Urbana Corp has been one of the first write-up’s on my blog. I initiated my position almost a year ago, and the thesis was simple: it’s a crappy closed-end fund, but it’s trading at a big discount and it has a buyback program in place that should easily generate more value than what’s disappearing due to management costs, trading costs and other expenses.
While Urbana announced a new share repurchase program at the end of Augustus it seems to me that it has stopped buying back shares after just a few weeks. Today the company has exactly 70,000,000 shares outstanding (10,000,000 common shares and 60,000,000 non-voting shares). The share count has remained at this level for the past few weeks, and while the repurchase program was paused in the past it’s a suspiciously round number. Combine this with the statement below from the CEO (made last year):
We do plan to build this company and our goal is significantly above its current size. I would not like to run our size down too much.
And it seems to me that the company has reached the number of shares they are willing to repurchase. Given the fact that a big part of my thesis was based on the value created by the buybacks it seemed like a good idea to reconsider my position in the company. Unfortunately the discount to NAV is back at the level of when I bought my position (~45%), and in the mean time NAV/share has been going down even though the company did reduce the share count from 75.5M to 70.0M. The result: a loss of approximately 9.1 percent.
No position in URB-A.TO anymore
With the first half of 2012 behind us it seemed a good idea to me to quickly review my portfolio. Not because a time frame this short is really useful in evaluating how good or bad certain picks have been, but a portfolio is not a static entity. Some positions could become more attractive over time because of new developments, insights or changes in price, while other positions become less attractive.
The performance of the various positions is summarized in the table below. As is visible I have a few positions with a small loss and some positions with a pretty good return with SALM being the icing on the cake. I wish I could attribute this to buying undervalued companies with good downside protection, but this is not yet even getting close to getting a sufficient sample size. Besides: the company with the highest return was (and still is) also the riskiest company based on the amount of leverage.
|Ticker||Purchase Date||AVG Price||Rating||Dividend||price||Return|
|ORGN.PK||May 10, 2012||1.45||8.5->7.5||0.38||1.45||26.2%|
|CNRD.PK||Mar 29, 2012||16.50||9.0->8.5||-||14.92||-9.6%|
|SODI.OB||Mar 26, 2012||3.09||8.0||-||2.96||-4.2%|
|DSWL||Mar 6, 2012||2.11||8.5->8.0||0.02||2.84||35.6%|
|SALM||Feb 21, 2012||2.65||8.0->8.5||0.07||5.64||115.5%|
|IAM.TO||Jan 24, 2012||0.59||8.5||-||0.59||0.0%|
|ARGO.L||Jan 3, 2012||14.69||8.5||1.3||12.84||-3.7%|
|URB-A.TO||Nov 28, 2011||0.99||8.0->7.5||-||1.02||3.0%|
|0684.HK||Nov 16, 2011||2.21||8.5||0.025||2.09||-4.3%|
|ASFI||Nov 7, 2011||8.33||9.0||0.06||9.51||14.9%|
I have also included how I would change the rating of the attractiveness of the various positions based on today’s stock price and information. I have summarized my reasons for the changes below. In most cases more details can be found in the comments on the original write-up or in a followup posting.
- ORGN.PK: Have to say that this stock really showed the value of this blog for me. Got great feedback from multiple readers and realized that it’s currently trading closer to fair value than I initially thought. The positive return thanks to the fat dividend is purely luck and only showed I didn’t fully understand the risks (and luckily in this case the rewards!) of the interest rate swaps (now terminated).
- CNRD.PK: Small re-rating based on some errors in my original write-up, mainly because there was less excess cash on the balance sheet than I thought.
- DSWL: I’m more convinced than ever than I’m right that it isn’t a fraud thanks to the increase in regular dividend plus a special dividend this month. But since the stock price is also up a decent amount I think it’s less attractive today.
- SALM: It’s up a lot, but still trading at a near 20% FCF yield. The refinancing possibility next year (missed this in my first write-up) and massive insider buying after I bought it are the reasons to upgrade my rating. But it was a close call: the increase in share price is obviously not positive for the risk/reward ratio.
- URB-A.TO: The discount has been getting smaller since I initiated my position, and the recent transaction was also a small negative development.
So far there isn’t anything in my portfolio that I think I should sell right now. Cash is in my opinion one of the least attractive assets with an almost guaranteed negative real yield. But if a better opportunity comes along I do have two positions on the hot seat.
Long everything mentioned in this post.
Urbana Corporation issued a press release yesterday announcing that they have bought a 15.6% stake in Caldwell Financial Ltd. Urbana is managed by Thomas S. Caldwell who also owns 45.14 percent of Caldwell Financial. So this transaction looks in my opinion pretty bad: it could be a nice way for insiders to cash out of Caldwell Financial at the expense of the Urbana shareholders. I don’t know if this is indeed what happened. The press release is short on details and while insiders own a total of 69.3% of Caldwell Financial they could have bought the 15.6% stake from a third party.
While my initial thought was that as an Urbana shareholder I was getting screwed pretty bad the potential loss of value seems minimal. In the weekly NAV update the company already disclosed earlier this week that they own 700,000 shares of Caldwell Financial with a cost price of just 1.5M (just a bit more than 1.3% of NAV) and based on Urbana’s latest Annual Information Form this position is indeed the 15.6% stake. It discloses that TSC owns 45% or 2.2M shares of Caldwell Financial. Based on this the 700,000 shares would translate to a 14.4% position: close enough to the announced 15.6% number.
So while I still think the transaction is very questionable there is no big loss of value, and I’m not yet selling my position. But Urbana is certainly moving up in the list of things I could sell if I find another good idea.
Urbana Corporation, in essence a closed-end fund focused on stock exchanges, released it’s annual report for the year 2011 previous month. Initially I didn’t intend to write an update because the report didn’t really contain any news. The company is publishing an overview of it’s NAV and portfolio holdings every week, so there are no surprises with regards to the portfolio performance or the number of shares bought back. Urbana is steadily buying back shares, reducing the share count from a peak of 87.5M in the beginning of 2010 to 72.5M now. Since the company is trading at a significant discount to NAV those share buybacks add to the value per share for remaining share holders in a meaningful way (the discount was around 45% when I initiated my position in November, and is currently still around 40%).
The reason for this post is that my original write-up didn’t include an estimate what a fair discount for Urbana is. It’s easy to understand that the current discount is too high: the company is buying back 10% of shares per year, and with a 40% discount that would result in a growth of NAV/share of 4.44%:
(InitialNAV - CostOfBuyBack) / NewShares = NewNAV
(1 - 0.06) / 0.90 = 1.0444
At the same time the company has ~3% in overhead costs per year, so thanks to the buybacks Urbana should currently have a portfolio that is capable of outperforming the market with 1.44%/year. And a fund that’s capable of outperformance should trade at a premium! But this of course can’t be true for Urbana since the outperformance can only be realized while trading at a discount and it certainly should trade at some discount because of the high fees. What we want is to find an equilibrium where the fees of the Urbana corporate structure are exactly cancelled by the share buybacks.
Before we can do that we need to take a look at another variable: the expected return of the portfolio. If you would for example expect that the equities in the Urbana portfolio have a return of 6%/year in the long run it would imply that a discount of 50% would be fair if the company would not be buying back shares. With a 6% return and a 3% expense ratio you would basically have a situation where 50% of the earnings are siphoned off. With a higher return assumption a fair discount would be smaller since you would need a smaller part of the asset base to cover the fixed 3% costs.
- The expected return of the URB portfolio is equal to ‘the market’ minus 3%
- A fair discount for URB is when it returns ‘the market’ after fees
- The company continues the share buybacks indefinitely
- The company does nothing else to close the gap to NAV (liquidate, self tender)
With some crude Excel work to include the effect of share buybacks I get a fair discount of 14% when we assume that the expected future market return is 10%, and a fair discount of 20% when the market return is 4%. So I think it’s safe to say that a discount around 17% would be appropriate for Urbana Corporation.
And while I’m waiting for the gap between the current ~40% discount to close to less than 20% I’m owning an asset that should outperform the market with ~1.4%/year. So unlike a lot of other asset based plays I don’t really care how fast value is realized. Either the discount remains big and I can make money because the company can grow intrinsic value at above average rates by buying back shares, or the discount simply gets smaller. I would prefer the last option, but it’s not a situation where you will end up with terrible returns if it’s going to take ages before this happens.
Author is long URB-A.TO, and short a little bit CBOE and NYX as a partial hedge
The end of the year is always a good time to look back, and even though I started this blog a little bit more than a month ago there is actually something to talk about since two of the three companies in the blog portfolio have released new financial reports.
Asta Funding (ASFI)
Asta Funding reported its results for the fiscal year 2011, and financial performance was roughly as expected. The cash flow from the zero basis portfolio’s remains strong and predictable and the company had as of 14 December $108.8M in cash and securities versus a market cap of 122M right now.
What they are doing with the cash is a more mixed story though. The results of the share buyback program have been very disappointing so far: they practically didn’t buy any shares back. On the conference call the CFO indicated that this was because of liquidity and legal constraints, but personally I find that hard to believe. If this doesn’t improve next quarter I’ll probably reduce my position a bit, since the share buy back for $20M was originally one of the attractive points of the stock. At the same time 13M of cash has been moved in securities, and 3.5M has been invested in the litigation funding business, something the company had never been active in previously. While it’s hard to know how this is going to work out I think it’s positive that the company is starting relatively small.
Allen International Holdings (0684.HK)
Allen International released it’s Interim Report 2011/2012 in the beginning of this month, and while sales for were up 5% compared to the previous period net profit was down 43.5% (but still above the 5yr average) due to the following factors:
The increase in raw material costs, double-digit increase in labour wages in Guangdong Province, the PRC and the continuing appreciation of Renminbi were amongst the adverse factors that contributed to the erosion in the gross profit margin. On top of this, the shortage in both electricity and labour supply had further increased the difficulties and challenges in our operations.
Most of these factors would also impact competitors and should not permanently impact the viability of the underlying business. We should never expect great profit margins from a commodity business like this, but there is also no reason to be overly negative, and the company remains cheap with a very strong balance sheet.
Urbana Corporation (URB.TO/URB-A.TO)
The discount between NAV and share price has increased a bit more the past month. The share price for URB-A.TO is currently 0.88 while NAV/share is 1.73. Even though it currently doesn’t look pretty in my portfolio it’s actually positive news. The company is steadily buying back shares, and the bigger the discount the better for remaining share holders. I bought the company less than a month ago and since then the share count has already been reduced from 75.5M to 74.4M (December 16 report date).
Long ASFI, 0684.HK, URB-A.TO