Asta Funding reports FY2012 results

Asta Funding (ASFI) announced today the results of the 2012 fiscal year. While the share price has gone up a bit since I initiated my position (just ~10%) I think the company is actually cheaper today than a year ago. The following quote from the CEO illustrates nicely how much value was realized last year:

Mr. Stern continued, “At September 30, 2012 our cash and cash equivalents and investments totaled $106.3 million as compared to $106.9 million at September 30, 2011. During the fiscal year 2012 we invested over $20 million in personal injury claims and repurchased over $16 million of Asta Funding, Inc. shares.

So what we see is that the cash balance has basically remained constant last year implying that the company managed to generate ~$36 million in free cash flow. Combine the free cash flow and the cash on the balance sheet with the current market cap ($120 million) and I think it should be quite obvious that Asta Funding is still very undervalued. Given the aggressive share repurchases that’s actually great news for me!

In the category “who the hell cares?”:

In addition, I am announcing that the Board of Directors of Asta Funding, Inc. has approved the payment of the 2013 annual dividend totaling $0.08 per share, payable to shareholders of record on December 24, 2012 and payable on December 31, 2012. The special dividend reflects the confidence of the Board of Directors in the strong cash position and the Company’s solid balance sheet. The management team and Board of Directors would like to thank the shareholders for their continued support.

Moving the 2013 dividend forward sounds great until you realize that it’s less than a 1 percent yield and it’s going to cost the company just one million dollar. They could have paid ten years worth of dividends and it’s still wouldn’t significantly impact the balance sheet.

Disclosure

Long ASFI

6 thoughts on “Asta Funding reports FY2012 results

  1. John

    Lets hope that they start generating some profits soon from their legal businesses, and not purchasing large blocks of shares at prices that are significantly higher than market

    Reply
    1. Alpha Vulture Post author

      It seems to me that the investments in personal injury claims are already generating some income: other revenue is up significantly YoY. But hard to figure out what kind of profit this part of the business made: hopefully the 10K will provide some details.

      I wouldn’t mind if they would buy back more large blocks of shares at a small premium: would actually consider that to be very good news if it would happen. But agree that’s not the most fair method to buy back shares since smaller shareholders don’t have the same opportunity to sell their shares. A big tender offer would be perfect.

      Reply
  2. Paul

    After reading the report over 2012 and 2011 I took another look at your initial writeup. In summary you expect a doubling of market cap in three years. However, what I lack in the analysis is the general cost and administrative expenses (a.k.a. overhead) that it costs to collect the money. This amounts $23.6M and $21.8M over 2012 and 2011 respectively. With total collections of $115M and $106M this means that roughly 20% of collections goes into cost. Or from a different perspective: $65M in years.

    Reply
      1. Paul

        The more I think of it I get to the conclusion that ASFI is a poor vehicle to convert non-current assets (receivables) into current assets (cash).

        Consider for example that the company collects over 2012 (2011) $106M (2011: $115M) and:
        – generates $16M (2011: $22M) of cash for stockholders in form of current assets on balance and money returned to shareholders. This is important because the whole thesis is about free cash flow for the stock holders.
        – invests $21M (2011: $7)
        – grows its book value $11.5 (if we for sake of argument include $16M share buyback) (2011: $11M)
        – burns cash in adminstrative expenses, tax, etc

        Would no investments have been done then cash returns could have been nice in order of magnitude of $30M over 2011/2012. This might even be extrapolated to one or two more years in an optimistic scenario.

        However, investments are done. This locks up cash for stock holders. Unfortunately, the investments seem too small to replenish the portfolio which in relation to the high overhead cost is not good.

        Generating $100M cash out of $30M of receivables in 2012 is nice, but if most is lost and the other part locked up then that raises questions if the expected return is reasonable and what the catalyst would be to unlock it.

        Reply
        1. Alpha Vulture Post author

          The ‘cash return’ this year was in the order of magnitude of $30M, but some of it was simply invested in a new business opportunity. You never know how that’s going to work out in advance: returns could be anywhere between very poor and extremely good. Every operating business locks up cash and has uncertainty, and ASFI isn’t different. I don’t have a specific expectation w.r.t. the new business, I’am more or less neutral and think valuing this part of ASFI simply at BV is fine.

          Another note: looking at gross cash collections isn’t that useful. Sure, almost 50% of the collections are ‘lost’ on third parties that have to collect the debt, but that’s part of the calculation when buying the debt and also part of the assumptions when calculating the book value.

          G&A costs are important, and especially the question “how much is variable based on the size of the portfolio, and how much costs are fixed?”. I think these costs are reasonable flexible: the main money drain are the people that work for ASFI, and if they continue to keep their portfolio more or less in run-off mode it’s not that hard to fire some people/stop hiring.

          But it’s of course far from certain that this is going to happen: the company is certainly not liquidating, and you should certainly not expect that all cash is directly returned to shareholders. So you don’t have a clearly defined catalyst: but time is on your side as more and more invisible assets with zero book value are converted to something tangible on the balance sheet, and debt is paid down.

          Reply

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