Argo Group Ltd. (ARGO:LN) has been a consistent Top 7 holding for me since launching the blog last year. It currently represents 4.9% of my portfolio.
It was among the first handful of stocks I wrote up late last year (here & here). I also included it in my Baker’s Dozen for 2012. I followed up with another detailed write-up in May-12. [btw An asset manager series later that month may add useful context: Parts I, II, III, culminating in a Fortress Investment Group (FIG:US) write-up]. I then briefly revisited Argo in Oct-12 as part of my catalyst series.
I was pleased to note recently my Argo write-ups have actually proved the most popular with readers. Which certainly isn’t reflected in the performance of the share price: ARGO is actually down 20% YTD! Considering the UK market’s progress this year, and based on reader/investor feedback, it’s reasonable to suggest some/all of this price decline might have been avoided…
This compelled me to write to Argo’s management a month ago with a number of recommendations to enhance shareholder value, improve investor relations & disclosure, and to increase Assets under Management. I’m pleased to see the letter would appear to have reminded new/existing investors of Argo’s far higher intrinsic value, and its potential – the share price has subsequently rallied +15%. It also garnered some v useful shareholder feedback & support, which prompted me to send this follow-up letter to Argo last week:
‘December 12, 2012
FAO: Kyriakos Rialas, CEO
Andreas Rialas, CIO
Cc: Michael Kloter, Chairman
33-37 Athol Street
Isle of Man
Dear Kyriakos & Andreas,
I’ve opted to address this letter to you both, as directors & the largest shareholders of Argo. Again, thanks to Kyriakos for his previous reply – I’m pleased to hear my ‘observations…will [be] take[n] into account’. Please note I am writing this letter on behalf of myself, Guy Thomas, and & a number of other shareholders. We currently represent an aggregate 5% shareholding in Argo.
I look forward to your careful consideration of my other recommendations. However, based on feedback to date, there is a widespread & more urgent focus among shareholders on a return of capital – ideally, via my Share Buyback/Tender recommendation. The recent 15% rally in the share price (since my letter) is welcome, but doesn’t mitigate the fact ARGO is still down 20% YTD. It also doesn’t address shareholders’ increasing frustration with the company’s substantial undervaluation.
The current 11.625p share price is a 44% discount to 20.7p of net cash/investments per share, and a massive 63% discount to my latest 31.1p estimate of intrinsic value per share. Argo’s $22.5 million of net cash/investments represents a compelling opportunity to:
- Commit to a minimum return of $12.5 mio to shareholders (approx. equal to Argo’s current market capitalization), within a reasonable time-scale.
- Initiate a tender offer to retire (at least) 1/3 of Argo’s outstanding shares, priced at 17.6p (a 15% discount to current net cash/investments per share). This would cost just $6.4 mio, about half the total commitment. It would also enhance net cash/investments per (remaining) share to 22.2p, and my estimated intrinsic value to 37.8p per share.
- Determine the most efficient return of the balance of the commitment to shareholders – via regular share buybacks, a return of capital, or perhaps a special dividend. Obviously, share buybacks at a continued discount to NAV/intrinsic value would further enhance those values.
- Ensure adequate liquidity (of $10.0 mio) for the continued success of Argo’s business operations & seeding of its funds.
- Allow shareholders to realize the company’s current market capitalization, while continuing to participate in Argo’s long term success.
Considering the current $302 mio in Assets under Management, this new level of liquidity would remain on a comparable basis to many other listed managers. In my experience, buying & selling funds, the importance of seeding in fund-raising is sometimes over-stated. There are alternatives that might also be employed to reduce/replace the need for seeding. Of course, such an exercise in value realization & enhancement for Argo’s shareholders would also be a terrific selling point with clients.
I have over two decades of experience in investing, trading & sales, asset management, and corporate treasury. Guy’s breadth of experience clearly speaks for itself. I believe we can offer a valuable contribution, both from a business & a shareholder perspective. We look forward to your active engagement regarding this proposal. We are both available by email (firstname.lastname@example.org) and by phone to discuss further, at your convenience.
I would appreciate your reply to confirm receipt of this letter & when you expect to respond properly. Please note I intend to publish this letter on the Wexboy blog in due course.
If you’re a private investor/adviser/fund manager with an (in)direct shareholding in ARGO (large or small), and are in broad agreement with this proposal (and/or my prior recommendations), I’d like to hear from you.
Please comment below and/or email me at email@example.com