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So, bet you thought this was about Trump…and/or his Inauguration?

Nope, sorry…just my little bit of fake news! I meant something much better – who remembers this childhood classic: Top Trumps! To know the game is to love it…though if you don’t, it probably seems impossibly quaint in today’s digital world. I still remember the De Tomasa Pantera was the best card by far in my Supercars deck – what are the chances you’ll remember a detail like that about your latest app in the years/decades ahead?! Anyway, it’s still that time of year…and yeah, I’ve cheated a little. Pretty much everybody’s finished with their Top Tips & Picks for the New Year, so now I’ll swoop in & hog your undivided attention! Well, at least ’til your next tweet…

Regular readers will know what to expect from my Top Trumps for 2017 – yep, I’m sticking with my disclosed holdings. I mean, what could be better?! [Well, except some undisclosed holdings..?! No more teasing, I swear: I’m just about finished with the (very) slow accumulation of positions in half a dozen new stocks, soon I’ll line ’em up & start work on some proper investment write-ups]. Though I should remind you, in my last post I deliberately focused on the negative aspects of my 2016 Losers…hopefully, I offer a more balanced perspective here. Or at the v least, highlight how ridiculously cheap some of these stocks have gotten!? So, let’s crack on:

[NB: i) With the near-liquidation of Alternative Asset Opportunities (TLI:LN) this month, it’s no longer a disclosed holding, ii) I highlight my current portfolio allocation (as of CoB Jan-26th) for each holding, but will use my year-end allocations (which are similar) for 2017 performance reporting purposes, and iii) I include relevant corporate/IR websites & Bloomberg tickers, but avoid posting previous write-ups, in an effort to present each holding afresh – but feel free to reference last year’s portfolio commentaries (here & here), plus it’s easy to search/find original investment write-up(s) on the blog also.]

i) Newmark Security (NWT:LN) (2.4% of current portfolio):

Share Price:   GBP 1.45p

Market Cap:   GBP 6.8 Million

A special situation…which actually obscures an underlying growth story. While these trading updates (here & here) have crucified the share price, Newmark’s electronic division still looks like the real problem here. For almost a decade now, revenue’s unchanged, while divisional margins declined relentlessly – from 20-23%, to a £(0.5) million loss today. Poor return on capital was bad enough, but losses kill any argument for keeping the division. And after 4 years as CEO, shareholders presumably have little confidence Marie-Claire Dwek can still deliver a turnaround – and her hands are now full dealing with the larger asset protection division. Noting Chairman Maurice Dwek always ran a tight ship here, the situation appears untenable – something’s gotta give…

Presuming an eventual sale, a larger competitor could easily wring 10-15%+ margins from this division – achieving a 0.5 Price/Sales multiple (i.e. £3.8 million) seems reasonable. [And noting net assets of £5.1 million, it also looks salvageable in a wind-down/piece-meal sale]. Who knows what the FY-2017 result will be, but let’s assume 50% of said consideration ends up incinerated, in terms of a once-off net loss (in reality, I suspect a working capital reversal will mitigate cash losses).

Such a scenario would imply £6.2 million of cash, close to the current market cap…tagging NWT as a possible target. It also implies a negligible 0.04 Price/Sales multiple for an asset protection division that’s averaged £13.3 million revenue pa in the past 4 years & boasts average (pre-impairment) margins of 22%+ (nearer 14%, inc. un-allocated corporate expense). It also grew revenue 17% pa & 10% pa in the last 5 & 10 years, presenting a ridiculously cheap growth opportunity. [Plus, I believe this growth trajectory confirms management’s assertion a poor FY-2017 result will prove nothing more than a timing issue, in terms of an eventual sales payoff]. As for Newmark’s cash, using it to fund share buybacks & bolt-on acquisitions would also add substantial shareholder value. [It also justifies maintaining the dividend – a 6.9% yield offers compelling support]. Meanwhile, my marked-down position size looks about right…’til we finally see some kind of sensible/decisive capital allocation here from the CEO/board.

ii) Rasmala (RMA:LN) (3.0%):

Share Price:   GBP 110p

Market Cap:   GBP 33 Million   

Rasmala was a ghost in 2016…the business made no discernible progress, nor did the shares. Which is all the more frustrating, noting the oil price soared, the AIM Index clocked a 14%+ return, and even (some) deep-value micro-caps rallied significantly. Longer-term, the legacy private equity portfolio remains unsold, AUM is unchanged for over 3 years now, and after 5 years at the helm CEO Zak Hydari is still nowhere close to delivering a sustainable return on equity. Even successful activism – relinquishment of the banking licence, a £20 million tender offer, a share buyback approval (albeit management hasn’t acted on it since) – has been ignored by investors.

But it’s priced accordingly: Eliminating the equity stake in Diamondcorp (DCP:LN), which looks touch & go here, RMA trades on a 0.35 Price/Book multiple. For a company which operates near break-even & has a relatively low-risk/un-levered/hedged balance sheet, that’s a dirt-cheap valuation. But alas, a valuation which may not change significantly ’til we see a significant corporate event – whether it’s another tender offer (we’d probably need to see management do the buyback first), or some kind of merger/takeover. Though the appearance of Somers Ltd., who have steadily built a 8.1% stake to date, may well prove a potential catalyst. While it’s still one of their smaller holdings, Somers has a history of constructive activism – we can expect them to push for value enhancement/realisation here too.

Opportunities for a deal with another Somers portfolio holding might appear limited (though Bermuda Commercial Bank could perhaps approach Rasmala as a potential balance sheet transaction/expansion), so finding a buyer or initiating a formal sale seems a more likely bet. [And Somers wouldn’t have much trouble attracting support from other disgruntled investors!]. And noting another relationship that’s been developing recently (here & here), Ajman Bank (AJMANBAN:UH) is perhaps a candidate – though in a formal sale, other bidders could pop out of the woodwork (SHUAA Capital (SHUAA:UH), for example?). Like most special situations, earning a decent (annualised) return here will inevitably depend on how long it might take for value to be realised – and so, time is the enemy here…

iii) Zamano (ZMNO:ID, or ZMNO:LN) (3.3%):

Share Price:   EUR 0.055

Market Cap:   EUR 5.5 Million

Unfortunately, with special situation/activist stocks, things can sometimes get (much) worse before they finally get better…as with Zamano, it seems. Since the UK/Payforit trading update – where management basically threw its hands up in the air, aghast – investors have tagged the business itself as (less than) worthless. Which is understandable, but a wee bit overboard… While smaller investors may have been puzzled by the apparent laissez-faire approach here of large stake-holders- who were maybe focused more on an eventual exit, rather than the day-to-day vagaries of the share price – I think that’s clearly no longer the case. While it should have accompanied the original trading update, in the end (albeit, two months later) management was forced to deliver an actual restructuring plan.

Annualised cost savings of almost 0.4 million were announced, with more to come, to ‘allow the Company to continue to operate profitably into the future…whilst also protecting the Company’s existing cash position & shareholder value’. Crucially, all M&A discussion/activity has ceased, with the focus ‘on maximising shareholder value whilst continuing to explore options for further value creation’. Presuming both, Zamano now trades on a 0.75 Price/Cash multiple (vs. €7.3 million net cash as of end-Nov), and a substantial portion of this cash should now be available (logically, with acquisitions off the table) for a return of capital.

But let’s not write off the ex-cash value here – after all, ZMNO’s survived plenty of industry changes & setbacks for nigh on 20 years now, plus it also managed to generate €2.5-3.0 million EBITDA pa for the last 4 years. Which suggests it can rebuild a profitable business again…except that would take time, plus a full management bench. A bird in the hand may now be more compelling – in fact, hopes for a sale could explain the radio silence re a new CEO. [Even if the company’s intangible assets were sold off piece-meal, and/or it was touted as a potential listed vehicle for a business wishing to IPO, I suspect significant value could still be realised in terms of the current market cap]. All options to ‘explore’…but to actually realise value here, investors need some timely decisions & implementation from the board. And while it’s a small stake, Farringdon Capital must be frustrated with a significant mark-down already on its new 9.0% stake (purchased from Pageant Holdings, and with little chance to exit unless they find another deep-value block buyer at an even worse price) – we can hope they provide fresh support/activism here.

iv) Donegal Investment Group (DCP:ID) (4.2%):

Share Price:   EUR 5.05

Market Cap:   EUR 49 Million

Yup, Donegal’s yet another special situation (a classic sum-of-the-parts), but at least there’s a real game plan here. Last July, I estimated a 6-12 month timeline for selling An Grianan, which looks about right still. Arguably, Brexit’s a plus in terms of attracting potential UK buyers – wouldn’t surprise me if DCP could rustle up a bunch of passports for an eventual buyer & family! Failing that, a local sale’s always a fall-back – any Irish farmer worth his salt wouldn’t hesitate to sell his family into slavery if it meant he could buy more land…

As for realising Donegal’s 30% stake in Monaghan Middlebrook Mushrooms, I conservatively estimated it would take 12-24 months. Hopefully, the legal process finally grinds to a halt in the next few months, but we should also allow for the risk of the settlement itself (i.e. purchase of the stake by MMM/Wilson family) dragging on. Fortunately, this final stage may present asymmetric risk/reward – I suspect the judge will have little sympathy for any argument undermining the previous €26 million valuation, while there’s a strong case for a much higher valuation. [Esp. if the Fyffes (FFY:ID) mushroom acquisitions last year (here & here), at an average 7.8 times EBITDA, can now be referenced as the most relevant comps]. Notably, DCP carries MMM on its books at €24 million, but highlights a commissioned valuation report which values the stake at an amount significantly higher than its current carrying value’.

Meanwhile, a 0.88 Price/Book multiple (based on a stated €5.76 NAV) would otherwise look reasonable, in light of an average 7% RoE & an unchanged NAV over the last four years. [If current support around €5.10 actually breaks, we may even see €4.50-4.65 temporarily]. But any sale will be substantial vs. Donegal’s overall value – in fact, I’m optimistic proceeds from both transactions will exceed the current market cap. And we know this will trigger a value-event, as the Board is actively considering, subject to the requirements of the Group’s businesses, a return of capital to its shareholders’. And since I estimate DCP’s intrinsic value to be well in excess of the current NAV/share price, a tender offer/share redemption is an obvious way to enhance shareholder value here. Plus we can certainly hope the CEO/board are aligned with this perspective, noting they’re one of the few Irish management teams whose aggregate personal shareholdings are a multiple of total compensation!

v) Fortress Investment Group (FIG:US) (4.9%):

Share Price:   USD 5.10

Market Cap:   USD 2,012 Million

A decade later & investors still hate Fortress… Mostly because it IPOed at $18.50 & immediately popped to $35 per share – a crazy valuation & an obvious candidate for collapse in the financial crisis. By the end of 2008, almost inevitably, the shares traded sub-$1.00! No wonder investors still avoid it like the plague, or simply hang on bitterly nursing huge losses…despite the fact it’s a six-bagger since the crisis. [Ignoring the bribery scandal, OZM:US is much the same story]. The sector itself also presented a major headwind, with most private equity/alternative asset managers in a slump for the past 2-4 years, with investors (wrongly) anticipating an abrupt end to a relentless but fearful bull market. Of course, many doubt the prospects of the industry itself, but I’d strongly disagree…while hedge funds have struggled, I believe private equity’s ideally situated. If we turn out to be mired in a low-growth low-return world (like Japan), private equity’s far more qualified to thrive than 95% of listed companies (who usually measure success simply in terms of top-line growth). And if not…then everybody’s happy anyway! [Well, except for anti-Trump protestors…] And frankly, the pension funds don’t have a choice – they have to believe in private equity regardless, if they ever hope to fund their plans. 

Fortunately, investors have come to their senses in the past year, with the sector bottoming out & now beginning to break higher. We see the same pattern emerging with FIG – and fundamentally, it looks well situated here, with a particular focus on secular investment themes & opportunities, whilst the Logan Circle fixed income business serves as a potential ‘hedge’. [Plus their focus on infrastructure is intriguing…surely Trump’s the President who might finally kick-start the notion of Public-Private Partnership in the US?]

Fortress now has $2.75 net cash/investments per share, plus another $3.02 per share in unrecognised gross embedded incentive income – so even with a bit of tax leakage, you essentially get the future growth & earnings of a $70 billion asset management business for free..!? A business that’s grown AUM almost 60% in the last 5 years, and earns a consistent 36% operating margin (i.e. pre-tax DE) on $1 billion+ revenue (i.e. 1.4% in management & incentive fees). Taking a similar approach to valuation as I did here originally, FIG’s easily worth double today’s share price. And while you wait for other investors to fall in love again, you enjoy a 7.1% dividend yield (9.2%, inc. the special dividend), regular share buybacks & tender offers, plus an ongoing commitment to release balance sheet capital…all courtesy of a highly motivated management team (insider ownership’s now 45%!).

vi) Saga Furs (SAGCV:FH) (4.9%):

Share Price:   EUR 17.35

Market Cap:   EUR 62 Million

At first glance, Saga Furs doesn’t look so appealing…auction sales & turnover have fallen relentlessly in the last three years, operating margins have gone negative, yet it still trades on a 1.45 Price/Sales multiple. Where’s the growth, where’s the value?! But we’ve seen this scenario before – while Saga’s clearly subject to the volatility of both production and retail cycles, it shares an effective duopoly with Kopenhagen Fur, as de facto toll collectors (i.e. auctioneers) to the global fur trade. So despite the price volatility, pelt volumes have continued to grow (with no signs of abatement in consumer demand) – I remain convinced Saga’s ultimately a cyclical growth stock, and in time we’ll see a fresh peak in sales & turnover again (as in 2013 & 2006).

While auction sales have fallen over 60% in the last 3 years, due to collapsing prices, Saga’s unique business model has mitigated some of the damage. I’ve previously highlighted its counter-cyclical fee model – commissions (as a % of auction sales) increased from 7.9% in the last peak year (2013) to 12.8% last year, limiting the turnover decline to less than 40% (still very challenging). Interest income on receivables, an integral part of the model, also increased. In the end, FY-2016 still delivered the worst operating loss in a decade, but the adjusted operating margin (i.e. inc. interest income) was just (2.2)% – that’s a sub(1) million loss – pretty immaterial in the scheme of things…esp. when compared to the potential consequences of such a revenue decline in a less robust business!? And inevitably, in response to such low pelt prices, production declines, inventories dwindle, and industry/consumer demand can be expected to increase…in fact, we already saw a healthy bounce in auction prices/demand in December.

Noting adjusted operating margins have ranged from a peak 39%+ to (2.2)% in the past decade, and averaged almost 23% over the same period, 1.45 Price/Sales & 0.7 Price/Book are actually bargain multiples for what can reasonably be described as the Sotheby’s (BID:US) of the fur trade. And this discount to intrinsic value’s only one part of the equation – we can also hope to enjoy a substantial uplift in pelt volumes, auction sales & turnover over the next few years.

vii) VinaCapital Vietnam Opportunity Fund (VOF:LN) (5.1%):

Share Price:   GBP 271p

Market Cap:   GBP 560 Million     (USD 705 Million)

Everything aligned for VOF in 2016 to deliver a blistering +70% return (in sterling terms): Its substantial capital markets (i.e. non/un-listed) portfolio allocation was a primary driver of a return that was nearly double that of the VN-Index, its NAV discount closed significantly, plus it enjoyed a dramatic boost from sterling’s post-Brexit depreciation (VOF shares are now listed in GBP). The portfolio out-performance is particularly gratifying, as I’d previously highlighted VOF’s more diversified portfolio as a better long-term bet (vs. its peer closed-end funds/ETFs, which focus on listed equities), in what’s still obviously a frontier market. [See blog comments here, for a comparison with the VanEck Vectors Vietnam ETF (VNM:US)…which, extraordinarily, managed to lose money for its shareholders last year!?]

The underlying VN-Index return is also a reminder there has been little sign of over-heating in the market, which leads me to believe there’s plenty more gas in the tank here. 2017 GDP growth’s expected to surpass the current 6.2% rate, retail sales are humming along at +10.2% yoy, inflation remains sub-5%, the USD/VND remains stable, the banks & the property market appear to be heading in the right direction again, and 10-15% EPS growth is expected…yet Vietnam continues to trade at a 20-30% P/E discount to regional averages. As for VOF itself, it trades on a 0.81 Price/Book multiple, despite an aggressive & ongoing share buyback programme – I see plenty of gains ahead in terms of NAV growth & discount compression, as Vietnam continues to leverage & benefit from its labour/cost export advantage, and (just as importantly) its burgeoning domestic consumer economy.

viii) Tetragon Financial Group (TFG:NA, or TFG:LN) (5.5%):

Share Price:   USD 12.55

Market Cap:   USD 1,172 Million

Looking at the longer-term chart, one might presume TFG’s NAV discount has been closing steadily…but in reality, the shares have mostly been tracking NAV higher. After the recent $50 million tender offer, I estimate NAV’s increased to $20.12 per share (all else being equal)…leaving Tetragon trading on a 38% discount to NAV. And stripping out net cash, it actually trades on an ex-cash 50% discount to the value of its investments & asset management platform. Noting TFG’s balance sheet strength, its record of compounding NAV by 15% pa in the last 5 years (& 12% pa since the original 2007 IPO), a generous & progressive dividend policy (which now offers a 5.3% dividend yield), and a history of tender offers & buybacks ($250 million+ in the last 3 years), this valuation makes little sense.

Two main objections are generally cited: The first being Tetragon’s portfolio, which is supposedly chock-full of CLO equity…whereas in reality, CLO equity now amounts to just 24% of NAV, a ratio that continues to fall. The second is management itself – certainly well deserved, based on past history – but TFG now has 24% insider ownership, and management has actually demonstrated consistent alignment with shareholders in the past few years. Quite obviously, growing the asset management business & increasing the share price/NAV has become a far more lucrative proposition now than attempting to gouge shareholders.

Fortunately, technicals confirm this: After trading a tight $9.50-11.60 range for most of the last 4 years, the shares broke decisively higher in December – I wouldn’t be surprised to see a $14 price handle soon (& further progress in due course). Management is also placing increasing emphasis on the AUM growth & earnings of TFG’s alternative asset management platform, currently focused mainly on credit, real estate & infrastructure. AUM has grown (primarily organically) an astonishing 33% pa in the last 4 years, to reach almost $19 billion now – despite the growth focus, it already boasts 30-40% EBITDA margins. Management also dual-listed the shares in London, expanded research coverage, invested more time in dial-in & road-show presentations, and has now begun wooing the business press – the ultimate intention here is to IPO the alternative asset management business.

But I’m also conscious another of my holdings here – Fortress Investment Group (FIG:US), also a cash-rich & under-valued alternative asset manager – is actually TFG’s largest shareholder (controlling a 14-15% stake). I’d actually rate the chances of a merger/takeover here just as likely as an IPO, noting FIG’s long & extensive experience with building investment platforms & spinning out permanent capital vehicles…

OK, fin…

All comments & questions are most welcome in the comments below (or by email) – the best of luck to all my readers in 2017!

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