Tag Archives: ASFI

Exited position in Asta Funding

When I wrote about Asta Funding last month I thought it was a nice little arbitrage with little risk, but also limited upside given that the spread was just 3.8%. While surprises when doing merger arbitrage are usually bad news, I got lucky with Asta Funding. Their largest outside investor, RBF Capital, announced that they thought that the going private offer of $11.47/share was significantly too low and that they would oppose the deal. A month later they upped their game with a going private proposal of their own at $13/share.

The stock is now trading at $12.50/share, but given that 61.8% of the outstanding shares are owned by Asta Funding insiders this proposal has a very low chance of becoming reality. However, with a 8.8% stake RBF Capital owns a decent bit of the float and getting a majority of the minority to approve the proposed transaction might become difficult. 8.8% of the shares is just 23% of the float, but there are always a bunch of people that just don’t vote (and effectively vote against the deal) and there might be more than a few holders sympathetic to RBF Capital’s argument that the going private price is a lowball offer.

But it is far from certain that RBF Capital’s efforts will lead to a significantly improved offer from Asta Funding insiders. There are many alternative scenarios possible. Insiders could simply abandoning the going private proposal and go back to business as usual. Alternatively RBF Capital could just be posturing for an eventual appraisal case that would offer no free ride for other minority investors. And of course it’s totally possible that a lot is said and done and in the end the original proposal goes through. When the stock was trading close to the buy-out price of $11.47 I was happy to hold on to see how things would play out, but at the current prices I think the market is pretty optimistic so I decided to exit.

Disclosure

Author has no position in Asta Funding anymore

An Easter merger arbitrage idea: Asta Funding

The first company I wrote about on this blog in 2011 was Asta Funding (NASDAQ:ASFI). Looking back, an ambitious start since it was certainly not a stock that was easy to analyze. I sold it in 2014 for a marginal profit, but Asta Funding always stayed on my radar. Last year it looked like the story would finally finish when the CEO of the company submitted a non-binding proposal to take the company private at $10.75/share. With insiders already owning a majority of the outstanding shares and the company having a book value of $13.71/share (of which a large part consists of cash, US treasury bills and equity securities) it was a deal that made sense and until recently the stock traded at a tight spread to the proposed offer.

However, last month changed everything. Merger spreads exploded everywhere, especially for deals that were not yet definitive. I had my doubts as well about this one, even though it was a good deal and the large cash balance would make the company pretty immune to the impact of the coronavirus. To my surprise Asta Funding announced last Wednesday that not only did they sign a definitive merger agreement, the price was also increased  to $11.47/share, making this one of the very few new deals that were inked in the past few weeks. In normal market circumstances you would expect a cash deal like this with no regulatory risks and no financing risks to trade at a spread of almost nothing.

Of course, we are not living in ordinary times. But for a deal that was signed this week that doesn’t really matter. You would not expect the buyer getting cold feet because he knows exactly what he is getting into, and of course, the merger agreement explicitly states that the impact of a pandemic cannot be a material adverse effect. Many deals that were signed in the months leading up to the big outbreak outside China also have this clause. While many of them are probably also interesting arbitrages, here we not only know that legally the acquirer will have a tough time of walking away, but also that he doesn’t have any interest in doing so.

With the stock trading at $11.05 while it is being bought for $11.47/share the spread is currently 3.8%. Not bad for a deal that I think is extremely low risk, and will most likely be completed before the end of June. I couldn’t resist picking up some shares, but kept my position size reasonable small. There are so many interesting merger opportunities that it is hard to pick which ones to buy, and while I think this one has a low risk, the reward is also not super big.

Disclosure

Author is long Asta Funding

Exited Asta Funding

I exited my position in Asta Funding (ASFI) last week when the share price made a small jump after the company announced that it settled it’s debt obligations with the Bank of Montreal. Asta Funding was the first write-up on this blog more than two and a half years ago. It was at the time a high conviction idea and it constituted a big part of my portfolio, but unfortunately the performance of the stock was mediocre. While my portfolio gained more than 100% in this time frame my investment in Asta Funding returned just 4.3%.

Looking back I think I was partially unlucky, but also partially wrong. In my initial analysis I overstated the upside potential because I didn’t account for G&A expenses (rookie mistake). This is something I realized long ago, and also taking this in account there appears to be significant upside potential based on the asset value of Asta Funding.

The bigger problem is that management is less shareholder friendly than I thought. My thesis was that Asta Funding was undervalued because of the complex balance sheet, but I now think that the discount exists mostly because of how management is running the company. While I could have spotted some of these issues back in 2011 I think this is also a bit of bad luck. At the time management looked a lot better because they just announced a big share repurchase program that was also (partially) executed after some delays. Unfortunately it now seems that everybody at Asta Funding is getting paid well, except shareholders: they even cut the dividend that was pretty mediocre to begin with…

I still think that at current prices Asta Funding is interesting, but I prefer opportunities where I have more faith in how fair the management team is.

Disclosure

Author has no position in Asta Funding anymore

Earnings season updates (AWDR.OL, PVCS.L, CNRD, ASFI)

It’s earnings season again, and that’s always an interesting time for an investor since it’s the moment of truth: is your thesis playing out as expected, or is reality throwing a wrench in the wheels?

Awilco Drilling

Awilco reported results for the second quarter earlier today, and they are excellent. Revenue was 59.5 million thanks to slightly higher contract rates and a revenue efficiency of 97.3%. The company also announced a second quarterly dividend of 1 USD, giving the company a dividend yield of more than 20%. Other good news came earlier this week when the company announced that it signed a 3 year contract for the lease of WilPhoenix, increasing the value of the backlog with 424 million to 860 million. If the stock price stays at the current levels I’m probably going to increase my position slightly.

PV Crystalox Solar

Crystalox Solar also reported today, and the results for the first six months of 2013 seems to be alright. The business is in trouble, but the company does have a lot of cash and it anticipated that it should be roughly cashflow break-even in 2013 after restructuring. Cash from operations before changes in working capital is slightly positive while reported earnings are slightly negative. So that look good to me. The return of cash to shareholders is taking more time than I expected, but according to the company that should happen sometime later this year.

Conrad Industries

Conrad Industries reported yesterday and the results were simply excellent, and it appears that the company is on track to earn a record amount in 2013. The backlog is up 218% compared to previous year and the new construction site that was build on the land adjoining the Conrad Deepwater facility was taken in use this June. A slight negative is that it seems that the BP claim is being delayed, although that’s not a surprise given the fraud BP has to battle.

Asta Funding

ASFI reported results a week ago, and the most interesting development is the settlement with the Bank of Montreal on the non-recourse debt that backs the Seneca portfolio. Asta Funding has prepaid $15 million on the loan, and the next $15 million in of collections will also go to the bank. After this Asta Funding can recover the $15 million prepayment, and further collections will be split 70/30 between ASFI and the bank while the interest rate on the loan has also been lowered. Seems like there is a bit of value after all in the Seneca portfolio for Asta Funding, although it’s not going to be a lot.

Disclosure

Author is long AWDR.OL, PVCS.L, CNRD and ASFI

Couple of quick updates (RELLA.CO, ASFI, IAM.TO)

While I was on vacation last week a couple of companies released their yearly results (RELLA.CO and ASFI), and another holding of mine was finally sold (IAM.TO). I’ll briefly discuss the various developments.

Rella Holding A/S

Rella is the holding company that owns the biggest part of Aller, a Scandinavian publisher of mostly weeklies. Aller only reports once a year, so when they do it’s a good moment to review how the company is performing. Comparing the balance sheet of Aller with previous year version should give a good indication on what happened with the asset value:

Rella/Aller 2011 and 2012 balance sheets side-by-sideWhile the share price of Rella is up roughly 25% since I first wrote about the company it’s almost just as cheap today as it was then. The book value of Aller is growing while it’s repurchasing shares and paying out dividends, and as a result Rella is owning an increasingly bigger part of Aller. At the same time Rella is using the dividends received from Aller to repurchase it’s own shares. That’s a combination I like!

The biggest part of Rella’s value consists of the securities on Aller’s balance sheet, but it’s also important that the operating entity remains profitable. The results of primary activities were down significantly in 2012 compared with 2011: 142M DKK in 2012 versus 246M DKK in 2011. This decease is primarily due to employee costs in connection with staff reductions. Revenue is actually up a tiny bit, and I also think it’s positive to see that prepayments from subscribers are up a bit compared to last year. Weeklies aren’t dead yet, and next year should also be slightly profitable:

Based on the current activity level and the 2012/13 budget figures from the leading subsidiaries and the accounts for the latest time periods, a result of primary activities (EBIT) of DKK 100-150m is expected.

As long as Rella continues to trade significantly below tangible asset value, Aller remains profitable and both companies continue repurchasing shares I’m not going anywhere.

Asta Funding

After a bit of a delay Asta Funding finally published it’s 10K last week. I haven’t found any big surprises in the 10K compared with the press release that was issued a month ago. Due to some accounting peculiarities it’s not directly visible how cheap ASFI is based on it’s asset value, but it certainly is. The company has currently a $123M market cap while it owns $106M in cash and investments, and it does not have any big liabilities (there is only non-recourse debt). Besides the cash we find $12.3M in consumer receivables on the balance sheet and $18.6M is invested in the personal injury litigation financing business.

Besides these assets that are visible on the balance sheet the company also owns a large number of consumer receivables that have zero book value (fully amortized portfolio’s). Last year these assets generated $36.4M in zero basis revenue. Since the company is not replacing it’s aging portfolio of consumer receivables we should expect that revenue’s will drop in the future, and this could become problematic if there are a lot of fixed costs. They can’t continue on the current path indefinitely. So this is something to keep an eye on, but so far ASFI is still cheap and using a lot of cash productively by repurchasing shares.

Integrated Asset Management

Buying this company last year was a mistake. It looked cheap because it had a negative enterprise value and had a history of profitability, but in what could best be described as a beginners mistake I  failed to realize that there were a lot of accounts payable and a lot less accounts receivable. So logically the company had to use a bunch of their cash this year, and IAM was not as cheap as I thought. At the same time the financial performance of the company was also disappointing last year. Since the company is very illiquid it took some time for me to exit my position, but managed to do so this month at a small loss (-3.4%).

Disclosure

Long RELLA.CO and ASFI