Tag Archives: ARGO.L

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

Argo Group announces second buy-back programme

Today Argo Group announced that it would start a second share repurchase program. The first program, in which the company managed to buy back 28.1% of the outstanding share capital, was completed in July. In the second program the company is looking to spend £2.0 million, the same amount as in the previous program. With 48.4 million shares that remain outstanding and a share price that has been steadily moving upwards this year to 16.25p this would be enough money to retire another 12.3 million shares: 25% of the share capital and 50% of the float. We’ll have to see if the company will be successful in doing that. I was very surprised at the amount of shares they managed to buy in the previous program, so perhaps they can surprise me again. Since the stock is still trading at an almost 50% discount to NAV a successful repurchase program could increase intrinsic value materially.

Disclosure

Author is long Argo Group

Argo Group completes share buyback programme

Last Friday Argo Group announced that is successfully completed the share repurchase program that was started on the 30th of March. In just three months time the company spend £1.96 million repurchasing 19.0 million shares (28.1% of the outstanding shares) which is pretty impressive considering that insiders owned 33.2% of the share capital and on the AIM market average daily volume is around 60 thousand shares a day. Apparently there was plenty of liquidity off-exchange using block trades.

I have mixed feelings about the successful share repurchase program. It’s good that they managed to buy a large amount of shares at a nice discount to NCAV which is nicely accretive to intrinsic value. At the same time I’m worried that the management team didn’t do this share repurchase program to create value, but to solidify their control of the company. Thanks to the repurchase program their ownership went from 33.2% to 51.2% without paying any control premium to minority shareholders. I don’t really like this, and that is why urged people earlier this year to vote against the share buyback proposal. Unfortunately the vote passed, and I now have to accept that I’m even more at the mercy of the whims of the Rialas brothers than before.

Agro Group repurchase history

Disclosure

Author is long Argo Group

Vote AGAINST the Argo Group Share Buyback Proposal

Vote no!Most shareholders in Argo Group must have noticed that the company has launched a proposal to buy back shares that requires shareholder approval because it could increase the stake of insiders to a controlling stake. I think that this would not be a positive development if management is unwilling to cash out minority shareholders at a fair price, among other things. Wexboy makes the case to vote against the proposal in a lot more detail here, and I would urge every Argo shareholder to read it (and vote accordingly)! Unfortunately, I’m not able to vote against the proposal because my broker (Binck) doesn’t support it, but if I could I would certainly vote against the proposal.

Disclosure

Author is long Argo Group

Argo Group sells Indonesian investment

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.

TPPI refinery

Disclosure

Author is long Argo Group