Argo Group publishes 2016 results

Argo Group, a small alternative asset manager trading in London on the AIM market, is one of the first stocks I wrote about when I started this blog. I bought the company in the first days of 2012 and owning this stock has been a frustrating experience ever since. Thanks to a good 2016 I’m now basically back at my starting point. I bought the stock at 14.69p/share and today it trades at almost the same price at 15.37p/share. I did get two 1.3p/share dividends in the meantime for a total return of 22.3%. Pretty pathetic for a more than five year holding period in one of the biggest bull markets in human history!

While 2016 was a good year it seems that for now the business will continue to muddle through. In the 2016 annual report to company acknowledges once again that they don’t have sufficient assets under management to be profitable without earning performance fees (and this year even with some performance fees the operating profit was negative). But a plan to liquidate the company is absolutely not on the table: they are looking for an accretive acquisition and working on increasing AUM (something they write about for years, but are so far never able to do).

So why am I continuing to hold this stock? Simple: it was very cheap and it is still very cheap. The stock is now trading at a discount of 53.7% to net current asset value, and that’s huge! And it’s not like they are hemorrhaging cash. Last year they had a small operating profit, and this year a small operating loss. While the discount alone is enough of a reason to own Argo they also have an off balance sheet asset that could be quite valuable. Argo has a bad debt provision of US$6.4 million for management fees receivable from the AREOF real estate fund. This fund has a negative equity position, but according to Argo’s management these debts are expected to be fully recoverable: except that the timing of the payments is uncertain and unknown. I’m not exactly that optimistic, but last year the fund managed to pay back US$2.8 million, so there might be some truth there. Given that the book value of Argo is just US$20 million the bad debt provision could be pretty significant.

When you look at the historical financials below it’s also clear why the stock price hasn’t done much the past five year. After some bad news in 2014 and 2015 tangible equity/share is now basically back at the same level as five years ago:

So for now I will hold this stock patiently, but I’m not yet sure how long I should continue to do so. I have owned this now for more than five years, and I can’t wait forever… at the same time: if I would encounter this stock today for the first time I think I would still hapily buy it, so why not continue to hold it?

Disclosure

Author is long Argo Group

16 thoughts on “Argo Group publishes 2016 results

  1. bugface

    What assets do they own?

    Are they buying back their own stock 50% below NAV? If not, they are incompetent

    Reply
  2. Hisham Mannaa

    You might want to look at impax asset management. Despite the recent run up in share price, much value is still on the tabel

    Reply
    1. Casper F

      Hi Hisham, as far as I can see Impax has:
      90M Mcap
      5.2M earnings
      26.7M Equity
      That gives a PE of 17 and a P/B of 3.4
      Argo currently has an earnings-problem, but a P/B of 0.43, so they are not even in the same ball park regarding bargin’ness

      Reply
  3. Casper F

    Incredible how an increase in revenue of USD 0.65M can lead to an increase in employee costs of USD 2.6M. Funny how they are reluctant to pay a dividend before they are consistently profitable but not shy to showel huge bonuses out to the employees even they are not consistently profitable.

    Also slightly disappointing to hear that they did not yet manage to attract more money to their funds considering that in their 2016H1 report they wrote “Boosting AUM will be Argo’s top priority in the next six months”. :o(

    I still hold on to my shares as they are extremely undervalued, but I’m disappointed that it takes so long for the value to become unlocked…

    I had also hoped that the the Buyback II program had packed a bit more bite. Using USD 0.06M out of 2M authorized is not exactly agressive. But we can hope they will start Again soon…

    Reply
    1. Alpha Vulture Post author

      Yes, so far not a lot happening with the second buyback program. Would indeed be nice if they would be more aggressive, buying back your own stock at less than 50% of NCAV must be the easiest way to make money. But perhaps they were more interested in gaining control over the company in the first buyback than making money… we’ll see. Jury is still out on that one,.

      And yes, it’s not a very good sign that 1.6M in performance fees in revenues results in 2x higher employee expenses… but apparently they also spend some money on some IT-consultant in 2016 and some other things. Headcount also up a little bit.

      Reply
  4. Don

    “They are looking for an accretive acquisition and working on increasing AUM.” Assuming this happens it’s likely the company won’t be trading below NCAV. If that happens, how would you value the shares?

    Reply
  5. Wade

    Have you spoken to management? Curious at to why they’re not buying back stock and/or putting themselves up for sale in order to realize value. Sounds like they need someone to shake things up.

    Reply
  6. Walter

    Argo Group reminded me of Saloman Brothers when Buffett made a splash, but soon realised it was an investment mistake. That mistake is the “employee/sales-driven” business model. Meaning the workers’ pay themselves chunky fees when winning clients.

    This explains the big discount.
    One factor of Argo Group is the size of its AUM (£90m) is minuscule compared to other funds. As this means employees are the biggest cost, accounting for 38% and 70% of revenue.
    On valuation, the AUM/Mkt. Cap. ratio plays a vital role unless these employees are churning out 20% returns. And they wouldn’t be working at Argo in the first place.
    For ARGO, this is £90m/£7.37m = 12 times, not a big ratio.
    Compare that with Aberdeen Asset Management of £312bn/£3.81bn = 81.8 times. Or, Impax Asset Management of £5.2bn/£88m = 59 times. So, ARGO Group valuation looks hefty, compared with these major players.
    The last seven years, ARGO averages $984.5k in net profit, or £830,000, giving a 9 times’ PE Ratio. (lower than Impax and Aberdeen)

    As you said, we are in a bull market where the FTSE 100 more than doubled. If these seasoned professionals can’t invest in appreciating assets, then like Buffett said, you are better off investing in index funds. I wouldn’t be surprised if ARGO Group share price would have risen to £0.3/share today if they put their money in an index fund!

    Reply
    1. Alpha Vulture Post author

      I don’t think looking at P/E ratio’s or AUM/Mkt cap is very meaningful here. The value here isn’t really the business. The value here is that the market cap of Argo is 9M USD while you get $6M in cash + more than $12M in USD. As long as the business isn’t worth a lot less than zero it works.

      Reply
        1. Alpha Vulture Post author

          Yes, if they would liquidate it’s for sure an easy double. But I don’t expect that to happen.

          At the same time, just because they aren’t going to do that doesn’t mean that the value isn’t there or that it won’t be realized or recognized by the market at some point in time. In a sense the only sure way for any stock to get to fair value is a liquidation/sale of the company. Most stocks will not take that route, and will go back to fair value in some way anyway. How/when/if that is going to happen with Argo: I have no idea. but you are for sure buying it very cheap at this price, and I think that with sufficient amount of patience good things will probably happen.

          Reply
  7. Owen F

    Hmm it looks likes an Argo fund is in the running to purchase Marfin Bank [Romania] [https://www.profit.ro/povesti-cu-profit/financiar/banci/exclusiv-sase-oferte-surpriza-pentru-preluarea-marfin-bank-rusii-vor-sa-reintre-pe-piata-bancara-din-romania-dupa-un-deceniu-16931281]

    AREOF appears to have borrowed from Marfin. FY Sept 2012 [https://www.proactiveinvestors.co.uk/companies/rns/130328areo0781b]

    “It should also be noted that the Bank of Cyprus is also lender to the Era Shopping Park Oradea and that Marfin Popular Bank (commonly referred to as Laiki Bank), another Cypriot Bank subject to a restructuring as a result of the financial crisis in Cyprus, is a sole lender to the Company’s Riviera Shopping City asset and part of a consortium of lenders to Sibiu Shopping City. Although these banking facilities are fully drawn down, the planned restructuring of both the Bank of Cyprus and Marfin Popular Bank may have an impact on their future relationship with AREOF.”

    Wonder what this means for Argo, as it would appear a lot of the previously written off management fees from AREOF will be regarded as irrecoverable and that fees going forward will reduce by 50%.

    Reply

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