Asta Funding (ASFI) announced it’s results for the first quarter of fiscal 2012 today, making it the second time the company released earnings information since I have initiated my position in November. The stock is down 12 percent since, so a good idea to review my original investment thesis and see if it’s indeed playing out as expected.
Quick valuation review
The company reported having 111 million in cash and securities as of December 31, 2011, and during the conference call the CEO mentioned that as of today they have 113 million in cash. This translates to $7.79 in cash/share while the current share price is 7.55: making ASFI officially a net-net. And not only is the company a net-net, most of it’s assets are cash, cash equivalents and securities: not the often lower quality accounts receivables or inventory. The company is also remaining profitable ($0.20 EPS for the quarter, up from 0.18 for the comparable period previous year). So ASFI seems to be cheaper than ever, but is it also growing value at the originally projected speed?
The company started with 104M in cash a half year ago, and managed to grow that amount to 111M while at the same time investing 2M in new debts, 4.4M in personal injury financing and 0.6M in paying out dividends. If we add this all up the company created roughly 14M in value in the past six months. If we would extrapolate those results for the next two and a half years we would arrive at a 188M valuation for ASFI at the end of 2014, not the 230M I originally estimated. The previous quarter included a one time 1.3 million charge though, so while it seems that my previous calculations were a bit too optimistic, it’s not that far off.
In the second quarter of fiscal year 2012 the growth of intrinsic value seems to be continuing at roughly the same speed. The company has grown the cash balance with another 2 million while at the same time investing 2 million more in Pegasus: generating roughly 4 million in half a quarter.
Personal injury financing
One major development for ASFI is Pegasus, the new joint venture in personal injury financing. The company has invested 6.4M so far in this business and has announced that they are willing to invest up to 21.8 million dollar annually. While this will transform ASFI from the safe super easy to value company based on it’s cash balance to something more unknown and risky, I don’t think it’s a bad development. You’re not investing in a company to let them sit on the cash: it needs to be returned to share holders or it should be used in financing business activities.
The CEO of ASFI is optimistic over the potential returns of this new business (but would you ever expect anything else?), and the press release contains the following sentence:
While the over-all returns to the joint venture are currently estimated to be in excess of 20% per annum, APH reserves the right to terminate Pegasus if returns to APH, for any rolling twelve (12) month period, after the first year of operations do not exceed 15%.
If they are indeed able to hit those targets I would be very happy, but it’s not a crucial part of the investment thesis. The value of the current cash balance and future cash flows is significantly higher than the current market value of the company, and as long as the new investments are not destroying too much value I should be able to come out ahead in the long run. With insiders owning a significant part of the company there is actually a strong incentive for them to create shareholder value.
The company was very quiet about the 20M share repurchase program that it announced a half year ago, and for good reason: they didn’t buy back any shares, but the explanation given by the company actually sounded reasonable. The company stated that it couldn’t trade it’s own stock due to a blackout period while it was setting up the new joint venture, information that didn’t became public until the end of the quarter.
The investment thesis for ASFI seems to remain intact, although my initial valuation was probably on the high side and the continuing lack of share repurchases are a bit worrying. The next few quarters are going to be interesting, since it should start to show how good or bad the move in personal injury financing is going to be.
Author is long ASFI.