Wednesday, July 6, 2011

Urbana Corp: Management Communication

A lot of managers are unclear in communicating their stock buyback plans. They won't buy back shares, but nor will they tell shareholders that they have no intention of doing so. Shareholders are left holding the bag, wondering if management is being shareholder friendly or just pretending to be so. At the other end of the spectrum, however, are managers that are clear about their buyback intentions; these can generate extraordinary returns for shareholders. Consider Urbana Corp (URB), an investor in securities exchanges around the world.

Urbana has been previously discussed as a potential value investment on this site. At the time, its price tag seemed rather elevated. But since then, it has come down significantly. It is now at the point where once again the stock trades at a significant discount to the company's net assets, which are mostly comprised of publicly-traded exchanges such as the NYSE and CBOE.

Because of the large discount, management has bought back 10% of its shares. The company's cash position isn't large, so to effect the buyback program, management has shown a willingness to go so far as to liquidate net assets to some extent. If it weren't for certain regulatory restrictions on buybacks, it's likely that even more shares would have been repurchased.

Shareholders are not left guessing as to management's intentions going forward, either. As per the company's proxy statement:

"In regard to Urbana's share price, the environment...was...exacerbated by a few major Fund holders...becoming sellers in order to match their own fund redemptions. The resulting discount of Urbana's share price to the underlying asset value represented a significant opportunity for Urbana to profitably buy back and cancel...shares...Urbana's management anticipates continuing this program, to the extent long as a significant discount continues to exist." (emphasis added)

Furthermore, the company's #1 goal for the coming year is to "Narrow the price/asset share discount or use it to redeem additional 'A' shares." This situation is reminiscent of the one we saw with Quest Capital, where management was very clear that as its portfolio converted to cash, it would seek to buy back shares to eliminate its discount to book value. That situation rewarded shareholders with strong returns, and hopefully this one is no different.

The stock exchanges are littered with companies with director authorizations for buybacks that go unutilized, even when said companies trade at massive discounts to liquid assets. This lack of communication does a disservice to shareholders. But when a management team is clear about its intentions and can be seen carrying through on them, shareholders can find themselves in a great position to achieve abnormal returns.

Disclosure: Author has a long position in shares of URB.A


Chris said...

Some reasons why the stock should trade at a discount:

-The majority owner pays itself a 1.5% annual investment management fee.

-What I find are surprisingly large expenses burn through the dividend income the company's investments generate

-Liquidity risk

Anonymous said...

I was quite disappointed with the management disclosure in the latest annual report and MD&A. If you look closely, the Bermuda Stock Exchange private investment is now gone, but no mention of the disposition price. Feels like management is trying to hide something. I understand it's a small investment, but then why bother disclosing the position if later to hide its disposition ? For a shareholder, that makes it difficult ot evaluate management.

Anonymous said...

Hi Saj,

Urbana's holdings seem to be doing nicely. I like the fact that they have significant positions in US financials which should do well over the next few years. Stock price is 57% of NAV. Do you still like this?



Anonymous said...


Just wondering if you can clarify something for me regarding URB. Do you know why the voting shares a tading way above the non-voting shares? I know one has votes but your vote doesnt really mena anything considering Caldwell owns majority of the shares.



Saj Karsan said...

Hi Brian,

I've given up trying to understand such things. At times, the voting shares have also traded for less than the non-voting. One can always come up with reasons to explain why one is cheaper than the other (e.g. votes, liquidity etc), but I just chalk it up to market inefficiency.