Wednesday, June 29, 2011

Asta Funding: Safe and Catalyzed

Asta Funding (ASFI) purchases consumer receivables at large discounts to face value, and then tries to collect more on those receivables than it paid for them. Asta was first discussed on this site as a potential value investment about eighteen months ago due to the significant discount to book value at which it traded. Today, it looks much more attractive.

The problem eighteen months ago was that virtually all of the company's assets were in the form of receivables. Despite the company's history of successful receivable purchases and collections, the high unemployment rate and the country's housing situation was making it hard to collect. Asta lost $90 million in 2009; meanwhile, the company's book value was only $157 million! Without knowing how much the company could actually collect of the receivables on its books, investors would be taking a big risk, despite the large discount to book at which the company traded.

Today, the situation is much improved. A significant portion of the company's receivables have been converted to cash. This lowers the investor's risk, as the company's book value is no longer totally based on uncertain receivables. As of the company's latest release, it has a cash balance of over $100 million. In the company's last quarterly release, it had a receivables balance of $133 million and total liabilities of $81 million. This company trades for only $120 million, however.

Furthermore, the company's book value appears understated due to how the company accounts for its receivables portfolio. As a result, the company is "profitable" as it is collecting on receivables which have already been written-off and are therefore not included in the company's book value.

The biggest risk to this company appears to be management's intentions with the large cash balance. Management noted in its latest quarterly filings that "we are actively seeking investments in, or acquisitions of, companies in the financial services industry." The good news for shareholders, however, is that the company's CEO does own more than 10% of the company, so he is probably more concerned with getting a good deal than growing just to increase his importance and salary.

To that end, the company just announced a $20 million buyback program as share prices fell. The company's stock price is 10% lower than it was last year even though the company's risk is substantially lower (due to its cash collections in the last year). For investors who prefer investing when a catalyst is present, this represents an opportunity, as the company may buy back as much as 15% of its shares at current prices.

In Asta, investors are offered a cash-rich company with management ownership that trades at a discount to a conservative book value. If management does go ahead and buy back shares, this could turn out very well for shareholders, with downside protection in the form of cash and receivables.

Disclosure: Author has a long position in shares of ASFI

5 comments:

Taylor said...

Saj,

I clicked on the link and didn't get anything. I'm assuming book value is understated because the company only records the cost of receivables?

Thanks,
Taylor

Saj Karsan said...

Hi Taylor,

I've corrected the link.

Anonymous said...

Hi,

Is this company subject to any of the new banking/lending reform?
Many pay-day loans/tax refund loans etc. companies came under the scrutiny of various regulators lately and in some cases the low prices of those companies were justified by regulatory uncertainty.

After all, what this company is doing is somewhat similar (although not exactly the same) to a pay-day loans.

I understand that there is a nice margin of safety here, but when regulators are involved its very hard for stock prices to appreciate because regulators can give fines and it might erase any margin of safety.

Yaniv

Anonymous said...

Yaniv,

There's very little, if any, similarity between a payday loan business and a debt collections business. Asta Funding was a value investment when it was trading for $3.xx two years ago. It is no longer. Revenue has diminished greatly and even though it would appear they have a large cash balance, it is important to know how that came about. They received a tax refund because of large impairment charges that forced them to turn a certain portfolio back over to the entity in which it originally purchased it from. The tax refund was in excess of $45 Million. Such a refund is a one time occurrence and should not be mistaken as a positive. They had to diminish their value by a few hundred million in order to receive the tax refund therefore, their value has diminished over the years. Management has rarely done anything it said it would do. Currently, they've issued a stock repurchase plan. This isn't the first time they've done that. The problem, however, is that they don't follow through with it. They'll buy a few shares back here and there but I can't recall a time in which they've bought the amount that they've stated was their intentions. There are friends and family members listed on the company payroll - some as "consultants". After the recession when a viable business could get a loan for less than 5% interest, the company decided to take a loan instead from a family owned private entity at the rate of 10% and they took their sweet time paying it back. When shareholders were losing money on their investment, management was charging shareholders 10% finance charges.

Nothing about this investment can be categorized as a value opportunity. Read ALL financials and learn the history of the company. Don't focus on just one year or you'll find yourself in this "value trap".

Anonymous said...

"The good news for shareholders, however, is that the company's CEO does own more than 10% of the company, so he is probably more concerned with getting a good deal than growing just to increase his importance and salary."

That's not always a good thing for shareholders. The CEO & Family own in far greater excess than 10%. Sometimes, as it does in this particular case, it means the CEO is all for himself. Owning more than 10% of a business does not always add up to being a positive for the shareholder.