The Blue Sky Alternative Investments Ltd (ASX: BLA) share price fell 13% to $9.93 at lunch time, following the publication of a short report from Glaucus Capital.
Glaucus is a famed short seller, which targets companies that it thinks are overvalued. Most recently, Glaucus was responsible for outing Quintis Ltd (ASX: QIN) for its 'ponzi-like' behaviour – Quintis is of course now in administration.
Today's report on Blue Sky Alternatives focuses on what Glaucus perceives as aggressive valuations of Blue Sky's alternative investments. Essentially Glaucus provides a list of situations where they believe that Blue Sky has revalued companies at a higher valuation even though the companies would not appear to deserve a revaluation. For example:
"Foundation Early Learning is 10.8x levered. Blue Sky has marked up its investment in Foundation Early Learning (FEL), a roll-up of day care centers, by 42% since 2014. Blue Sky touts FEL as one of its best performing investments. Yet according to its publicly available accounts, FEL's operating cash flows fell 62% year-over-year in FY 2017. We calculate that FEL's EBITDA was just $1.8 million in FY 2017 and that it has a startling net debt to EBITDA ratio of 10.8x. Given FEL's negative cash flow and excessive leverage, FEL looks closer to financial calamity than a successful investment warranting a markup in value."
This paragraph from the Glaucus report illustrates perceived problems with one Blue Sky investment. Glaucus is essentially stating that Blue Sky is carrying FEL at an unjustifiably high valuation, which results in Blue Sky being able to charge management and performance fees to investors that it may not have earned.
The report is detailed and also not available to Australian residents, but Glaucus states that they believe that Blue Sky's assets under management (AUM) are up to 63% less than Blue Sky claims. As a result, Glaucus believes Blue Sky is worth $2.66.
These types of allegations from Glaucus are quite serious and guarantee a response from Blue Sky over the next few days – in fact Blue Sky just entered trading halt as I wrote that sentence, where it will remain until the 3rd of April.
While it might be tempting to buy the dip in Blue Sky shares, Glaucus' report has essentially questioned the validity of the entire Blue Sky business model to date. As a result I think shareholders would spend their time more profitably by first trying to determine the truth in these allegations. I would be inclined to watch from the sidelines for now.
