Tag Archives: IAM.TO

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

Integrated Asset Management (IAM.TO)

Integrated Asset Management (IAM.TO) is a company that resembles Argo Group in many ways. It’s also a small asset management company, it is a net-net with more cash and cash equivalents than it’s market cap, it is profitable and paying a big dividend (current yield is 8.5%). Some key statistics from Yahoo Finance:

Last Price: CA$0.59
Shares outstanding: 28.31M
Market Cap: 16.70M
Trailing P/E (ttm): 3.27
Price/Book (mrq): 0.86

IAM.TO focuses on alternative investments such as real estate, managed futures and private equity, and services both institutional investors and retail investors. Two weeks ago the company announced that a major client (good for 8% of revenue and 15% of AUM) would terminate his account, so we do have to keep this in mind when looking at the financials. The latest annual report is easily readable and contains graphs with financial data for the past 10 years for key statistics such as AUM, revenues, EPS, cash flow and dividends. Wish this would be standard!

Valuation

The company last reported for the period ending 30 September 2011, and at that date it had no debt, 8.2M in cash and 11.7M in investments in funds managed by the company versus a market cap of 16.7M. It would not be totally fair to value the company based on it’s current assets plus the value of the business itself, since a decent amount of money is used in business activities such as providing seed capital for new funds. The company could probably return most of this cash to share holders, but it would hurt the business to some degree. But when the market values the business at a negative number it’s not that important to be very precise (EV is minus 3M).

Average EPS over the past 10 years have been 0.042 (latest year: 0.15) and average cash flow per share has been 0.128 (latest year 0.14). If you would throw an 8.5x no growth multiplier on those averages you would get a per share business value between 0.357 and 1.088. Add the cash and equivalents (0.70/share) and we get a target share price between 1.06 and 1.79 while the current share price is just 0.59. One reason for the big difference between EPS and cash flow is that the company wrote down a significant amount of goodwill in 2009 related to the acquisition of BluMont Capital (the retail alternative investments business of Integrated Asset Management).

These numbers are a very rough estimation of value, but the low end of the valuation is probably on the pessimistic side. AUM have grown significantly the past 10 years and are – after accounting for the loss of the big client – still higher than the 10 year average. The company also has large unrealized performance fees and tax assets related to the BluMont Capital acquisition. On the other hand: assets management companies might be facing increased pressure to reduce fees, undermining profitability as this column at Bloomberg from Alice Schroeder argues.

Insiders

The majority of the company is owned by insiders. Employees control more than 60% of the outstanding shares, with the CEO controlling 38.3% (most shares are held in a corporation that also has the CFO and a director as share holders). The CIO of the company owns another 17.2%. I would prefer insiders to own a little bit less, but having insiders own too much is better than them owning too little. In the previous year there has been a little bit of insider buying, but nothing significant. The number of common shares outstanding has remained almost constant the past years, but there are 2.57M options outstanding with strikes between 0.70 and CA$1.50.

Conclusion

Mr. Market seems to be very negative towards asset management companies and financial companies in general, and while there are some good reasons to not be overly optimistic (or even neutral) it also seems overly pessimistic to value a company with a long history of profitability below the market value of the cash and securities it owns. It should at least be worth something!

I have been discussing, and buying a decent amount financial companies in the past months and that is potentially becoming a bit problematic. Having a portfolio that is highly concentrated and correlated is asking for trouble. My position in ARGO.L is on the small side though since it hard to buy due to the limited liquidity, so I do have some room to add IAM.TO to the portfolio as well. In general I try to scale my position size in relation to the ranking I give the stock, but portfolio diversification is more important to me so I will keep the combined position size of ARGO.L and IAM.TO in check.

On a scale from 1 to 10 I give the stock a 8.5: the company has a strong balance sheet, is profitable, has a lot of insider ownership and a high dividend yield. I don’t like the expensive acquisition in the past, and the lack of insider buying or share buy backs.

Disclosure

Author is long ARGO.L and IAM.TO.