Xmas Trimmings, etc.

Monday, Dec 24 2012 by
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Asta Funding (ASFI:US) $9.37:   I’ve marginally trimmed my stake from 3.8% to 3.6% – consider this to be purely risk ‘house-keeping‘. This realizes a +22% gain vs. my write-up price on this small slice, and a +31% gain vs. my actual net entry price (which inc. the impact of dividends). I never got around to an Asta follow-up, as the share price (& NAV) just steadily chugged higher. Despite the rising share price, I’ve been bemused (even encouraged) by the general air of neglect still attached to this stock. Even ASFI shareholders have expressed a distinct lack of enthusiasm for the company’s progress in the past year! This is particularly in reaction to the company’s diversification into personal injury & divorce financing. Which puzzles me…

I’d counter this distaste in a number of ways: i) This new direction was prompted by Asta’s reluctance to pay up to acquire new distressed consumer receivable portfolios*. Personally, I’m delighted – how often do you see management take an absolute, rather than a relative, approach to value? [Picking up distressed debt at 9 cts on the dollar, while everybody else pays 10 cts, doesn't mean you've bagged an actual bargain!] And to resist pissing away idle cash burning a hole in their pockets is quite admirable too. Of course, returning capital (via share buybacks) is a great alternative – Asta’s pursued this to a limited degree during the year. However, considering current metrics, I consider the short term return/attraction of a buyback is fairly even balanced against the potentially higher returns on offer from a (gradual) investment of their cash into distressed assets.

[*I'm still somewhat mystified by the lack of supply in the wake of such a generational economic contraction. I believe we've witnessed a shift (perhaps permanently) in consumer & bank behaviour: a) Consumers were hit simultaneously with economic contraction plus an unprecedented decline in house prices. This shut off access to the home equity spigot, so consumers became far more dependent on maintaining their credit card, auto & cell-phone credit to try maintain/support their lifestyle, and/or job search. And the attitude towards housing as a primary investment/store of value was damaged, perhaps irreparably, just as quickly as home equity was destroyed.

This was compounded by the fact everybody suddenly knew somebody who'd been foreclosed upon, a process that appeared to take anything from one to (even) three years. As a result, the shame of losing your home, and the imperative to make your mortgage payment first, was simply wiped away for many people. This caused the unprecedented phenomenon of people using their mortgage payments to stay current on other financing/sources of credit, thereby prompting a significant decline in distressed consumer receivables.

b) The banks appear to have gone along for the ride... No surprise really, considering the existential threat posed by their mortgage/sub-prime/structured investment vehicle exposure. The last thing they needed was to compound their problems by recognizing losses on God knows how much distressed consumer debt! Fortunately, with the shift in consumer behaviour, and far greater flexibility in payment terms (particularly for credit cards), 'extend & pretend' was the easy & obvious path for banks to follow. There's been plenty of commentary about banks utilizing this strategy in relation to corporate & commercial property loans, but I'm surprised at the lack of investigation re consumer debt - think about it, it's clearly been the stand-out missing story post-financial crisis. Of course this lack of supply, and unrealistic pricing on any remaining debt being sold, has jacked up prices & competition for distressed debt buyers.]

ii) Diversification’s always welcome, as long as it’s pursued in a sensible fashion. I think this is certainly the case here – Asta’s teamed up with experienced entrepreneurs in each field, they’re investing via JVs on a phased basis, and they’ve structured returns to ensure capital repayment & a minimum return for Asta is prioritized. It’s early days yet, but progress appears to be tentatively positive to date. Further success in these ventures will encourage Asta to incrementally ramp up investment, while poor operational/financial results will prompt a likely wind-down & withdrawal.

iii) Just to contradict myself, we’re really not talking about diversification here, anyway – this is no alarming gallop into unknown territory! Buying distressed debt is equally about pricing purchase terms correctly, as it is about operating a successful & cost-efficient legal process. Pricing & operating a divorce or personal injury financing business isn’t terribly different ‘under the hood‘, especially when you team up with an experienced operator. And, after all, we all know we’re talking about pretty much the same underlying clientele in all three areas anyway… Asta & the Stern family have generally demonstrated they’re good operators, both from a financial & a legal/operating perspective.

Sure, they went a little overboard with their purchases & leverage ahead of the financial crisis (like just about everybody). This almost sank the bloody company… But fortunately they negotiated much of their debt on a non-recourse basis, and they simply knuckled down to improving & maximizing their receivables process for a few years. In return,  a new shareholder gets a cheap share price, a far leaner/less risky company, and a management that’s been once bitten, twice shy – a great combination, in my opinion, and something I look for/depend on in a number of my investments.

Asta’s recent diluted FY EPS was $0.70 – one might also reasonably argue for an underlying EPS of $0.77. Versus the prior yr-end NAV of $11.82, that’s a Return on Equity (RoE) of 5.9%-6.5%. This certainly won’t set the world on fire, but Asta now has $107.4 mio of cash, $46.0 mio of net cash, and its entire $61.5 mio of debt is non-recourse. Considering the low risk/high potential nature of the balance sheet, I think it’s still v reasonable (with a slight stretch) to assign a 1.0 P/B Fair Value. It’s useful here to note Asta’s earned a far higher RoE, and traded at a multiple of book value, in the past!

This pegs Asta’s Fair Value at $12.95 per share (their latest NAV), for an Upside Potential of 38%.

Trinity Biotech (TRIB:US) $14.86:   I’ve trimmed my TRIB stake from 6.9% to 5.9%. This is a +55% gain vs. my original write-up price on this top-slice, and a colossal +462% gain vs. my actual (historic) net entry price. The company’s clearly more fairly valued now, with the current share price nicely balanced between my latest Intrinsic Fair Value of $13.41 & my Relative Fair Value of $16.69 (but note these figures will have shifted a little higher since).

I’m more convinced than ever the recent Barron’s coverage, increasing investor/institutional attention, TRIB’s current technicals, and the company/sector’s history will lead to a blow-off phase – or a step-change in valuation, call it what you will – that drives the share price to $18, perhaps $25, or even higher. The chart illustrates this far better:

Of course, this could just prove to be the point where I get fooled by greed & the illusion of relative value..!? But then again, value investors always seem to sell out far too early – right at that point where growth investors only start to get interested. A holding & selling approach, based primarily on technicals & risk management, certainly seems the best solution to that particular conundrum from here on.

Colony Financial (CLNY:US) $19.90:   I’ve sold my entire Colony stake, for a gain of +42% vs. my write-up price. Versus my actual net entry price my gain is +61%. Colony’s another holding where I never felt much need for a follow-up – it seemed patently obvious that a low-leverage/high quality US REIT, with a high dividend yield, would inevitably snap back to book value plus in due course. Especially when you consider the ever more ludicrous pricing on some of its lower-quality/more indebted peers!

With adjusted NAV now at $19.33 per share, the share price has recently exceeded book value. But you may have noted I originally (and perhaps somewhat unusually for me) set a Fair Value 1.15 P/B target on CLNY. This reflected my view that Colony’s lack of leverage (still the case, net cash now stands at $200 mio), potential revaluation gains from certain investments, and the continued escalation of pricing in its peers & other high dividend stocks, all deserved a premium to book value. Frankly, all this still applies now – perhaps even more so – a 1.25-33 P/B in due course wouldn’t surprise me & may even be deserved. This suggests we may see a $24, even a $26, share price ultimately.

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So, why on earth am I forgoing a possible 29% Upside Potential?! I think some of you may have guessed…yup, it’s all about correlation! In my write-up on Fortress Investment Group (FIG:US), I noted I was somewhat limiting my stake due to the high level of likely correlation with CLNY. With a second FIG purchase, and a 33% share price rally since my write-up, my FIG stake’s now expanded to 4.0%. Despite that rally, it still offers far greater relative upside than CLNY, with my last $7.80 Fair Value per FIG share (more recent news-flow suggests that should be raised) pointing to a current 89% Upside Potential. This was clearly setting me up to perhaps choose between the two stocks. In the end, there was an easy solution – I decided to sell CLNY, and use the majority of the proceeds to initiate a new position.

This new stock should be pretty correlated (to CLNY, or FIG), but it offers a more aggressive exposure (but is similarly un-leveraged). It also trades at an estimated 0.62 P/B – pretty hard to pass up! Particularly when you compare it to a 1.03 P/B for CLNY – even more so vs. its two closest peers, both trading at a 1.05 P/B (and a related peer stock v recently jumped 100%+ in price). I haven’t figured out what size holding I’m aiming for here yet, but hopefully I’ll be writing this baby up shortly..!

KWG Kommunale Wohnen (BIW:GR) EUR 6.282:   In my recent write-up, I predicted a EUR 100 mio market cap might prove a tipping point for KWG – in terms of a step-change in investor interest & valuation, and/or attracting the attentions of a larger competitor. This level also corresponded to a key technical resistance zone around EUR 6.10-20. [Note: Bloomberg, in a rare exception, is way off on outstanding shares - the correct count is 15.9-16.2 mio shares]. Little did I imagine reaching this market cap & game-changing news would coincide to the day..! btw You have to love this chart:

On Friday, KWG & Conwert (CWI:AV) both announced Conwert had acquired a majority 60% stake in KWG. This prompted an intra-day rally of +17%, with the share price ending up +3% on the day at EUR 6.282 (per Bloomberg). This trading pattern is probably explained by the rather misleading/opaque nature of the press release – hopefully not a sign of things to come… What was perhaps missed initially is that there’s no KWG share issuance, KWG will remain listed, and Conwert is simply replacing Karl Ehlerding (and family, plus possibly another core shareholder, or two – it’s not totally clear).

Let’s be charitable, and perhaps blame Ehlerding for the poor disclosure – I guess he’s understandably paranoid about publicity in the last few years! However, it would be unfair to think he’s just prematurely jumped ship here – his cost base was established at a dramatically lower cost level, and he’ll continue to participate via Conwert shares & options.

Of course, it’s fair to wonder how all this bodes for KWG? One scenario would argue KWG’s share price may suffer from a new majority shareholder with a different/self-interested agenda – obviously, there have been examples that corroborate this. More neutrally, I don’t recall a majority owner who has actively/negatively impacted the underlying intrinsic value of a company. Of course, a positive scenario would argue KWG will quickly be re-classed as a large-cap German residential  property stock (as I’d hoped anyway), will perhaps access cost savings & cheaper financing, and gain exposure to a bigger selection of deals. On balance, I look to price, opportunity & self-interest to ultimately add a positive perspective to this deal:

Price:  On Friday, KWG confirmed the completion of their previously announced acquisition of 2,900 (mostly) North-Rhine-Westphalia units. They also confirmed their ‘expected NAV increase by one EUR per share‘. I had previously included 50% of this increase in my adjusted NAV calc. – I’m now happy to include the full impact, which will peg my average NAV estimate at EUR 9.82 per share. This puts KWG on a current 0.64 P/B, and resets my Fair Value at EUR 10.02 per share, for an Upside Potential of 59%. What’s not to like..?!

Opportunity & Self-Interest:  KWG’s CEO, Stavros Efremidis, will become an Executive Director of Conwert with responsibility for all their German property. Conwert has previously highlighted that expansion of their German residential property portfolio is a key objective. This offers up interesting possibilities for KWG – for example, its continued expansion (on better financing terms), or a potential Conwert German property spin-off (or even a reverse-merger into KWG). Whatever the path, it suggests continued growth in KWG’s NAV & fair treatment of its minority shareholders will be a desirable objective for Conwert, in support of its longer-term German plan(s).

At worst, an eventual takeover, or a squeeze-out of minorities, should also offer a premium to shareholders. If this came in the form of CWI shares, that wouldn’t be a terrible end-result either – I’ve already flagged up Conwert as possibly the next best alternative to KWG.

Happy Xmas (NSFW!):  Now, all that’s left for me to do is wish every reader a Merry Xmas, and a Happy New Year! I hope you’ve enjoyed the blog, plus the stock ideas, just as much as I’ve enjoyed all the emails, comments & discussion throughout the year.

In reality, serious investing is often a rather intense & solitary occupation – which means finding like-minded souls, and swapping ideas, gossip, jokes & a few war-stories is all the more rewarding. I’m sure many of you appreciate that kind of camaraderie just as much as I do!

So, enjoy the Xmas holidays with your family – don’t worry about news & share prices, ‘cos nobody else will be either. Especially the US fiscal cliff…obviously, those idiots in Congress will get it sorted in the end, even if it’s not by Jan 1st. I prefer to focus on our last minute shopping list, including some of my favourites: Of course the turkey (with far too much gravy), mince pies, vintage port, Prosecco, foie gras, etc. I even have some Julmust as an interesting extra! I also wait with bated breath for my wife to open her Xmas present – if I’ve correctly understood the hints being dropped all year, I may actually have come up with a real winner this time. We’ll see… I may post over the holidays, I may not, I’m not sure – but I look forward to assessing FY 2012 performance first thing in 2013, and then we’ll take things from there!

As regards my favourite 2013 stock picks… Well, sorry (bah, humbug!), I think you know them already – yes, just read back through the blog, you’ll find them all there! Frankly, choosing brand-new stocks is often a real challenge – I usually have strong conviction, a medium-long term holding period, and see significant upside potential in my current holdings, so adding to them often makes just as much/more sense. But don’t worry, I always have a few new ideas lurking, so hopefully I’ll still be throwing out a nice selection of new, cheap & interesting picks during 2013.

Merry Xmas, Readers!


Filed Under: Value Investing,

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A blog about value investing, mostly in UK, Irish and US listed stocks. Interested in individual company stocks, investment funds, risk arbitrage, event driven/special situations, fixed income and even some natural resource stocks. ...read more or visit website »


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About Wexboy

My personal investing career began with an emerging markets obsession. Investing in individual emerging market stocks was a much taller order then than today, so I gravitated towards investment fund shares and warrants. Little did I know that (despite the volatility involved) this would turn out to be a very fortunate approach – it pretty much saved me from the consequences of poor/misguided stock analysis, chasing stock tips and investing in garbage stocks all the way down to zero.... Only when I learned of value investing did I finally discover a quantitative approach, plus a set of tools, that appealed to me and equipped me better for investing. And I guess it appealed to my mathematical background and perhaps my natural scepticism. It also tempered my lust to dive into investment trends – in fact, I’ve come to realize that any decent secular trend will take many many years to play out and there will be cycles of booms and busts in any related stocks to exploit, so hold your horses, stick to value investing and your chance will come…!  more »


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