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American Capital, Ltd. Message Board

  • donedealer donedealer Aug 9, 2014 9:10 PM Flag

    Back of envelope NOI projection for ACAS

    I continue to be perplexed as to how a restructured ACAS is going to achieve more than about $1 NOI per share. This is far short of the $2 which I believe is necessary to support a $20 price I start with the $41 million NOI earned in Q3'14 . This is $164 million annualized or 61 cents per share. I then take all of the operating company equity of $961 million and sell it to a managed entity. This yield 7.5% (1.5% in management fees and 6% interest in floating rate debt) This yields $72 million or 27 cents NOI. Next I assume A take down of the full $750 million revolver to invest in floating rate debt at a net 4% spread (about 6% yield less about 2% cost of funds). This adds $30 million,11 cents share.This brings me up to 99 cents of NOI per share. I then add one years growth at 10% to the 61 cents base. This additional 6 cents brings me up to $1.05 of NOI per year.

    I have yet to see any other NOI projection on this board or,any financial rationale as to how this restructuring is going to produce an NOI necessary to support a price per share above $15. Granted, lot's of abstractions but nothing concrete.

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    • Done, I think you are ultimately going to have to compare the post-reorg ACAS to its peer company group. If that group is trading at or around NAV, then ACAS likely will as well. In ACAS's case, you will likely have pieces that must be valued relative to peers. In sum, I think you wind up much closer to NAV than its present valuation. Certainly, ACAS management would not go through the expense and headache of a reorg if they didn't feel VERY strongly that an elimination or severe narrowing of the discount to NAV and vast simplification of the business structure would be the result. Both the reorg and the simplification of the business structure work to pull the share price toward NAV.

      • 1 Reply to dabqs
      • dabqs

        Your points are well taken and I hope you are correct. However, I have done better when my investments are based on objective realistic projections rather than hope. Valueline today lowered the EPS projection for 2015 to 1.00, in the ballpark with other analysts. I hope that this can support a price of $20 pert share even though the PE ratio is above what I would pay.

    • Done,

      You may be right--but then again you may not be. the problem with your calculation is that you are projecting into the future a capital structure and set of activities that are unlikely to be continued in their present form. The investment in floating rate debt, for example, is a temporary expedient to generate income flow from what otherwise would be cash held to facilitate the restructuring.

      In the future, I would expect ACAM to be a fairly high growth asset manager and to be valued as such. This will happen as new funds are added and existing ones expand in size. Take MTGE, for example, which I began investing into a little over a year ago and have continued to add to. The fears of sharply rising interest rates hit the company sharply and it was forced to restructure its holdings and increase its hedges to protect NAV; this is costly and reduced earnings, forcing cuts in dividends. The strategy has proven quite successful and dividends have leveled off; I believe that within about 6 months they will start increasing again (not bad for a stock yielding close to 13%). MTGE is still selling well below NAV, so additional stock cannot be sold to increase ACAM/ACAS earning assets. In the future, however, the stock is quite likely to sell above NAV and open the door to the sale of additional equity on a significant scale. The opportunity here can be seen by comparing the market cap of MTGE to that of AGNC. I also expect substantial expansion of the energy & infrastructure fund and the new funds now being rolled out.

      I expect the income-oriented business development company fund to focus on high-yield loans rather than equity or floating rate loans, thus increasing the potential for rising dividends. For these reasons, I don't think it is appropriate to project into the future a valuation based on the activities of the recent past.

      Sentiment: Buy

      • 2 Replies to holding38
      • Don ..

        ACAM paid ACAS a $19M dividend in Q2 .. let's call that an $80M/yr run rate. Look at your comps for AM's ... they are trading at a 2-3% dividend rate tops. At ACAM's current value, their dividend to ACAS is about 8%. Even at 2x market valuation, it'll still be lower than its peers.

        ECAS .. paid ACAS $34M in Q2 and $138M YTD. It's only valued at $827M .. $827M!!

        NMB

      • You may be right but I would prefer that the future be based on projections rather than hope. Clearly, ACAS has been more successful with equity than debt investments, but are now strategically moving away from equities. Also, this recent avoidance of leverage coupled with emphasis on low risk floating rate debts appears to indicate that management plans to keep a low risk profile for the remainder of this business cycle. If so, then then the pps may not approach NAV for several years. There may be a significant time cap between management plans and market expectations.

    • blair.wagner@snet.net blair.wagner Aug 10, 2014 10:50 AM Flag

      The mystery deepens! Are we dealing with smoke and mirrors here?
      Trusting the next quarter report will explain some of this "black box" financial moves.

      Sentiment: Hold

    • you could also look at GAAP EPS and annualized - 90% of $.76 * 4 = about $ 2.75 a share in divies per year. At a 10% divy rate the stock price would be $27.

      The reason this little arithmetic exercise is important - it shows that ACAS currently derives most of its income and long term value creation in non cash flow ways - in appreciation of solid assets. Another way to look at it would be an asset base of real estate - 10% rental property and 90% raw land - how would you value such a portfolio?

      • 1 Reply to bellard
      • How do you get EPS from appreciation in equities when the restructuring is designed to divest the equities to achieve a management fee? Historically, ACAS has made an attractive return on equities and no return on debt investments. Now equities are being divested. Are you suggesting that there will be appreciation in debt investments? The only growth (appreciation) factor going forward will be securing more fees for managing third party assets. .

 
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