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Asta Funding Full Year Results - Share Buybacks Creating Big Value
Posted by: whopper investments (IP Logged)
Date: January 23, 2013 07:17AM
One of my largest holdings is Asta Funding (ASFI) (it’s just smaller than JCTCF, which has been on an absolute tear lately), and in fact I’ve been adding shares in the past week. This is actually a bit of a switch for me, as I had started selling a bit of my position when the shares were in the $10.50-ish range a few months ago.
So why am I adding shares at $9.50 after selling at $10.50. After all, that’s not that big a difference (~10%). If I really believe my margin of safety was only 10%, why the heck would I be investing?
The answer is simple.
I don’t think anyone who has ever taken the time to get to know Asta has come to any conclusion except that they were trading below liquidation value. The problem with them is really their related party transactions. Management is paid pretty high salaries, their new JVs certainly have some strange arrangements, and a consulting agreement they entered into with a director is highly suspect.
Plus, management paid a premium to buy a huge block of shares from a dissenting shareholder, there was a poison pill put in place despite management controlling enough shares to easily influence pretty much any transaction, and executive + director pay is astonishingly high.
In other words, the question has never been valuation. The question was who would collect all of the company’s assets- shareholders or insiders?
I think the question is starting to get resolved in shareholder’s favor (for the most part). The reason is simple, and it’s my favorite catalyst to see in undervalued stocks- share buybacks.
In fiscal 2012, Asta spent $16.1m buying back shares. Sure, some of that relates to the strange “premium block” transaction, but the fact remains that 1) that transaction was hugely value accretive and 2) plenty of those transactions were done in the open market. In addition, per their most recent conference call, it looks like Asta has spent another $1.5m or so repurchasing 150-200k shares.
These are huge, huge numbers. It represents ~10% of their market cap and basically all of their operating cash flow for last year.
That simply blows my mind. Consider this- last year, Asta repurchased 10% of their shares. In addition, they invested $20m (or just 15-20% of their market cap) in their Pegasus sub. Despite all of this investment, their cash balance (when you include marketable securities) was basically flat year over year at $105m+, or around 85-90% of their market cap.
All of those repurchases at under book value, plus their strong earnings, pushed book value to just shy of $13 per share. For those of you who have been following for a while, you know that Asta’s book value dramatically understates liquidation value due to its zero basis portfolio, and this was again proven by their strong zero basis revenue generation.
But there’s another positive to stock repurchases. As the family controls a larger and larger percentage of shares (they’re well over 30% at this point), at some point it behooves them to stop taking money out of the “kitty” and just let value accrue to the corporation as a whole. Why? Because taking money from the kitty is taxable at ordinary rates, while leaving it in the corporation lets them defer taxes.
About the only concern I see is in their Seneca portfolio. It’s carrying value is currently $65.4m, versus debt of $61.5m. All of that debt is non-recourse, and the portfolio collections have proven resilient. The low gap between carrying value and debt means there’s no longer much worry of a write off, as I had previously worried. The big concern at this point is the debt for the portfolio is coming due in ~18 months.
Given the strong cash generation here, there’s likely some incremental value to the portfolio, but the question is whether they’ll be able to refinance that debt to realize it. Asta could, of course, pay down the debt with corporate cash, but I’m sure every shareholder would rather Asta just turn the portfolio over and focus on buying back shares at this point.
The other concern is what happens when the repurchase program is fully utilized. I’d hope management continues to repurchase shares as long as they trade for such a huge discount, but it may behoove them to invest the cash in order set up more of these rich related party transactions.
Finally, there’s a risk that management forces through a takeout at way less than the company is worth given their huge control. While it does concern me a bit, at the very least management would have to pay a nice premium to the stock price to justify taking it out, so even though managementmay get a huge discount, shareholders would likely still do well.
Disclosure- long ASFI, JCTCF
Stocks Discussed: ASFI,