Tag Archives: ASFI

Quick ASFI update

As can be seen on the portfolio page of this blog ASFI is my highest conviction pick, but since buying it half a year ago my conviction level has been dropping because of the lack of share buybacks. A cash rich and undervalued company is great, especially if that cash is used to buy back undervalued shares. ASFI announced in June 2011 a share buy back for $20M worth of shares (significant for a ~120M market cap company), but totally failed executing it (buying back less than $0.5M worth of shares).

Last Friday ASFI announced a new share repurchase program, again for $20M, but this time under Rule 10b5-1 of the Securities Exchange Act of 1934. According to the company this should make it easier to repurchase shares:

A plan under Rule 10b5-1 allows a company to repurchase its shares at times when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods.

Hopefully the company will be able to deliver on the repurchases this time.

Disclosure

Author is long ASFI

Asta Funding Q1 2012 results

Asta Funding (ASFI) announced it’s results for the first quarter of fiscal 2012 today, making it the second time the company released earnings information since I have initiated my position in November. The stock is down 12 percent since, so a good idea to review my original investment thesis and see if it’s indeed playing out as expected.

Quick valuation review

The company reported having 111 million in cash and securities as of December 31, 2011, and during the conference call the CEO mentioned that as of today they have 113 million in cash. This translates to $7.79 in cash/share while the current share price is 7.55: making ASFI officially a net-net. And not only is the company a net-net, most of it’s assets are cash, cash equivalents and securities: not the often lower quality accounts receivables or inventory. The company is also remaining profitable ($0.20 EPS for the quarter, up from 0.18 for the comparable period previous year). So ASFI seems to be cheaper than ever, but is it also growing value at the originally projected speed?

The company started with 104M in cash a half year ago, and managed to grow that amount to 111M while at the same time investing 2M in new debts, 4.4M in personal injury financing and 0.6M in paying out dividends. If we add this all up the company  created roughly 14M in value in the past six months. If we would extrapolate those results for the next two and a half years we would arrive at a 188M valuation for ASFI at the end of 2014, not the 230M I originally estimated. The previous quarter included a one time 1.3 million charge though, so while it seems that my previous calculations were a bit too optimistic, it’s not that far off.

In the second quarter of fiscal year 2012 the growth of intrinsic value seems to be continuing at roughly the same speed. The company has grown the cash balance with another 2 million while at the same time investing 2 million more in Pegasus: generating roughly 4 million in half a quarter.

Personal injury financing

One major development for ASFI is Pegasus, the new joint venture in personal injury financing. The company has invested 6.4M so far in this business and has announced that they are willing to invest up to 21.8 million dollar annually. While this will transform ASFI from the safe super easy to value company based on it’s cash balance to something more unknown and risky, I don’t think it’s a bad development. You’re not investing in a company to let them sit on the cash: it needs to be returned to share holders or it should be used in financing business activities.

The CEO of ASFI is optimistic over the potential returns of this new business (but would you ever expect anything else?), and the press release contains the following sentence:

While the over-all returns to the joint venture are currently estimated to be in excess of 20% per annum, APH reserves the right to terminate Pegasus if returns to APH, for any rolling twelve (12) month period, after the first year of operations do not exceed 15%.

If they are indeed able to hit those targets I would be very happy, but it’s not a crucial part of the investment thesis. The value of the current cash balance and future cash flows is significantly higher than the current market value of the company, and as long as the new investments are not destroying too much value I should be able to come out ahead in the long run. With insiders owning a significant part of the company there is actually a strong incentive for them to create shareholder value.

Share buybacks

The company was very quiet about the 20M share repurchase program that it announced a half year ago, and for good reason: they didn’t buy back any shares, but the explanation given by the company actually sounded reasonable. The company stated that it couldn’t trade it’s own stock due to a blackout period while it was setting up the new joint venture, information that didn’t became public until the end of the quarter.

Conclusion

The investment thesis for ASFI seems to remain intact, although my initial valuation was probably on the high side and the continuing lack of share repurchases are a bit worrying. The next few quarters are going to be interesting, since it should start to show how good or bad the move in personal injury financing is going to be.

Disclosure

Author is long ASFI.

End of year portfolio update

The end of the year is always a good time to look back, and even though I started this blog a little bit more than a month ago there is actually something to talk about since two of the three companies in the blog portfolio have released new financial reports.

Asta Funding (ASFI)

Asta Funding reported its results for the fiscal year 2011, and financial performance was roughly as expected. The cash flow from the zero basis portfolio’s remains strong and predictable and the company had as of 14 December $108.8M in cash and securities versus a market cap of 122M right now.

What they are doing with the cash is a more mixed story though. The results of the share buyback program have been very disappointing so far: they practically didn’t buy any shares back. On the conference call the CFO indicated that this was because of liquidity and legal constraints, but personally I find that hard to believe. If this doesn’t improve next quarter I’ll probably reduce my position a bit, since the share buy back for $20M was originally one of the attractive points of the stock. At the same time 13M of cash has been moved in securities, and 3.5M has been invested in the litigation funding business, something the company had never been active in previously. While it’s hard to know how this is going to work out I think it’s positive that the company is starting relatively small.

Allen International Holdings (0684.HK)

Allen International released it’s Interim Report 2011/2012 in the beginning of this month, and while sales for were up 5% compared to the previous period net profit was down 43.5% (but still above the 5yr average) due to the following factors:

The increase in raw material costs, double-digit increase in labour wages in Guangdong Province, the PRC and the continuing appreciation of Renminbi were amongst the adverse factors that contributed to the erosion in the gross profit margin. On top of this, the shortage in both electricity and labour supply had further increased the difficulties and challenges in our operations.

Most of these factors would also impact competitors and should not permanently impact the viability of the underlying business. We should never expect great profit margins from a commodity business like this, but there is also no reason to be overly negative, and the company remains cheap with a very strong balance sheet.

Urbana Corporation (URB.TO/URB-A.TO)

The discount between NAV and share price has increased a bit more the past month. The share price for URB-A.TO is currently 0.88 while NAV/share is 1.73. Even though it currently doesn’t look pretty in my portfolio it’s actually positive news. The company is steadily buying back shares, and the bigger the discount the better for remaining share holders. I bought the company less than a month ago and since then the share count has already been reduced from 75.5M to 74.4M (December 16 report date).

Disclosure

Long ASFI, 0684.HK, URB-A.TO

Asta Funding (ASFI)

To start off the blog I thought it was a good idea to do a write-up on one of my favorite idea’s of the moment. The company in question is Asta Funding Inc. (ASFI) and is in the business of buying distressed consumer debt for a few cents on the dollar, and tries to turn a profit by trying to squeeze out a bit more money from it (mostly credit card debt). The business is losing market share since 2006, and seems to be in a terminal decline.

Some key statistics about the company:

Last Price: 8.01
Shares outstanding: 14.64M
Market Cap: 116.27M
Trailing P/E (ttm): 32.30
Price/Book (mrq): 0.69
EV/EBITDA (ttm): 8.91

At first sight the company does not look particularly attractive, and at SumZero you can  find a lengthy argument that explains why the stock is a short. It’s probably a good idea to read that first before continuing, because some healthy scepticism is always good. The latest 10K contains a table that summarizes the financial data of the company for the past five years:

It is certainly true that the company is in a decline. Income is dropping, cash collections are dropping, and the amount of new debt the company is buying is insignificant so it’s almost a certainty that this trend is going to continue. But this is not necessarily a bad thing. The market for distressed consumer debt has become more competitive: the SumZero post notes that delinquency rates have been dropping after the financial crisis, and that other industry participants have been buying riskier portfolios that they didn’t buy before to maintain the loan reinvestment level. Not investing when expected returns are unattractive is a great decision!

So if the company is in a decline, the question is basically: how much cash will it have after all debts are collected? The company is currently trading for 0.69 times book value, and while that is not bad, due to some accounting issues the true value is actually much higher.

  • The company has at the moment 74M in debt, but this debt is non-recourse against the parent company. The company bought a portfolio (The Seneca acquisition/The Portfolio Purchase) for 300M, put in a subsidiary and used 225M bank debt to finance this. The portfolio has at the moment a book value of 80.9M versus a debt of 74M. Worst case the value of the Seneca portfolio is zero, not minus 74M. It does provide a nice free option if the Seneca portfolio produces more than that; at the moment all income from it is used to pay down the debt.
  • The company uses cost-accounting for a large part of their assets. Under the cost recovery method, no income is recognized until the cost of the portfolio has been fully recovered. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In such case, all cash
    collections are recognized as revenue when received.

Mainly due to these accounting issues it is not directly visible that the company has at the moment almost it’s entire market cap in cash, and has assets that will probably generate enough cash over the coming three years to double this.

The Math

In the latest 10-Q form for the period ending June 30 the company reported 105M in cash. The company has currently 122M of consumer receivables on the books, 34M is accounted using the interest method and 88 Million is accounted using the cost recovery method.

The portfolios that are using the interest method are put in this group because the cash flows are predictable. Part of the cash received is used for depreciating the book value of the debt, while another part is recognized as profit. They are assuming that they are able to recover 130-140% of the book value after costs. For example, the last three quarters, the company has depreciated the value of the interest method portfolio from 46M to 34M while recognizing a finance income of 4.1M (for a net free cash flow of 16M). The company provides the following time table for collecting these debts:

So in three years time almost all the debts should have been collected, resulting in roughly 1.3 * 32M = 41.6 M and a profit of 9.6M that, after 35% taxes, is 6.2M.

The 88 Million on the books using the cost recovery method is mostly part of the Seneca portfolio, and all cash flow generated from this portfolio is used to pay down debt. Just 7M of this 88M asset generates cash flow that goes towards ASFI and it shareholders. Given the fact that a lot of debt in the cost basis portfolio generates significant cash flows after they have been written down to zero I would expect that they can probably recover this 7M.

The hardest item to value is the debt that have been written down to zero, but is still producing cash flows. These assets – that have zero book value –  have a face value of 5 billion, and are producing at the moment a very stable cash flow of 8.7 million/quarter. For 900M of face value the company does have legal judgements that allows for wage garnishment and seizure of assets, so this is presumably often money coming from people that will be able to pay down a significant portion of the original debt. The numbers for 2011 and 2010 are as follows:

If the company would be able to maintain these cashflows for 3 more years that would roughly result in 104M in cash that all go towards earnings. In reality the cash flows will start to decline, but they will also continue for much longer than 3 years. On VIC, that contains an excellent write up on ASFI, the author had a phone call with Asta’s CFO who indicated that there is no reason to expect a change in the pattern of cash flows. We do have to account for taxes though since the money from the zero basis portfolio’s goes straight towards income. With a 35% tax rate the 104M would net 67.6M. The company does have a deferred income taxes asset valued at 17.3M and a liability of 4.4M for a net asset of 12.9M that can be used to eliminate some of these taxes.

So if we add all this up we get 105 + 32 + 6.2 + 7 + 67.6 + 12.9 =  231M vs a market cap of 116M now, implying roughly a double in three years time.

Taxes

The company wrote down a big part of their portfolio in 2009. Instead of assuming that they would be able to collect the book value of the debts in the interest accounting bucket in 18-24 months they extended this to 24-39 months. And instead of taking five year to collect 130-140% they now assume they will take seven years. This created a big loss on paper (see reported income for 2009) and a deferred income tax assets worth 17.3M. The IRS has started an audit, presumably related to the impairments in 2008 and 2009. This should have no material effect on the value of the stock. They might be required to move the payment of some taxes forward (and potentially pay some penalties), but in the end they have to pay taxes over the same amount of income.

What will be done with the cash?

With all this cash the biggest question is: what will be done with it? Management destroying shareholder value by overpaying for companies is unfortunately all too common, and management has indicated that they are looking to acquire a company. Management/The Stern Family has significant skin in the game. The Stern family (The CEO is Gary Stern, and Arthur Stern – the founder – is active on the Board) controls more than 26% of outstanding shares. They have been careful not to overpay for distressed debt, so I’m reasonable confident that they are not willing to massively overpay, just so they can continue to play CEO. And with presumably 230M in cash by 2014 they need to do something incredible stupid to destroy so much value when we are starting with a 116M market cap right now.

Another good sign is that the family is willing to lend money to the company and pledge cash and securities owned by the family as collateral. From the latest 10-K:

On December 14, 2009, the Company and its subsidiaries other than Palisades XVI, entered into a revolving credit agreement with Bank Leumi (the “Leumi Credit Agreement”), which permitted maximum principal advances of up to $6 million. This agreement expired on December 31, 2010. The interest rate was a floating rate equal to the Bank Leumi Reference Rate plus 2%, with a floor of 4.5%. The loan was secured by collateral consisting of all of the assets of the Company other than those of Palisades XVI. In addition, other collateral for the loan consisted of a pledge of cash and securities by GMS Family Investors, LLC, an investment company owned by members of the Stern family.

Note: Palisades XVI is the vehicle used for the Seneca portfolio, so this could not be used as collateral

Also very positive: The company has announced a share buyback for 20M, roughly 17% of the stock outstanding at current market prices, and that should add significant share holder value since they are buying it back while it is significantly under priced.

Seneca optionality

The Seneca portfolio is an option that could provide some cash flow if they are able to pay off the 74M of debt that is left, but this is questionable. In the past 9 months they have reduced the debt from 90.4M to 74.2M and at that rate it’s going to take roughly 4 years before the debt is payed down. Since cash flows from bad debts dry up over time it is doubtful if they will ever be able to do that. But an almost free (company does have costs running the portfolio) option is not bad.

Conclusion

At the time of this writing ASFI should have it’s market cap in cash (they reported 105M on June 30, and they have easily generated the missing 11M by now) and with a significant free cash flow in the following years it is hard to imagine a scenario that could result in a permanent loss of capital. The might recover less of the debts if the economy deteriorates and/or management could destroy value with an acquisition. But getting below the current value is going to be pretty hard. At the same time management interests seems to be aligned with share holders, management seems conservative, and the 20M buyback is a good way to spend some of the cash.

One thing that I haven’t noted so far, but actually is pretty relevant is that the company uses mostly third party collection agencies and attorneys, so the cost structure is very flexible.

On a scale from 1 to 10 I give the stock a 9, mainly because the downside is well protected.

More reading

Whopper Investments also presents the long case, and has also a reaction on the SumZero short case.

Disclosure

Author is long ASFI.