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American Capital, Ltd. Message Board

  • blankwillie blankwillie Jun 3, 2013 12:12 PM Flag


    Anyone care to take a stab on the recent decimation of book value of the AMCAP LLC will have on the book value of ACAS? I was hoping ECAS would help this quarter but ICP.L just went up 50 to come in 50 so no help there. Comments?

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    • I would assume that AMCAP is valued at this point largely on the management of AGNC, although MTGE, additional future sales of shares of AGNC, and the future of the infrastructure and other funds should contribute more in the future. It seems to me that the recent collapse in the ACAS SP reflects a largely unthinking response to the sharp decline in the mREITs. The income and book value declines in AGNC seem to have driven the sell-off. Since it is difficult for me to value AGNC, I turned to the mREIT specialist at Morgan Stanley. Here is what I found in their report dated 5/31 and based on the 5/30 price:
      4Q12 1Q13 2Q13 3Q13 4Q13
      book value: $31.64 28.93 29.22E 29.53E 29.98E
      dividend: $ 1.25 1.25 1.25E 1.25E 1.25E

      "Valuation: Our $32 price target represents a 1.05 price-book multiple on our 4Q13 book value estimate of $30 per share, driven by stronger ROEs than agency mREIT peer group due to active asset allocation and prepayment protection."

      Price target: $32 (bull case $35, bear case $26). My account executive said to me that the specialist thinks that in the worst case the dividend might be cut to around $4 per share, but then it would start to rise again. This makes sense to me since I can imagine that rising interest rates will not be fully hedged, but over time the company's profitability depends on the interest rate spread, and I would imagine that in a higher interest rate environment, the spread might well be higher than it is today. Overall, it seems to me that even if the dividend return on AGNC falls to 15% from 19% (and then rises again), AGNC is dramatically undervalued, and when the market comes to realize that interest rates will increase modestly over time--rather than shoot to the moon--AGNC, MTGE and ACAS will recover nicely.

      Sentiment: Strong Buy

    • I think it will have a bigger impact on the share price due to the perception that ACAS is well tied up with MTGE and AGNC. I have tried to assume a complete break down of this business as there could be events that we don't know and will bring these pieces to fall apart. I feel that MTGE and AGNC have hit their peaks and can do nothing but go down for awhile. Depending on how the FED behaves and ACAS manages it's debt structures for MTGE/AGNC we will not know how well the can handle the eventual rate hikes. So I tried to break ACAS apart and based on various other peoples work and when the share price was in the 12-13 range I believe I found that that business was worth roughly $2 of ACAS share price at that time. So lets say it is now $2.50 of BV then a wipeout which is not likely right now would place the BV $16.50+(gains made though other business units)lets say a $1 bringing BV- ACAM=$17.50 and SP should move to $13.20-$14(14 being its peak) if AGNC and AGNC were destroyed. I think that says we are at a value of 8% to peak within a quarter. So it is compelling at this price to buy a large amount of ACAS and sell at peak to retain a part for free. IMHO

      The stink is on REITS right now and a possible run maybe the event that causes its demise. IMHO

      ACAS itself I believe is fine at this time although undervalued. IMHO

      Sentiment: Buy

      • 2 Replies to jeffy777
      • It would take an unusual rate increase to damage AGNC and MTGE to the extent that you described in your post. IMO highly unlikely and not worth the math exercise to model. I think that the current Fed chat in the market right now is pure "excuse selling" and that the Fed recognizes that it must maintain its stimulus programs to protect a fragile economic recovery. I think we'll see continued Fed stimulus for at least several more years to ensure a healthy recovery. Agreed that ACAS is fine and is undervalued here.

        Sentiment: Buy

      • Thank you for your analysis. If we get a double whammy of ECAS value collapsing this quarter I would not be surprised to see ACAS mark down its book value well over $1.50 ending June.

14.78-0.20(-1.34%)10:48 AMEST

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