Yearly Archives: 2011

Aberdeen International (AAB.TO)

While looking at Dacha Strategic Metals I encountered Aberdeen International in the statements as a related party. The company describes itself as follows:

Aberdeen is a publicly traded global investment and merchant banking company focused on small capitalization companies in the resource sector. In general, the Company’s investment philosophy is to acquire equity participation in:

  • pre-IPO and/or early stage public resource companies with undeveloped and undervalued high-quality resources;
  • companies in need of managerial, technical and financial resources to realize their full potential; and
  • companies undervalued in foreign capital markets.

Aberdeen provides valued-added managerial and board advisory services to these companies in addition to investment capital. The Company’s strategy is to optimize the return on its investments over a 24 to 36 month investment time frame. Aberdeen also has access to key experts in the mining and financial sector who can provide further assistance in evaluating and monitoring companies and their progress. As part of its business model, Aberdeen’s officers and directors take active management, director and ownership roles in a significant percentage of companies in which Aberdeen invests.

This also gives a somewhat reasonable explanation of the presence of Stan Bharti on the board of so many companies. Aberdeen has a portfolio of various stocks, warrants and debt in resource companies, and it owns 1.2M shares of Dacha Strategic Minerals. Just like DSM the company is trading at a big discount to NAV. The company reported that NAV/share was $1.31 as of 31 October while the current share price is CA$0.57, resulting in roughly a 55% discount (NAV is $114M).

Just like Dacha Aberdeen is also buying back the maximum legal limit for the current fiscal year (so far 2.4M shares have been bought back with 5.0M shares remaining), and in addition to this they are also paying a 2 cent dividend: resulting in a 3.5 percent dividend yield at current prices. These policies show that shareholder interests are being considered. Insiders own 17% of the common stock, but there has been some insider selling this year.

The company has a large amount of warrants outstanding with a strike at CA$1.00. The company has 86.8M shares outstanding, 6.9M options and 37.5M warrants. The warrants have a strike significantly higher than the current share price, and will expire on June 6, 2012. It does limit the upside a bit in the short term, but given the strike and the expiring date it is not a big issue.

Expenses also seem not totally unreasonable at first sight. Operating, general and administration expenses for the past nine months were 3.6M while NAV was 114M, translating to a 4.2% expense ratio. That would be pretty high for a CEF, but AAB is a bit more like a real business since it is a merchant bank.


I haven’t completed my research yet, it looks promising so far, but there are some items remaining on my checklist. I do want to take a look a historical performance, take a better look at the expenses, calculate the current NAV/discount and look if there is something noteworthy with regards to insiders or related parties. What questions do you think that need to be answered?



Further reading

Some old write-ups on Aberdeen can be found at

Dacha Strategic Metals (DSM.V)

Dacha Strategic Metals is a small company that specializes in investing and trading rare earth elements. These elements are often required in small quantities in high-tech products. A description of the various metals and its applications can be found on the DSM site. The bull-case for DSM is very simple, the company reported the following #’s:

Assets include metal inventory and cash. At November 30, 2011, in addition to its metal inventory, which had an estimated fair market value of US$111.5 million, the Company had cash of approximately US$4.0 million for a total of US$115.5 million, or US$1.51 per share, based on 76.4 million shares outstanding, or, US$1.29 per share on a fully diluted basis of 96.8 million shares outstanding.

The share price is currently at 0.4850 CAD (approximately 0.475 USD), making it possible to buy assets with a 63% discount (fully diluted). The company discloses the NAV weekly on it’s website, and with Google it’s easy to check that the listed prices for the various elements are reasonable (spot prices can be found here or here).

Besides the huge discount there is even more good news. The company has been buying back shares, and at the end of November it reported that it has bought back 5.5M shares since June this year and that it has 1.2M shares remaining that it can buy back under the current Normal Course Issuer Bid. Given the big discount buying back shares seems to be an excellent allocation of capital, and the amount of shares they are buying back is actually the maximum that is legally possible in Canada (there is a 10% of public float/year limit).

So far it looks like we can buy a company that is shareholder friendly at a high discount to NAV, but unfortunately it’s not that simple. Just like Urbana it’s probably best to view Dacha as a closed-end fund, and the two big questions that haven’t been answered so far is: are management incentives aligned, and what are the expenses?


In fiscal year 2011 DSM had 5.2M in expenses while the net asset value increased from 27.2M to 52M (numbers in CAD, the company switched to reporting in USD this year). This would give us an average asset value of ~40M and with 5.2M in expenses we would get a TER of ~13% (HUGE!). The picture for this year looks better though. The company had 2.57M in expenses for the first six months, keeping expenses roughly constant while NAV increased from 53M to 128M, resulting in an expense ratio of roughly 5.7%. It’s partly an issue of scale, but most of the expenses are related to management pay, and I have a hard time imagining that they really add a whole lot of value trading rare earth elements.


Management has been granted a considerable amount of options in the past. In 2010 1.8M were granted with a 0.72 strike, in 2011 5.2M warrants were granted with a 0.45 strike and 0.35M options were granted in the current fiscal year with a 1.08 strike. The executive compensation is summarized in the table below:

While executive compensation is in my opinion high (especially when you consider that Stan Bharti is chairman of more companies than I can count) there are two slightly positive things. The number of warrants granted is actually based on the estimated value of these warrants, so the bigger the company the smaller the dilution. Secondly the strike price of the warrants is very close to the current share price of DSM, so if they want to make money they do have to preserve shareholder value. The potential value of the warrants is also significant compared to the base salaries; so the incentive is there.

Another positive sign is that there has been some insider buying this year in the open market. The CEO bought in September 100,000 shares for 0.628 CAD/share, not an insignificant amount compared to his base salary. But there is currently not a lot of insider ownership: as a group they own roughly 5.5M shares compared with a total of 76.4M shares outstanding.

Related party transactions

Another negative point are the various related party transactions on the balance sheet. Nothing excessively bad; but there is for example a 3M loan to a related party that seems to be bad (and management took a long time before recognizing the loss while the loan was actually already non-performing). The company also has a small investment in another related company, it loaned money from a related company in the past and it paid consulting fees to a related party.


DSM doesn’t seem to be the best company, and the management also doesn’t seem to be the most shareholder friendly. There are plenty of things that I don’t like, but on the other hand: the discount is at the moment very big, and it’s not all bad. There is some insider buying and the warrants do align shareholder and management interests somewhat. They also offer a bit of a margin of safety, besides the current discount, because a dropping share price would be anti-dilutive.

I have not yet made up my mind, but at the moment I’m inclined to make DSM.V a small position in my portfolio (let me know what you think!). But even if I would be more comfortable with the management I would keep the position small. Falling rare earth element prices are a significant risk and prices have been pretty volatile.


Currently no position in DSM.V, but might initiate a position soon

More reading

A more enthusiastic long case at Old School Value.

End of year portfolio update

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

Meade (MEAD)

Meade is an extremely tiny company with a 3.88M market cap that specializes in manufacturing telescopes, binoculars and other optical products. The company was mentioned yesterday at Barel Karsan; and it’s attraction is the balance sheet: it’s currently trading at a 63% discount to net current assets. Some key statistics:

Last Price: 3.16
Shares outstanding: 1.2M
Market Cap: 3.88M
EPS (ttm): -0.42
Price/Tangible book (mrq): 0.37
EV/EBITDA (ttm): -7.14

The earnings that the company report are a bit too pessimistic. They are in the process of writing down goodwill, and the depreciation of property and equipment is also keeping the reported earnings down. At the moment they have almost completely written this down, while no significant capex is planned for the near future. That said: the company is still destroying value. Since the company is not paying dividends or expanding we can simply look at the NCAV/share to get a good idea on the value creation or destruction at the company.

So far they have been unable to turn the business around. The speed of the bleeding has slowed down, but it’s certainly not positive. And while they currently operate with property and equipment that has been written down to just 193K: there is going to be a point in the future were they need to start spending money on capex. Another development that is potentially worrying is that the allowance for doubtful accounts as a percentage of total accounts receivable has dropped significantly. They had an allowance of 408K on total accounts receivable of 3192K previous year while it’s currently 64K for 4077K accounts receivable. There might be a good explanation, but it could also be that the quality of the accounts receivable asset is deteriorating.


If management manages to turn the business around or quickly liquidates the company there is probably a lot of value in MEAD. It might happen, and yes they are in the meantime not destroying value at an alarming pace, but at the same time it’s mostly wishful thinking. There is not a cash flow positive business hiding behind the numbers, or a historical profitable business that’s just having a bad year. At the same time; there should probably be a number were buying MEAD makes sense. What do you think?



Gramercy Capital (GKK)

Gramercy Capital is a REIT that manages CDO’s: those structured asset-backed securities that played a large role in the subprime mortgage crisis. While doing some reading I found this – in hindsight – great quote on CDO risks in a document from 2004:

These include “low financial transparency, informational asymmetries (which create the potential for unanticipated, incorrectly priced and poorly managed concentrations of risk), and the possible promotion of new forms of moral hazard within the banking system as the linkage between origination and management of credit risk becomes more attenuated.”

If just the CDO abbreviation alone is not already enough to turn investors away, some key statistics from Yahoo Finance:

Last Price: 2.80
Shares outstanding: 50.53M
Market Cap: 141.48M
Total Debt (mrq): 4.38B
Book Value per Share (mrq): -13.54
EPS (ttm): -16.09

Those numbers look spectacularly bad, but the company is restructuring and all debt is non-recourse. The company consists of three parts: the parent, the realty division and the finance division. The company is in the process of getting rid of the realty division, and it released 7 December the pro forma condensed consolidated financial statements. They will continue to manage the realty division, and get a small management fee for doing so (10M/year). The finance division contains the CDO’s, and while the book value is negative they do produce cash flow for the parent company and since the debt is non-recourse this does have a positive value (more about this later)

Finally we have the parent company that does have a decent amount of assets. It has 80M in real estate 155M in cash and some other assets for a total value of 260M. Total liabilities are 40M, and they do have 88M in preferred shares outstanding so that would give us a total value of 132M for the common equity, or 2.61$/share. It’s not quite a net-net with the current share price at 2.80, but it should certainly be enough to provide an reasonable amount of downside protection.

The CDO assets

The big question is: how much value do the CDO assets have? The company receives a small management fee (7M/year) for managing the assets in the CDO’s, but the true value can be found in the equity that the company has in the CDO’s. If the minimum interest coverage and asset overcollateralization covenants are met all excess cashflow that remains after paying the more senior bond holders in the CDO structure goes towards the parent company. Currently the 2005 CDO is failing the overcollateralization test by a small margin, while the 2006 CDO is barely passing. The 2007 CDO is hopelessly undercollateralized and is probably never going to generate a significant cashflow unless the commercial real estate market recovers.

The cash flow from the CDO’s can be very significant, the 2005 and 2006 CDO’s, will yield around 50M this year. This is a big number compared to the 140M market cap of the company, but these cash flows are far from certain. The company in the latest 10Q:

As of October 2011, the most recent distribution date, our 2005 CDO failed its overcollateralization test and our 2006 CDO was in compliance with its interest coverage and asset overcollateralization covenants, however the compliance margin was narrow and relatively small declines in collateral performance and credit metrics could cause the CDO to fall out of compliance.

I’m not really comfortable valuing a cash flow that is so unpredictable and has such a thin margin of safety. Indaba Capital Management, a small hedge fund that has a big position in the preferreds, values the cash flow with a multiple between 2x and 4x giving the finance division a value between 73 and 180M and the common equity of the company a value between 204 and 359M.

Compared with a 140M market cap right now there certainly seems to be a good amount of upside, and the downside is well protected thanks to the assets at the parent level. The problem is that the future cash flows are very uncertain: buying GKK should probably be viewed as buying a very cheap option on the performance of the CDO’s.

If the CDO’s fall completely out of compliance the finance division probably starts making ~11M in losses/year (18M in SG&A minus 7M management fee). The realty division should be making roughly 6M/year, so in a worst case scenario the company will probably start losing some money, but nothing big.

The preferreds

An alternative is to invest in the preferred stock, but the company has not paid dividends on the preferred stock since December 31, 2008. The preferreds have a par value of 25$, a 8.125% interest rate, and have accrued 6.60$ in unpaid dividends. Giving the current liquidity position of the parent company you do have to ask why they haven’t resumed paying a dividend. With 155M in cash at the parent level they could easily pay those dividends worth ~23M, and that’s exactly why Indaba Capital Management is pushing the company to reinstate the dividend:

Despite such ample liquidity, the Company has not paid the accrued quarterly dividends on the Preferred Stock pursuant to the terms of such Preferred Stock for three years, which as discussed above, will total approximately $21.5 million as of September 30, 2011. We note that the Company also declared in its Quarterly Report on Form 10-Q filed on November 8, 2010 that it did not know when or if it will pay future dividends, including accumulated and unpaid dividends on the Preferred Stock. This declaration was in language identical to the statement in its 2010 Form 10-K which was filed on September 23, 2011 except that, in its November 8, 2010 filing, such statement was prefaced with “[g]iven our current financial condition” (emphasis added). It comes as no surprise to us that the Company did not include such explanatory language in its recently released 2010 Form 10-K given that the current financial condition of the Company is substantially improved from its condition in November 2010. We believe the Company is now sufficiently restructured and capitalized to pay all of the accrued but unpaid dividends on the Preferred Stock. According to our above estimates, such accrued but unpaid dividends represent only approximately 10% to 13% of the Company’s cash holdings.

The question is of course how successful they will be. If we let the actions of the management speak there is little reason to believe that they are planning to reinstate the dividend. And while the dividends are cumulative, no interest is paid on the accrued dividend so the preferreds are becoming an increasingly cheaper source of funding for the company (instead of 8.125% they are now effectively paying ~6.4%, and that rate will only go down – and this is at the expense of the preferred holders). On the other hand why would management want to screw over the preferred holders by withholding the dividend? The lack of a dividend is almost certainly also depressing the value of the common.

The company also can’t continue to not paying the preferreds. The company is a REIT and is by law required to distribute taxable income as dividends, and it can only pay dividends if the preferreds are paid. The company is posting positive earnings for the past nine months, but I’m not sure when they actually have to start paying taxes. They did of course suffer big losses in the past, and those can probably be used to delay paying tax.


When I initially read the case for GKK at Whopper Investments I thought that it was a pretty good idea, but reading and thinking about it more I’m not so sure anymore. What do you think?