AAB.TO - Aberdeen International

[sswan11]

Since I'm only a Canadian wannabe, I thought I'd solicit feedback about this financial co I read about on Tilson's Value Investing Letter, written by Tim Eriksen:

 

Aberdeen International

 

A second idea that we find attractive is Aberdeen International (AAB.TO), a global investment and merchant banking company listed in Toronto. Aberdeen seeks to acquire significant equity participation in pre-IPO and/or early stage public resource companies with undeveloped or undervalued high quality resources. The company is primarily gold focused but also has coal, strategic metals, oil and gas, and potash holdings as well. Aberdeen’s goal is to optimize return in a two year time frame.

 

Aberdeen trades at approximately 85 cents per share, which is about 55% of book value (63% fully diluted). It has a market cap of $75 million and pays a dividend of two cents per year, for a yield of 2.35%. Book value consists of public investments (40%), private investments (20%), two gold royalties (20%), loans (10%), and cash (8%).

 

What is particularly attractive at the moment is that management is aware of the discount and is working to eliminate it. They are considering establishing new funds at net asset value in order to be paid as an asset manager, transitioning into the fund management business, and/or selling their gold royalty assets. In addition, Aberdeen owns some performance warrants in recently IPO’d companies that are expected to vest later this year. The warrants are carried on the books at a zero value, but have a current value, if vested, of $14 million, or about 10 cents per share after taxes and other fees.

 

We see no reason for the stock to trade at a 40% discount to NAV, and think it can trade at or near par similar to competitors Sprott Resources and Pinetree Capital. We also think it is likely that the NAV can continue to rise this year as Aberdeen brings a few more of the private companies it has invested in to market, and the aforementioned performance warrants vest.

[jberkshire01]

We talked a little about Aberdeen in our Q4 letter (although our estimate for the hit to NAV after dilution at 0.30 was too high - it should have been more like 0.21 when we wrote the letter): http://www.scribd.com/doc/47322038/Chanticleer-Q4-2010-Letter-Edited-for-Public-Viewing

 

-JK

[Baoxiaodao]

Since I'm only a Canadian wannabe, I thought I'd solicit feedback about this financial co I read about on Tilson's Value Investing Letter, written by Tim Eriksen:

 

Aberdeen International

 

A second idea that we find attractive is Aberdeen International (AAB.TO), a global investment and merchant banking company listed in Toronto. Aberdeen seeks to acquire significant equity participation in pre-IPO and/or early stage public resource companies with undeveloped or undervalued high quality resources. The company is primarily gold focused but also has coal, strategic metals, oil and gas, and potash holdings as well. Aberdeen’s goal is to optimize return in a two year time frame.

 

Aberdeen trades at approximately 85 cents per share, which is about 55% of book value (63% fully diluted). It has a market cap of $75 million and pays a dividend of two cents per year, for a yield of 2.35%. Book value consists of public investments (40%), private investments (20%), two gold royalties (20%), loans (10%), and cash (8%).

 

What is particularly attractive at the moment is that management is aware of the discount and is working to eliminate it. They are considering establishing new funds at net asset value in order to be paid as an asset manager, transitioning into the fund management business, and/or selling their gold royalty assets. In addition, Aberdeen owns some performance warrants in recently IPO’d companies that are expected to vest later this year. The warrants are carried on the books at a zero value, but have a current value, if vested, of $14 million, or about 10 cents per share after taxes and other fees.

 

We see no reason for the stock to trade at a 40% discount to NAV, and think it can trade at or near par similar to competitors Sprott Resources and Pinetree Capital. We also think it is likely that the NAV can continue to rise this year as Aberdeen brings a few more of the private companies it has invested in to market, and the aforementioned performance warrants vest.

 

One thing I can confirm is that you are in good league if you own this one. Some sharp investors(not Sprott) like this very much, even at current price.

[Guest bengrahamofthenorth]

Somewhat similar to Urbana (urb.a.to)

 

30%+ discount, massive buybacks. Majority of assets are publically traded.

 

Downside, multiple voting shares, low levels of debt being used to fund the buyback though. poor investment track record.

 

The company should liquidate its holdings but we all know that isn't going to happen.

 

Disclosure: long urb.a

 

write ups on hardcore value and barel karsan.

 

http://www.hardcorevalue.com/2011/03/urbana-still-cheap-doing-right-thing.html

 

http://www.barelkarsan.com/2011/07/urbana-corp-management-communication.html

 

 

[Tim Eriksen]

In Aberdeen's latest presentation it lists major shareholders:

Management & Directors 17%

Institutional Investors 13% (list includes US Global, Freestone, TD, Luxor, Sprott, and Dimensional Fund).

 

I don't think Sprott was listed in the previous presentation.

[Baoxiaodao]

Somewhat similar to Urbana (urb.a.to)

 

30%+ discount, massive buybacks. Majority of assets are publically traded.

 

Downside, multiple voting shares, low levels of debt being used to fund the buyback though. poor investment track record.

 

The company should liquidate its holdings but we all know that isn't going to happen.

 

Disclosure: long urb.a

 

write ups on hardcore value and barel karsan.

 

http://www.hardcorevalue.com/2011/03/urbana-still-cheap-doing-right-thing.html

 

http://www.barelkarsan.com/2011/07/urbana-corp-management-communication.html

 

 

 

I know Urbana for a long time and I only bought a small position and sold out very soon after that. It is true there is a 30% discout to NAV. However, I really doubt this gap can be filled anytime soon. Until today, I am still not very sure how the exchange business will evolve over time. Will the trading still be dominated by exchanges like NYSE, CME and others? With the innovation in this area, I can imagine the intrinsic value of those once-excellent businesses go down a little bit every year. The use of electronic trading obviously increased productivity for those incumbents, but when trading is no longer bound to physical locations, it is easier for competitors to catch on. If NAV does not go up fast enough, how can the discount be eliminated since it is essentially a closed-end fund?

 

Another issue is that Urbana's management is very ill-incentivized. Just look at the issue of equity in 2009 I think. It seems to me the only thing matters to them is the size of the pool. AAB has a much better record. Although AAB repriced the options(which I resent), shareholders did received a major comeback. Was it not for the warrants, AAB's share price will be higher today.

[Baoxiaodao]

In Aberdeen's latest presentation it lists major shareholders:

Management & Directors 17%

Institutional Investors 13% (list includes US Global, Freestone, TD, Luxor, Sprott, and Dimensional Fund).

 

I don't think Sprott was listed in the previous presentation.

 

Sprott bought AAB sponsored gold miners long time ago and did very well. Maybe it is until recently did he think AAB is a better value.

[moore_capital54]

Aberdeen is basically controlled by Stan Bharti.

[SharperDingaan]

 

You might want to re-think the MOS

 

Imagine you own a house, valued at 100K, & you live in a community where no debt is permitted. The house is valued at only 100K - because the buyer has to either have the cash saved, or sell something else to raise the cash. He cannot borrow. Consequently there are few houses.

 

A friendly banker steps in & lends up to 50% of the house value. The value of each house immediatly increases to 200K (100/(1-.5)). The limited housing stock starts to trade, speculators start to pay > 200K to 'get into the market' by building new housing stock.

 

The market looks liquid. New buyers (demand) want the new houses (supply), there is activity, & the price doesn't fall - but almost all the activity is in the new build. Our banker gets confident & lends up to 80% - increasing house prices to 500K (100/(1-.2)) 8). Our old house now trades for 5x what it was worth, & 4 of every 5 houses are new builds that would not exist without the banker & the speculator.

 

Prices fall 25%. The banker triggers foreclosures, the speculators lose their shirts, ultimately both the banker & speculator go bankrupt, & our house goes back to its long-term cash value of 100K. Avertable on the national scale by bail-out (QE1, QE2, etc) - but not in the mining business.

 

For ABB to grow their business they need new funds, ability to sell the 'get into the market' mantra (new capital raises), & exit strategy proceeds. To exit their investments they need a FLOW of IPO's at HIGH prices. Flow depends on liquidity (lending, ability to raise cash), Price depends on increasing demand for the commodity - ie: gold at $2000/oz tomorrow, vs $1000/oz today. Different names - but the housing market.

 

They are an illiquid holding coy (try dumping volume), & the magnitude of hold coy discounts is well documented. Hence if you plan to eliminate the discount, you must be planing to trade at a material premium to your true 'market' value. Most research cites 20-40% discounts.

 

AAB may be a good investment, but its MOS is earned.

 

SD 

 

 

[Baoxiaodao]

 

You might want to re-think the MOS

 

Imagine you own a house, valued at 100K, & you live in a community where no debt is permitted. The house is valued at only 100K - because the buyer has to either have the cash saved, or sell something else to raise the cash. He cannot borrow. Consequently there are few houses.

 

A friendly banker steps in & lends up to 50% of the house value. The value of each house immediatly increases to 200K (100/(1-.5)). The limited housing stock starts to trade, speculators start to pay > 200K to 'get into the market' by building new housing stock.

 

The market looks liquid. New buyers (demand) want the new houses (supply), there is activity, & the price doesn't fall - but almost all the activity is in the new build. Our banker gets confident & lends up to 80% - increasing house prices to 500K (100/(1-.2)) 8). Our old house now trades for 5x what it was worth, & 4 of every 5 houses are new builds that would not exist without the banker & the speculator.

 

Prices fall 25%. The banker triggers foreclosures, the speculators lose their shirts, ultimately both the banker & speculator go bankrupt, & our house goes back to its long-term cash value of 100K. Avertable on the national scale by bail-out (QE1, QE2, etc) - but not in the mining business.

 

For ABB to grow their business they need new funds, ability to sell the 'get into the market' mantra (new capital raises), & exit strategy proceeds. To exit their investments they need a FLOW of IPO's at HIGH prices. Flow depends on liquidity (lending, ability to raise cash), Price depends on increasing demand for the commodity - ie: gold at $2000/oz tomorrow, vs $1000/oz today. Different names - but the housing market.

 

They are an illiquid holding coy (try dumping volume), & the magnitude of hold coy discounts is well documented. Hence if you plan to eliminate the discount, you must be planing to trade at a material premium to your true 'market' value. Most research cites 20-40% discounts.

 

AAB may be a good investment, but its MOS is earned.

 

SD 

 

 

 

SD, you made your point although I could not follow all you said. As we saw in the crisis, the NAV essentially evaporated. So it definitely need at least a neutral market for AAB's model to work.

 

However, I kind of disagree you on some of your comments, let me try to make my points.

 

"For AAB to grow their business they need new funds"

 

AAB is not a REIT or BDC, so technically, it does not need to constantly raise money to support it growth. I am not an expert on AAB, but as far as I remember(only my memory), AAB's NAV went up around 300%-400% without issuing new equity over the last few years. Of course it does not mean AAB will not need it in the future, but management has done an honorable thing so far to defend shareholder's interest, as well as theirs. EDV and URB are similar companies, and they raised capital at the rock bottom price.

 

"To exit their investments they need a FLOW of IPO's at HIGH prices."

 

SD, I am not sure if you read through AAB's documents available throughout the years. I want to point three things here. First, AAB make investments only at the very early stage. It is very true that there are losers, but a few winners will more than make up the losses. So far, Bharti has proved he can actually add value by identifying early stage opportunities, which means a very low entry price. Second, in junior mining business, it is true that in good times, it is way easier to make an IPO. However, AAB does not really need a FLOW of IPO's at HIGH prices. And an IPO is only one of the ways for AAB to create value. I suggest you read about AAB's early portfolio to see how its portfolio companies worked in the past. Finally, I think you are confusing AAB with some other companies which focused on IPOs. Again, I recommend reading AAB's annual reports and other documents to check its track record.

 

"They are an illiquid holding coy (try dumping volume), & the magnitude of hold coy discounts is well documented."

 

SD, you sound very suspicious about its business model and even today I am still wondering if I really understand those stuff they talk about, and therefore a very small position. However, as investors, it is more important for us to look at historical performance. Did you ever calculate IRR of the gold royalty investment made a few years ago? This part of value does not even include in the NAV. And it is probably 0.4 per share. As like other investment companies, over time when they demonstrated they can earn a superior return relative to the market, it is only natural that it trades at a premium. So it is hard to say AAB 'should' or 'should not' trade at a discount, because it is the performance of the portfolio that will decide. EDV used to trade at 40% discout to NAV a few years ago. But when they delivered 50%+ return for a few years, the shares went on trading at a premium.

 

 

 

SD, with all due respect, your negative opinion probably result from your past experience with those investment companies. However, to make a conclusion on a specific company, I think we need to do a thorough work before we do so. A wonderful business sometimes is born in a lousy industry. If we hold a certain bias to an industry, we will probably miss a lot of opportunities.

 

And what is a MOS?

[netnet]

I assume that SD means Margin of Safety.

 

I have to disagree with his analysis of AAB's margin of safety.  Not to get too deep into the weeds of philosophy, it seems that he is implying that in order for a security that is selling at a discount to NAV  to have a margin of safety, it must be that that security has a reasonable chance at being valued at par,  but I would have to disagree.  The margin of safety of a discounted security that represents in effect a bond whose principal is growing, i.e. a growing company, does not only rest with possibility that the discount will closed.  Rather the safety also rests with the growth of the company, since the discount gives you a multiplier effect.  (A 10% growth of a security that is sold at half price is really growing at 20%!)  The metaphor has been that in the long run the market is a weighing machine, but the market does not have to weigh the NAV at par.  To make the choice clear, would you rather hold the securities that AAB has at market value or via AAB with a 45% discount, even if that discount were never to close to say 25%?

 

SD you are also implying with the housing market analogy that the company is dependent on rising commodity prices.  To be sure rising prices are a considerable tail wind but they seem to be able to make money in stable markets.  If you think that commodity prices are going to crash, then this is surely not the place to be.  The sector they are in is hot and they are selling at a discount.  They do merchant banking, which generate fee income and warrants, and they have the royalties.  So they earned money in 2009 during market disruptions. (Even more important, they had no cash flow problems during the troubles.)

 

(Now that said, I prefer ALS.TO in the resource sector.)

 

Also, it is interesting to note that the company now does not include the value of its royalties in its intrinsic calculation.  It used to value the royalty, does anyone know why they stopped?

[Baoxiaodao]

I assume that SD means Margin of Safety.

 

I have to disagree with his analysis of AAB's margin of safety.  Not to get too deep into the weeds of philosophy, it seems that he is implying that in order for a security that is selling at a discount to NAV  to have a margin of safety, it must be that that security has a reasonable chance at being valued at par,  but I would have to disagree.  The margin of safety of a discounted security that represents in effect a bond whose principal is growing, i.e. a growing company, does not only rest with possibility that the discount will closed.  Rather the safety also rests with the growth of the company, since the discount gives you a multiplier effect.  (A 10% growth of a security that is sold at half price is really growing at 20%!)  The metaphor has been that in the long run the market is a weighing machine, but the market does not have to weigh the NAV at par.  To make the choice clear, would you rather hold the securities that AAB has at market value or via AAB with a 45% discount, even if that discount were never to close to say 25%?

 

SD you are also implying with the housing market analogy that the company is dependent on rising commodity prices.  To be sure rising prices are a considerable tail wind but they seem to be able to make money in stable markets.  If you think that commodity prices are going to crash, then this is surely not the place to be.  The sector they are in is hot and they are selling at a discount.  They do merchant banking, which generate fee income and warrants, and they have the royalties.  So they earned money in 2009 during market disruptions. (Even more important, they had no cash flow problems during the troubles.)

 

(Now that said, I prefer ALS.TO in the resource sector.)

 

Also, it is interesting to note that the company now does not include the value of its royalties in its intrinsic calculation.  It used to value the royalty, does anyone know why they stopped?

 

I could not agree more. It seems you have done your homework.

 

It is because of the lawsuit. Check out the website. A 10m principal is being disputed. Once the dust settled, and royalty was sold, this could make a very pleasant surprise.

[SharperDingaan]

 

Nothing like a dissenting comment:

 

Re growing the business. They buy into early stage ventures using cash. Agreed the ventures have increased in value, but they are not returning cash. .... So once they've spent their cash, where do they get more cash to do the next buy-in? NAV increase is not cash increase

 

Re flow of IPO's. Point is that you either sell or 'hold forever'. You can sell the asset directly to another coy, or to the public via an IPO, otherwise you are mining until the asset is depleted. Master or idiot, you need a buoyant market to sell into, & you need the resources to carry you until the next sale. NAV does not pay the bills, cash does.

 

Hold coy discount is well documented. NAV is what the assets are worth under going concern assumptions. Market value is essentially liquidation value (immediate asset sales under distress conditions, less costs to sell). NAV - market value = hold-coy discount. We dont like to hear it, but it is real, & it is not small.

 

We actually like their business model but its because its early in the game, its cheap access to J-curve venture capital investing, they have a reasonable base of old vintages that are performing, & they can still acquire/develop new properties fairly cheaply. It is also a good way to expand ones circle of comptency.

 

Country Wide Financial was also a great business model, but we all learned that the model was only great under certain circumstances.

 

Not negative, but we're also not afraid to challenge.

 

May you all do well !

 

SD

 

 

 

 

 

[ItsAValueTrap]

So anybody interested in Aberdeen now that it's at 13.5 cents/share?

 

Some of my old commentary on Aberdeen:

https://glennchan.wordpress.com/2012/03/20/aberdeen-aab-pinetree-pnp-northfield-capital-nfd-a/

 

My current opinion of Aberdeen is that management is truly awful.  They are trying to make money from shareholders, not with them.  The company is yet another example of the problems in the junior mining space.  But the price is low enough that I will probably take a very small position in it... like a moth to the flame, I am going to pick up this cigar butt.

[FreeOption]

Why wouldn't you just buy their holdings directly and avoid the corporate value destruction?  If you put reasonable haircuts for liquidity on their holdings, is it really trading at a discount?

 

The value destruction over the past couple years has been astounding.  The missed opportunities for creating/returning value to shareholders even more so.

[Hielko]

So anybody interested in Aberdeen now that it's at 13.5 cents/share?

 

Some of my old commentary on Aberdeen:

https://glennchan.wordpress.com/2012/03/20/aberdeen-aab-pinetree-pnp-northfield-capital-nfd-a/

I'am guessing that paying a dividend was a short term experiment?

My current opinion of Aberdeen is that management is truly awful.  They are trying to make money from shareholders, not with them.  The company is yet another example of the problems in the junior mining space.  But the price is low enough that I will probably take a very small position in it... like a moth to the flame, I am going to pick up this cigar butt.

Yes, management is terrible. I'm glad I recognized that and didn't invest, actually considered that at the end of 2011 (one of the first posts on my blog: http://alphavulture.com/2011/12/28/aberdeen-international-aab-to/).

[bskptkl]

Unfortunately I own this one - underestimated their value destruction capabilities...

 

After a couple of related Bharti companies were knocked off in proxy fights last summer (Longford Energy, Dacha, Forbes Coal) I noticed AAB started listing the change of control liabilities in their financial statements. For a 11 million market cap company their COC payments would amount to 13 million! Kinda makes them invulnerable to activist pressure though I would still vote for any activist.

[ItsAValueTrap]

http://www.marketwired.com/press-release/aberdeen-international-reports-value-investment-portfolio-cash-056-per-share-third-quarter-tsx-aab-1849947.htm

 

At the end of October, apparently they have 21.6 cents/share in publicly-traded securities and cash.  34.3 cents/share in other stuff.  If you haircut the rest at 90%, that's another 3.43cents/share.

 

21.6 + 3.43 = 25.03 cents/share

 

Currently trading at 13.5 cents/share.  EDIT:  It's a 50-cent dollar more or less.

 

I think that companies like Altius Minerals and Liberty Media (LMCA) are better ideas.  They are other piles of assets trading at a discount.  The discounts are a lot smaller, but management at those companies is infinitely better than Stan Bharti.

 

*I own a very small amount of Aberdeen.  I own ALS.TO, don't own any LMCA (which is probably a mistake).

[beerbaron]

http://www.marketwired.com/press-release/aberdeen-international-reports-value-investment-portfolio-cash-056-per-share-third-quarter-tsx-aab-1849947.htm

 

At the end of October, apparently they have 21.6 cents/share in publicly-traded securities and cash.  34.3 cents/share in other stuff.  If you haircut the rest at 90%, that's another 3.43cents/share.

 

21.6 + 3.43 = 25.03 cents/share

 

Currently trading at 13.5 cents/share.  It's also a 50-cent dollar.

 

I think that companies like Altius Minerals and Liberty Media (LMCA) are better ideas.  They are other piles of assets trading at a discount.  The discounts are a lot smaller, but management at those companies is infinitely better than Stan Bharti.

 

*I own a very small amount of Aberdeen.  I own ALS.TO, don't own any LMCA (which is probably a mistake).

 

ItsAValueTrap, what your take on the management of Aberdeen? I'm looking at the discout and I thinking that there does not take much for this to triple or double. On the other hand management went nowhere in the last 10 years in terms of creating long term value.

 

BeerBaron

[ItsAValueTrap]

You can re-read my comment on this thread and search my blog for mentions of aberdeen and stan bharti and forbes and manhattan.  As I said before, management is pretty bad.  However, by junior mining standards, they actually aren't the worst... but that's because there are others out there who are more awful.

 

Forbes and Manhattan took over Aberdeen sometime in 2007-2009.  (I can't remember right now.)  Since then the stock and book value/share hasn't done so well.

 

I wish more of my order at 10.5 cents filled.  Unfortunately only a tiny bit of it did.

[ItsAValueTrap]

Ok Aberdeen is trading at a crazy stupid cheap valuation right now.  Insiders could

 

1- Buy back shares.  (There's actually a somewhat legitimate argument against doing this.)

2- Buy shares on the open market.

3- Issue themselves options for 10% of the company.

 

I don't understand why insiders aren't jumping all over this.  I don't get it.  Somebody explain this to me???  Because otherwise this is a dollar trading at less than 50 cents.

[Spekulatius]

Ok Aberdeen is trading at a crazy stupid cheap valuation right now.  Insiders could

 

1- Buy back shares.  (There's actually a somewhat legitimate argument against doing this.)

2- Buy shares on the open market.

3- Issue themselves options for 10% of the company.

 

I don't understand why insiders aren't jumping all over this.  I don't get it.  Somebody explain this to me???  Because otherwise this is a dollar trading at less than 50 cents.

 

The insiders are looting the company and reducing the loot, by buying back shares,is not going to help them.

[matts]

Ok Aberdeen is trading at a crazy stupid cheap valuation right now.  Insiders could

 

1- Buy back shares.  (There's actually a somewhat legitimate argument against doing this.)

2- Buy shares on the open market.

3- Issue themselves options for 10% of the company.

 

I don't understand why insiders aren't jumping all over this.  I don't get it.  Somebody explain this to me???  Because otherwise this is a dollar trading at less than 50 cents.

 

The insiders are looting the company and reducing the loot, by buying back shares,is not going to help them.

 

Exactly. Glenn, I'm surprised that you, of all people don't think that this is a fraudulent company with high conviction?

 

 

 

[ItsAValueTrap]

I really dislike management but I don't think that it is a fraud.  They own stocks... I can't imagine that they are fake.  They own private companies, but Aberdeen is still trading at a massive discount if you assume that the private companies are zeroes (I would assume that they are worth close to 0 given that I don't trust the accounting).

 

Management definitely does charge a huge amount of fees.  They charge fees for running Aberdeen.  Aberdeen owns shares in other Forbes and Manhattan companies... another layer of fees.  There is G&A spending that benefits insiders (e.g. travel and entertainment).

 

Aberdeen does deserve to trade at a discount to NAV.  But the current discount is a little extreme don't you think?

 

2- It costs a lot to borrow the shares.  I'm not sure why.

 

*Disclosure:  I have a very small long position in Aberdeen.

**I seem to have an obsession with swing trading garbage stocks.

[writser]

I was thinking the same thing. You are our inhouse expert on shady stuff.

 

Technically speaking this is probably not a fraud but does that really matter? I.e. you're concerned about GSOL but you own AAB. One is perhaps a fraud, the other is definitely managed at the expense of stockholders. What's the better investment?

 

**I seem to have an obsession with swing trading garbage stocks.

Hah! That explains it. :D