Argo Group, an alternative asset manager, has been one of my first write-ups on this blog, but certainly not one of my most successful investments. I initiated my position at 14.69p/share only to see it drop 60% in the following years to a low of 6.00p/share a few months ago. Unlike some of my earlier investments that I sold because I thought that my initial analysis was flawed this was one idea that I kept believing in, and adding along the way. Not that this means that my first Argo write-up was flawless (far from it!) since the Indonesian investment, that is the subject of this post, isn’t even mentioned.
What I learned later is that Argo Group manages a very concentrated portfolio, and a major holding was a minority stake in a troubled Indonesian refinery. How big this asset is as a percentage of The Argo Fund has never been disclosed, but it has to be very big. In the latest interim report, Argo already reduced the carrying value of their stake in their own fund from $18.2 million to $13.8 million based on the agreed sales of an “important asset”. That’s a 25% write-down! My educated guess is that their TPPI stake is now approximately 65% of the Argo Fund, and with the sale of this asset almost completed there is now a large amount of liquidity:
Argo Group Limited (“AGL”), the independent alternative investment manager offering a multi-strategy platform for investing in global emerging markets, announces that certain funds it manages (“Argo Funds” or “the Funds”) have reached an agreement for the sale of a significant investment they hold in Indonesia (“Indonesian Investment”). The transaction conditions precedent are now fulfilled and the Funds has received a part of the sale consideration with the balance due over the next two weeks.
Because of the previous illiquid nature of the Argo Fund it has a large amount of accrued management fees outstanding ($5.8 million!) that now can be paid to Argo. With a market cap of $10.2 million (based on a 10.18p share price) that is big news. In addition to this the company also owns a $13.8 million stake in their own fund that is now mostly liquid as well. If we simply add these two numbers we get a total value of $19.6 million, implying a liquidation value that is almost twice the current market cap, and it gives zero credit to their other assets and (potential) earnings power. I still see a lot of value here, and I think the completion of the sale of their Indonesian investment will act as a catalyst since the company has indicated that they intend to resume their annual dividend and/or implement a share buyback:
Once the full sale consideration has been received by the Funds, the Board will consider a resumption of annual dividend payments and or a potential return of capital to shareholders via a share buyback subject to a review of AGL’s future strategy and working capital needs.
What the following, from the same press release, is supposed to mean, no idea…
The disposal of the Indonesian Investment improves the liquidity of the Funds and creates an opportunity for further transactions with the same counterparty that could in the future mitigate the impact of the book value losses incurred by the Funds as a result of the disposal.
Author is long Argo Group