Blue Sky cuts profits, pledges better transparency, but shares drop another fifth

BLUE Sky has cut profit guidance, knocking a fifth off the value of its shares in the latest blow to the Brisbane-based fund manager. It’s also pledging greater transparency.

Pet Circle (with founder Mike Frizell with office dog "Diesel") was one of Blue Sky’s investments. Picture: John Appleyard

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BLUE Sky Alternative Investments has cut profit guidance, knocking a fifth off the value of its shares in the latest blow to the Brisbane-based fund manager.

The company, which earns fees overseeing 80 funds investing in projects from student accommodation to childcare, on Monday also tried to address concerns by announcing an independent review of its heavily scrutinised valuations for every asset. It would also examine financial disclosures.

Shares dropped 22 per cent, or $1.16 to $4.08 on Monday, wiping $90 million off Blue Sky’s value. They have now tumbled 64 per cent, a fall or $569 million in market value since late March, after Calfornia-based short-seller Glaucus Research, which makes money from share prices falling, last month detonated a scathing assessment of Blue Sky’s model.

Blue Sky last month rejected Glaucus’s claims that the fund manager was inflating assets and manipulating investment performance.

But doubts remained, which Blue Sky tried to address on Monday. “It is clear that Blue Sky has fallen short of market and shareholder expectations around transparency and disclosure,” Blue Sky chairman John Kain said.

Recent “negative sentiment” would likely slow down new capital coming for new Blue Sky investments, the company said.

This meant fee-earning assets under management for this financial year would drop from an estimated $4.25 billion-$4.75 billion to $4 billion to $4.25 billion.

“Underlying profit”, Blue Sky’s preferred measure, would thereby fall below estimates of $34 million-$36 million to $20 million-$25 million.

The lions’ share of the downgrade is the reduction in deal fees. It also includes costs of up to $2 million for reviews.

Blue Sky managing director Rob Shand argued the company had a strong team and balance sheet. “We’ve got a fantastic track record of investing. It’s been built up over many years now … those fundamentals haven’t changed,” he said.

Blue Sky managing director Rob Shand.

One key concern has been Blue Sky’s valuation process. Higher asset values translate into performance fees for Blue Sky and boost sentiment on the company’s performance.

Blue Sky tried to address that on Monday by releasing details on 34 assets it had sold into the market. Twenty-six investments were sold for more than book value, such as pharmacy business HPS selling for 37 per cent greater than its value. Four were sold out for less, including an 8 per cent downgrade on an investment in online pet products seller Pet Circle.

“It’s a very good track record (overall),” Mr Shand told The Courier-Mail. “The investments that we’ve made over the last one, two, three years, frankly, as a portfolio performing very well.”

But parts of the market remain concerned about the values of Blue Sky’s unsold assets — the Blue Sky Alternatives Access fund, a stockmarket-listed fund investor, saw its stock drop 7.5c to $4.08.

CONCERN OVER UNSOLD ASSET VALUES

One concern has been Blue Sky avoids selling struggling assets — a charge the company has rejected.

On Monday, Blue Sky stood by policy of not revealing the values for unsold assets, arguing that doing so would damage the ability to reap a good price because it would paint a target for potential buyers.

Among changes coming through is Blue Sky pledging to spell out one-off upfront management fees and ongoing fees for managing funds. The board is also commissioning a review to improve disclosures around financial reporting, which includes valuations.

Mr Kain said the board was “very comfortable” the valuation process had been “rigorous and robust”.

“(But) how comfortable and confident we are is not the only thing that matters. What really matters is the market’s comfort and confidence. And the market is saying to us, we want to understand more about the business and we want to see more,” he said. “We respect that, and we embrace it.”

The result of the specific asset valuation review will not be public — its results will only be viewable via any impact on Blue Sky’s accounts.

Asked about accountability in the face of the share price pummelling and transparency concerns, Mr Kain said: “Certainly, at the moment, the board has full faith in the management team. But we’ll run this process and we’ll improve from there.”

The breakdown of finished funds showed some investors made large returns, such as people in a Kawana development doubling their money in less than 2 years. The Pet Circle investment, while sold below book value, still returned 1.7 times investor funds after more than three years.

But some returns were tepid; an investment in motorhome manufacturer Paradise Motor Homes, for example, only returned 1.1 times investor money after more than seven years.

Mr Shand argued the business had generated overall “really strong returns, after fees, for investors, and that’s why we have built up the business that we have”.

Email: Liam Walsh