'Some Value' Left in Knight Capital: Analyst (Update 2)
Updated with comments on Bloomberg TV from Knight Capital CEO Thomas Joyce, and comment from KBW analyst Niamh Alexander.
NEW YORK (TheStreet) -- While Knight Capital Group (KCG) seems to be in the midst of a meltdown, Stifel Nicolaus analyst Matthew Heinz still sees "some value" left in the firm.
After falling 33% on Wednesday, after a morning trading glitch affected some 150 individual stocks, with the Securities and Exchange Commission halting trade on several and announcing an investigation, Knight Capital early on Thursday announced a $440 million pretax loss from the event.
Knight Capital's shares were down another 50% in morning trading, to $3.56.
The Jersey City, N.J., firm -- headed by executive chairman and CEO Thomas Joyce -- said that its "clients were not negatively affected by the erroneous orders, and the software issue was limited to the routing of certain listed stocks to NYSE," and that it had "traded out of its entire erroneous trade position." While the firm's broker-dealer subsidiaries began operations Thursday "in full compliance with their net capital requirements," Knight Capital was "actively pursuing its strategic and financing alternatives to strengthen its capital base."
Heinz lowered his rating for the Knight Capital Group to "Hold," from "Buy," saying that if the firm were to sell to a competitor, it would be worth "approximately $3.40" a share.
The analyst said that he continues "to see value in the firm's business lines, particularly in its electronic execution services segment where we estimate ~$60M of
"Under normal circumstances," Heinz said, "we could argue for a 12x multiple on this business given its growth and margin expansion potential, but would give any purchase multiple a 25% discount." At nine times his EBITDA estimate for the electronic execution services (EES), Heinz would value this portion of Knight Capital's business at $540 million, or $5.50 a share.
Applying a 50% discount to an estimate $280 million valuation for Knight Capital's market making business, Heinz arrived at a total value of $820 million, for a takeout value of $340 million, or roughly $3.40 a share, after netting-out the $440 million trading liability and $40 million in net debt.