes them more money in a month than what Jack makes in a lifetime so it’s wise to be humble.
As for the Virtu IPO, it has been well-documented that its P.E. investor (Silverlake Partners) is looking to divest. As such, there is no difference between the two IPOs. Jack’s comments do suggest that Virtu’s P.R. has been more effective.
Someone is mixing up his ipo’s here
Tenenkrommend slecht stuk. “Complimenten.”
Er zit een kwart miljard aan cash in die tent. Wil je daar even rekening mee houden in je waardering Jack? M’n neefje van 4 kan betere bedrijfsanalyses schrijven.
Hee, jij kunt ook Nederlands
Has anyone wondered why Virtu’s taxrate seems below 5%?
How do they get away with that?
http://www.sec.gov/Archives/edgar/data/1592386/000104746915001003/a2219372zs-1a.htm
Virtu is looking to raise $314 million on a 2.6B valuation (12%). If Flow Traders is able to IPO at 1B valuation (if pigs could fly) and float 12% they would be raising 120 million. Either existing shareholders cash out equally, or some shareholders (Summit) get to cash out and others have to wait for another opportunity to sell.
“Er zit een kwart miljard aan cash in die tent. Wil je daar even rekening mee houden in je waardering Jack? M’n neefje van 4 kan betere bedrijfsanalyses schrijven.”
En hoeveel van die cash kan uit het bedrijf gehaald worden zonder een negatief effect op de winst/omzet? Waarschijnlijk heel weinig omdat het nodig is om te kunnen handelen, en dus is de waarde van de cash al meegenomen als je het bedrijf waardeert op basis van hun winst. Anders tel je het dubbel mee.
According to WSJ they were unable to sell the company in 2012. http://blogs.wsj.com/moneybeat/2013/11/20/cheat-sheet-on-european-high-frequency-trading-firms/
“Last year, it appointed Lazard as an adviser to oversee a strategic review of the business as investor Summit Partners reviewed its holding in the company. A potential sale of the business was considered with interested parties, but Dennis Dijkstra, its chief financial officer, said that was now “off the table”, as a price could not be agreed.”
Makes you wonder what price they were asking for back then and why there would be interest in an IPO now?
Die cash dient louter als onderpand voor hun gehedgede posities maar staat in beginsel niet op het spel als je begrijpt hoe deze business werkt. Je kunt het zien als werkkapitaal dat niet verloren gaat. De zittende aandeelhouders zouden ook de cash aan zichzelf kunnen uitkeren in de vorm van dividend en vervolgens weer uitlenen aan het bedrijf en als onderpand laten dienen zonder de verdiencapaciteit van het bedrijf te schaden (op wat belastingslippage voor de aandeelhouders na). In het verleden konden ze ook het nodige aan dividend uitkeren, daar zit het ‘m niet in. Aldus m’n neefje van 4. Nou jij weer, alphavulture.
https://www.youtube.com/watch?v=x93EHs627GI&feature=youtu.be&t=12s
I think this is what the guy above is trying to say, he’s probably long some Flow stock.
Of het kapitaal in beginsel niet op het spel staat maakt weinig uit; het gaat erom dat het nodig is voor de business. Bij de meeste bedrijven lopen ze in beginsel geen risico op (een groot deel) van hun werkkapitaal, maar ze hebben het echter wel nodig. De cash bij Flow laten uitbetalen als een dividend en vervolgens teruglenen is natuurlijk een transactie die dat alleen maar bevestigd dat het bij hun niet anders is. Werkkapitaal kan je alleen echt terugkrijgen als het bedrijf ooit liquideert, en heeft dan ook weinig waarde als je denkt dat het bedrijf nog lang blijft bestaan/groeien.
Aha. Dus de waardering voor een bedrijf dat op een berg geld zit en winsten blijft oppotten (zoals een Apple) en precies hetzelfde bedrijf dat dividend uitkeert is hetzelfde want de verdiencapaciteit is hetzelfde. Toch weer iets geleerd vandaag! En voor de goede orde, bij Flow kunnen ze wel meer dividend uitkeren inclusief de hele jaarwinst van 2014 incluis maar of dat fiscaal wenselijk is is natuurlijk vers 2 zeker met een IPO voor de boeg. Zie wederom Apple.
I’d say for the exact amount of cash they have on their balance sheet – we should wait for the detailed prospectus.
But given the time decay of their cash generating strategies – it’s a risky business. In few years time their intellectual property will be worthless. The value of Flow depends on how much they can develop new strategies.
I really wonder if FLOW Traders is ready for an IPO if their shareholders only can write Dutch in this discussion, not fair for the international potential investors.
it’s of course not ready for international ipo, it’s small time and can list themselves on amsterdam mid-cap/small-cap, next
Does anyone know what price the Flow Traders share will start selling at?
http://www.bloomberg.com/news/articles/2015-02-25/flow-traders-said-to-prepare-ipo-of-dutch-high-frequency-firm
a more relevant piece of information would be when and what would price be a month thereafter
Flow Traders started offering the shares to employees at 2 euros and 50 cents per share. The price will most likely be different at IPO launch and it will have fluctuated a month thereafter.
When some people hear the words “IPO” here’s what usually comes to mind:
Big risks. Unproven company. Big potential returns.
Because the price can be driven higher during the period between the IPO and the secondary market offering, employees and company officials who purchase stock during an IPO are usually required to hold the stock for a designated period of time before selling it. According to the Securities and Exchange Commission, this lockup period typically lasts about 180 days, preventing company insiders from making an initial quick buck off the price spike. It also helps to stabilize the price over the short term by preventing any massive selloffs. For this reason, buying in on an IPO poses some fairly significant risk for employees.
buying into your company stock is behavioural finance bias number one, it’s never too late to get out of the concentration risk
Dat werkkapitaal van Flow kun je zien als productiemiddelen. Net als een machine bij een fabriek. Je kan het verkopen, (of in het geval van Flow, uitkeren), maar dan heb je geen machines meer en kan je niet meer produceren. De waarde is dus alleen eruit te halen als je de werkzaamheden staakt. In het geval van Flow zal er pas gestopt worden als het mis gaat. Groot kans dat dan het werkkapitaal ook weg is.
That flow of capital can be seen as means of production. Just like a machine in a factory. You can sell it, (or in the case of Flow, pay), but then you have no more machines and can no longer produce. The value is therefore only take out if you cease operations. In the case of Flow will only be stopped if it goes wrong. Great chance than the working capital is gone.
what about discounted future cash flows off those machines not needing to be sold right now
Willem, ik geloof dat jij het zinnetje dat ze traditioneel meer dan 50% van de winst (de machines zoals jij het noemt) als dividend hebben uitgekeerd – en desondanks floreren – hebt gemist.
William, I believe the phrase you that they traditionally more than 50% of the profits (the machines as you call it) have distributed as dividend – and still flourish – missed.
2014 ebitda 84.1M eur, net profit 67.9M eur
S&P 500 trades at around 10x EV/EBITDA, which would imply a max valuation of 841M eur.
50% payout of net profits would imply 4% dividend yield, which is attractive in this market I guess.
This all under the assumption that current numbers are sustainable in the future. The growth numbers of the last few years could be supportive of that story, but we all know trading firms are somewhat cyclical in nature. Anyone remember 2009-2011?
what’s the multiple on knight, virtu, trading software, niche financials?
They are not listing on NYSE or Nasdaq but on Euronext. Yet they expect to be valued at comparable metrics to their US peers. Are they even able to meet US listing standards?
What’s so special about US listing standards that they wouldn’t be able to meet them?
Sarbanes-Oxley
with global capital flow and reducing reg arb, multiple comparison across geography is not completely useless exercise