Author Topic: ASFI - Asta Funding  (Read 10163 times)

writser

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ASFI - Asta Funding
« on: March 27, 2014, 03:38:11 PM »
I am surprised to see that there is no thread for this name yet. It is (or was) part of the portfolio of a couple of respectable value bloggers: Barel Karsan, Wexboy, Alphavulture, Frank Voisin and Whopper investments, to name a few. Also, Francis Chou owns a chunk (link) and it was written up at VIC. All these people did a far better job than I could describing this investment (and I'm quite lazy) so I will refer to them instead for all gritty details. Here is a quick summary for those of you who never heard of ASFI before.

According to their website Asta Funding is a "leading consumer receivable asset management company that specializes in the purchase, management and liquidation of performing and non-performing consumer receivables". That sounds honorable but it isn't: their core business is buying bad credit card debt and then hiring collection agencies to squeeze every last penny from poor people :). They used to be quite good at this. In 2007 they got a bit too excited and bought a $300m portfolio (3x their current market cap) of distressed consumer debt using borrowed money. Probably a savvy trader saw the credit crunch coming and quickly sold this portfolio to the first sucker he could find. The world collapsed several months later and the acquisition almost ruined the company. This portfolio is called "the Seneca portfolio". On a tangent, I wonder who came up with that name.

Flash forward to 2011. Asta funding survived the crisis. They managed to refinance debt for the Seneca portfolio - it is now non-recourse. A big part of their distressed debt portfolios is accounted for using the cost-recovery method. These assets have zero value on the balance sheet but still generate significant amounts of cash. So accounting peculiarities make it hard to see that this is a golden goose with cash on the balance sheet covering their entire market cap and invisible assets generating significant cash flow. On top of that the company announces a buyback program for 20% of outstanding shares. All value bloggers write about this bizarre mispricing and add ASFI to their portfolio.

Flash forward to 2013. The share price has hardly moved. A problem has arisen. Basically management refuses to buy back more shares. They bought back ~2mio shares over the past years but they prefer to try growing the company through acquisitions. In this context, it is important to realize that the CEO is the son of the founder. Their family owns a huge stake and shrinking the company is apparently no option. In the past few years management acquired a wide range of businesses that all have one thing in common: they are controversial. Personal injury financing, divorce settlement funding, structured settlement financing. If you are wounded, dying our in emotional turmoil these guys will turn up at your doorstep. ;) The potential of these segments has yet to be proven.

So where are we now? What I like:

* They managed to get an even better deal on the Seneca portfolio debt (link)
* They've been added and subsequently removed from the Russell 2000. Nobody is interested in this stock anymore. Liquidity is low. Even the value bloggers are now tired of this name (Wexboy trimming)
* Book value per shares is over $13 and growing. Still $90m in cash and liquid investments on a $110m market cap.
* Cash flow from operations > $20m / years. It's a bit complicated, check some of these blogs for more details. Recommended: Alphavulture is still keeping track of the company.
* I actually appreciate that they acquired a selection of hideous businesses. Profitability over popularity.

What I don't like:

* Looks like it is run like a family business, not a public company. Is giving your grandson at 29 a VP position with a $200k salary a good idea?
* Capital allocation: they should be buying back shares hand over fist. If they want to grow the company instead they should not beat around the bush every conference call.
* I think they could improve their disclosure The whole thing doesn't look very transparent anymore with all the joint ventures.

Cliff notes: ASFI is cheap, unloved, management acts questionable but they own a decent stake and will probably not ruin the company twice in a decade.


(These quotes indicate how interested the CEO is in share buybacks; for some reason I appreciate them)

Q2 2013 conference call:
Quote
Gary Stern - Chairman of The Board, Chief Executive Officer and President: Okay, this is Gary. We've -- we bought back quite a bit of stock through a buyback plan that ended, I believe...
Robert J. Michel - Chief Financial Officer, Principal Accounting Officer and Secretary: In March.
Q4 2013 conference call:
Quote
Gary Stern - Chairman of The Board, Chief Executive Officer and President: Okay. As you know, we did buy a significant amount of stock back about a year -- when was that, Bob? A year...
Robert J. Michel - Chief Financial Officer, Principal Accounting Officer and Secretary: March.
« Last Edit: April 03, 2014, 10:09:51 PM by Parsad »
When you are dead, you do not know you are dead. It's only painful and difficult for others. The same applies when you are stupid.


writser

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Re: ASFI - Asta Funding
« Reply #1 on: March 27, 2014, 03:39:58 PM »
That turned out to be a bit longer than expected. So, is anybody still looking at this or has everybody sold already and moved on? Feel free to point out any flaws in my previous post.
When you are dead, you do not know you are dead. It's only painful and difficult for others. The same applies when you are stupid.

pantheman

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Re: ASFI - Asta Funding
« Reply #2 on: April 03, 2014, 06:38:54 PM »
I was in this for a while last year and invested for many of the same reasons you listed above. Unfortunately, even after the adjustment with Bank of Montreal a couple quarters ago on the Great Seneca portfolio I don't see them making a whole lot, if anything really, on the portfolio. Current quarterly run rate on that portfolio is about $2.4m and seems to be declining at close to 10% per quarter. The other issue with that portfolio is it's nearing the end of useful life (management has talked in past calls about these things having 7-8 yrs of useful life as statute of limitations can affect returns). They have a lot of judgements (~$1bil if I recall correctly) which clouds the valuation. If the judgements are that great and given the pickup in the economy in the last 2-3 years and home values rising again I find it odd they're not returning more on their collection efforts. I've wondered if they're sandbagging the collections in order to get out from under the Bank of Montreal but with the revised terms this seems unlikely.

The other businesses they've ventured into actually seemed very intriguing to me and I think they're going into them in a smart way (requiring x% return on their investments before more capital is committed, for example). The real head scratcher for me is management's aversion to stock buybacks. They have repeatedly shied away from calls for buybacks on conference calls even though the return relative to book value is a no brainer. If they are so focused on IRR why not do the easy thing and just buy back the stock? They did authorize a $20m buyback in 2012 that expired in 2013 but only used $7.9m of that.

As to book value I think you really have to take a look at the book value fluctuation in the past 3-5 years. ROE since 2009 has been abysmal (Equity for each of FY09-FY13 in order has been 157.4, 161.9, 173, 168.5, 169.6). All this while they've deviated from their core competency of CC receivables but SG&A still running $5-$7m/yr. I closed out because I started to worry that management could care less about the stock price and I don't really have a grasp of the real risk inherent in the new business lines. Realization of gains/losses on the assumed legal cases takes a good amount of time and while I thought the cases would be annuity like it seems they're looking for only 20% return, at most, while being on the hook for the whole payout if they lose (again I have no idea on likelihood of these cases being winners, though management seems to think they have a good process to weed out the good from bad...time will tell).

Hielko

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Re: ASFI - Asta Funding
« Reply #3 on: April 06, 2014, 03:09:33 AM »
Looking at book value is in the case of ASFI not very meaningful. The seneca portfolio went from having significant positive equity to having negative equity, but in the mean time the value of the assets went from probably zero to probably worth a few million. And there is of course a couple of million missing from equity because of the buybacks.

writser

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Re: ASFI - Asta Funding
« Reply #4 on: April 06, 2014, 06:50:36 AM »
Agreed, looking at book value only is not significant. It's just a pillar that supports the thesis. One share @ $8.40 buys you approximately:

~$7.00 in liquid assets
~$4.50 in structured settlements and personal injury claims
~$1.50 in net consumer receivables

versus < $2.00 in liabilities. The consumer receivables generated over $1.00 in FCF/share over the last few years. So quite some things can go wrong, as long as management is a bit sensible. Which is exactly the problem. It's hard to judge whether the acquisitions will work out and what they will do with the rest of the cash. I'm sceptical on both issues but the market is pricing ASFI as if the bank account has already been emptied.
When you are dead, you do not know you are dead. It's only painful and difficult for others. The same applies when you are stupid.

writser

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Re: ASFI - Asta Funding
« Reply #5 on: April 24, 2014, 10:16:37 AM »
ASFI gets pumped on SA today but nothing is happening: http://seekingalpha.com/article/2156853-asta-funding-who-doesnt-like-free . Not a very good article imho. Huge focus on the numbers but nothing about the #1 risk. Too much analysis, not enough common sense. :)
When you are dead, you do not know you are dead. It's only painful and difficult for others. The same applies when you are stupid.

Bharps

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Re: ASFI - Asta Funding
« Reply #6 on: May 09, 2017, 02:45:05 PM »
Greetings all,

New to the board but have been active on SA for years and probably know a fair amount of folks on here. At any rate, I just started buying a small position in ASFI. It certainly has hair-mgmt and the board effectively control this thing after the Mangrove-driven tender earlier this year, and the son of the chair/ceo runs a SS disability subsidiary that has been loss making and is, to say the least, unproven. That said, the tender drove big accretion in BV, it's probably around $17-18/shr now. If anyone ever played around in Compucredit/Atlanticus (I owned some converts for a few years), it's somewhat similar-mgmt has a huge position, they play in a grab-bag of junk credit. They've done a fair amount of share repurchasing in the past, the largest piece from the tender offer earlier this year. Mangrove's pressure effectively forced them to use up most of their cash to take out shares, something a lot of value types have been advocating for years. After the tender offer, the stock has dropped around ~ $10.50 to ~ $7 now.

Other than that, we have a situation with a low ROE, trading at 40% of book, mgmt highly compensated and a family control the company. What's not to love?

Happy to hear other's experience and thoughts...

Saj

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Re: ASFI - Asta Funding
« Reply #7 on: May 09, 2017, 04:02:04 PM »
Welcome, Bharps.

What are your thoughts on management behaviour? I find it really strange. They have always had a large stake as owners of the corp (relative to their salaries), but they have never behaved like it. I don't get why they care so little about shareholder value, but the evidence over the years has piled up.

And now they actually control the whole thing, whereas before there was at least some threat (that Mangrove eventually exercised) that an outsider could clean things up. As a result, I'm scared to partner up with these guys since they are now free to earn the terrible returns on capital that they do for the rest of time.

Do you disagree with my point of view? I'm happy to reconsider, as at this price returns would be awesome if those in charge actually cared about shareholder value.

writser

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Re: ASFI - Asta Funding
« Reply #8 on: May 10, 2017, 02:43:32 AM »
Management behaviour is not that strange. They use their shares to control the company and use the company as their personal piggybank (nice salaries, jobs for the family, etc.). I'd rather have them maximize their wealth through increasing share value but the Stern family just doesn't seem interested in that. The large tender was nice (*) but they only did it because they were forced to do so by activists.

I agree that based on quantitative metrics ASFI looks very cheap at the moment. Question is, what price would you pay for a mediocre business with bad management? I don't think this is a good buy at 0.7x book and I would probably buy it at 0.2x book. Anywhere in between - difficult.

What keeps me from buying at the moment:

- ROE has been disappointing historically and I expect this to continue. If the discount to book doesn't shrink returns will be mediocre.
- Management is completely entrenched now, no possibilities for activists to do anything. They treat this as their piggybank and nobody can do anything about it. So why would the discount shrink?
- If, for some reason the business starts to do well I think there is a big chance that management will take the company private at a small premium. Again, nobody can do anything about it.

Basically, the only scenario in which you would do very well is if management suddenly decides to look after minority shareholders. I think that is extremely unlikely. Since I have been following this stock management has been mistreating / ignoring minority shareholders and I expect they will continue to do so. I have owned this for several years and it was a big disappointment.

That said, last Friday this was trading at a ~65% discount to TBV and I was close to pulling the trigger. At some point the quantitative metrics trump the bad management. I'm just not sure when ..

(*) Whether a $10.35 tender is nice with TBV around $15 is actually debatable. You could also say it was a huge rip-off but the activists accepted it because they had no other options.
« Last Edit: May 10, 2017, 03:36:57 AM by writser »
When you are dead, you do not know you are dead. It's only painful and difficult for others. The same applies when you are stupid.

Picasso

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Re: ASFI - Asta Funding
« Reply #9 on: February 06, 2018, 06:46:26 AM »
Looks like they finally decided to look after minority shareholders? Maybe?