One of the worst things about running a concentrated portfolio of 10-15 microcaps is how little news and movement there is in the stocks. It’s just not as exciting as I imagine trading in and out of large caps would be, where every day you’d have new analyst reports, market movements, etc. to keep read. Of course, because of the lack of “exciting” things, it’s much easier to focus on the true business fundamentals and apply basic value investing concepts to investing in micro-caps. Plus, it might not be as exciting, but it’s a heck of a lot more profitable.
Anyway, that’s why I was so excited when this morning not one but two of my big holdings announced some big news (plus a third, AEY, will announce full year results tomorrow). First, Asta (ASFI) reported full year results, and then Newcastle (NCT) announced they will be investing 443.7m in excess mortgage servicing rights (MSRs for the rest of the article).
Let’s start with Asta. I think the results were pretty darn impressive. The company ended the year with cash and equivalents of $106.9m and announced that as of today they have $108.8m in cash. This is a company with no recourse debt and (excluding the non-recourse debt) under $3.5m in liabilities. With their market cap currently at ~$113m, they are basically assigning zero value to the rest of their assets…. assets that generated over $80m in cash flow in the past year.
The Great Seneca portfolio (which is attached to their recourse debt) performed reasonably well too. I’ve always assigned no value to it in my analysis, so the fact that it is paying down its debt at a decent clip is encouraging. It’s currently on the books for $78.3m versus $71.6m in debt, meaning that even if the portfolio is completely worthless the biggest hit shareholders could take would be ~$7m write-down as Asta turns the “keys” over to the bank. With a current book value of $173m, that write-down would literally be a drop in the hat.
Honestly, the only real disappointment in the quarter was the company was not at all aggressive with share repurchases. They haven’t released the 10-K yet (it should be coming soon), but working off the balance sheet it looks like they repurchased only 9-10k shares. Given 14-15m shares outstanding, that’s a drop in the bucket. Don’t understand why they wouldn’t step it up.
Newcastle (NCT) announced that they were investing $43.7m in MSRs (see press release and investment summary at their investor’s website). You may remember that investing in MSRs was the reason they raised ~$120m in November. I think this investment is a big win for both the preferreds and the common.
Let’s start with the common. While I continue to think the dilution was a huge mistake and this won’t make up for it, the investment at least looks interesting. They’re forecasting a pretty high IRR and the group their investing with will own the other 35%, so interests should be properly aligned. Again, it won’t make up for the dilution, and all forecasts need to be taken with a pound of salt, but at least they did an investment that looks timely and has some upside.
For the preferreds, I think the investment was an absolute home run. Two reasons- these aren’t really the type of investments where you’re likely to take a complete zero- and it would take several complete zeros for the preferreds not to be completely covered. As a matter of fact, from my limited understanding, it’s pretty tough to actually lose a serious amount of money in these things. Most likely case is you invest at a very, very sub-par IRR, but actual capital loss is difficult. While sub-par IRR would be terrible for the common, the preferreds just need the company to not burn through cash to get paid off. Second reason- the company only employed ~40% of the cash they just raised to make this investment. All that remaining cash is just sitting on the balance sheet, protecting the preferreds downside.
Disclosure- Long ASFI, AEY, and NCT preferreds.
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Hey – i assume you saw this but on the ASFI call they mentioned they bought all the shares (approx 9k) they could legally buyback. I don’t know what the restriction is but would be good to know if that is going to change in the future. He mentioned volume limits but sounded like there were others. Since the company only averages about 15k shares traded daily so it looks like buybacks are going to be very slow. They kind of brushed off the question on special dividends so that looks unlikely as a way of returning cash to shareholders.
It was good to hear Gary continue to make it clear that ASFI will NOT make any contributions to the Seneca portfolio. One question I had was if you think the debtor (BOM) would be able to sue them and get through to the parent? He did talk about there being adjustments in about two and a half years though – any thoughts on that?
I do agree with you regarding the almost ridiculous levels at which this stock is currently trading. I do however wonder about the fact that they are looking to enter into other markets that they haven’t traditionally been very active in. How much of a risk is there that this could lead to some silly investment just to do something. They have been patient in the past but man its hard not to think they could just return a ton of cash to shareholders here and leave shareholders pretty happy.
Great points- I haven’t reviewed the CC yet (was hoping to get some time to do that today). If memory serves correctly, a company can only purchase 1/3 the volume of their stock and can’t put in orders to buy at the open or close, which would explain why the buybacks are coming in so light. It does beg the question though- why not do a tender? They could offer to buy basically every share tendered to them for say, $8.50 per share, and make both the people who tender and the remaining shareholders very happy.
BOM cannot come after ASFI to get anything. It’s been mentioned on previous conference calls, but you can also read through the loan. Previous adjustments have involved ASFI adding small bits of collateral to get covenants changed or removed. It’s not a worry. I can remember mgmt specifically saying they would “turn the keys over” if they felt it was in shareholders best interest.
I am worried about “silly investment” risk. But the family owns so much of this company- it’s tough to tell how much at quick glance because of how interconnected the holdings are, but they own at least 25%. They are certainly aligned with shareholders, and that gives me some comfort they won’t do anything stupid.
Done a little bit of checking, and is seems that the limits for share repurchases are as following (source: http://www-rohan.sdsu.edu/~kimj/research/paper_reg.pdf):
(1) (Manner of purchase) Repurchases are made through only one broker or dealer in a given day.
(2) (Timing condition) No repurchase is made as an opening transaction or during the last half hour of a trading day.
(3) (Price condition) No repurchase is made at a price exceeding the highest current independent bid price or the last independent sale price, whichever is higher.
(4) (Volume condition) Non-block repurchase volume does not exceed the higher of (A) one round lot or (B) the number of round lots closest to 25% of the average daily trading volume for the precedingfour calendar weeks.
Not sure yet how this can explain the low volume. On the CC ASFI stated that 8.9K shares was the limit they could repurchase. Think that restraint (3) is maybe the problem, but currently the bid is at 7.53 for 4 round lots, but if they are allowed to buy 25% of avg. volume at the bid price they should be able to have a much bigger order in the order book at the bid price.
10-K shows they didn’t repurchase any shares in Sept, which tells me they weren’t trying!!!!! Very frustrating
Hi – thanks for your ASFI comment on seeking Alpha – my reply doesn’t seem to appear even though 2 comments are noted, so not sure you saw it:
‘Thanks, Whopper!
Yes, I’ve been reading your site – congrats, some great articles on there! – you were on hiatus, but stormed back with a deluge of articles in December (how do you manage that many? – I feel very unproductive…). Have you had a chance to check out my new blog? – plenty of non-US stocks on there too, but hopefully should prove interesting anyway. I expect to get around to a blogroll soon, and will add a link to Whopper Investments then.
You know, I’ve seen far too much debate about accounting methods, cashflows, and the true value of receivables – so I didn’t want to get even deeper into that..! I preferred to focus on current and historical RoEs as tangible support for the current cheap valuation and significant upside for ASFI, only highlighting the significant income from zero basis portfolios to illustrate the conservatism of ASFI’s accounting.
Actually I did forget one thing, partly because I didn’t have the new 10K to hand as I was finishing the article – if you look at Note M, ASFI estimates the fair value of their receivables at $20 mio higher than their carrying value – another confirmation of their conservative accounting, and another v significant positive in light of their current market cap.
I’m also disappointed with the lack of share purchases, esp. when a sub $8 share price was on offer. Thought the price spike on Friday might be buyback related, but I notice volume was actually fairly average that day. I guess they are biased towards acquisition opportunities, but it’s unfair to shareholders to announce a share buyback and not follow through on it (although far too many companies do exactly like that, shame on them). Esp. as I think they have sufficient resources/cash now to do justice to both strategies…
Cheers,
Wexboy’
Hey Wexboy,
Hadn’t seen the comment. Thanks for the kind words; also, very insightful- good find with note M! surprised I missed it.
Hadn’t seen the blog yet but I will be sure to check it out!