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Urbana ($UBAA $URB) - will it ever stop dropping???

January 12, 2012 | About:

Urbana Corp (URB, UBAA) is a Canadian closed ended fund that focuses on investing in exchanges. It’s been written up quite a bit over the past year- by Kerrisdale Capital, Barel Karsan, and pettycash. All of the write ups are pretty good, but I had always held off on investing in Urbana- until now. So why did I change my mind, and why do I think it’s a ridiculous value at today’s prices??? Read on…

The premise of an investment in Urbana is very simple- the company trades for a massive discount to its NAV per share. They report their NAV every week (found here, note that they report in Canadian Dollars, so you have to adjust to American Dollars)- it currently sits at ~$1.69 (using a 1 Canadian Dollar = 0.98 American Dollars exchange rate) versus a current share price of ~$0.92.

Urbana buys back 10% of their stock every year when it trades for this big of a discount. Some value bloggers actually sent them a letter looking for more repurchases, but the company refused, saying they wanted to grow assets to a much larger size and more rapid repurchases would be counter to that intention. I wish the company would buy back shares even quicker, but at this big a discount to NAV, 10% repurchases can create a great deal of value, so I’ll live with it.

However, the reason they want to grow bigger is related to the reason I held off purchasing the shares- management interests run counter to shareholders. Management is paid a fee on a basis of assets under management, which behooves them to collect asset. Shareholders would rather they shrink assets by buying back shares or even liquidating the company for the quick value realization.

So why did I cave and finally purchase shares at these prices??? Urbana has two types of investments in exchanges- publicly traded (~75% of assets) and private. Because the private companies are, of course, private, their valuation is a bit questionable to me. If you take just the investment in publicly traded companies and net them out against all of Urbana’s liabilities, it comes out to over $1.11 per share. In other words, at today’s prices, you get the company at a 20% discount to the value of their public investments with all of their private investments (plus a tax asset) for free. That’s a huge, huge discount.

And there’s a potential catalyst on the horizon. Obviously, the share buybacks are the big one, but their biggest private investment, the Bombay Stock Exchange (15% of assets), is constantly talked about as an IPO candidate. If it did IPO, it could serve as a significant source of liquidity for Urbana or IPO at a stronger valuation than they’re on Urb’s books for. It’s possible they could IPO at a lower valuation, but given the market is currently giving them no value for the investment, I’m fine with that risk.

One last note before I wrap this up (I told you this was a rather simple investment!)- I don’t really have a view one way or the other on their public investments. 70% of their holdings are in CBOE and NYX, which are both mega-caps with plenty of institutional coverage. I generally assume mega-caps are fairly valued unless they’re trading for 50x or 75x earnings or something. NYX looks a bit cheap, CBOE looks fairly to maybe a bit overvalued, but even if they declined a 20% both the stock would still be selling for about the value of their public investments. That’s the power of asset protection.

Overall, URB is, IMO, a perfect addition to a net-net portfolio. That’s why I’ve added it to mine, and I’d add more if the price declined substantially.

Disclosure: Long URB

Rating: 3.9/5 (17 votes)


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