Just for fun, let's start with the author's book value for the common of about 30 mil. A swap at 50% of par value with the common at $5 would add 40 mil shares. I think management will wait until after the common is trading higher to do a swap, so I figure about 25 mil share dilution for the swap. So that leaves 32 mil shares and book value per share is 30 + 450 = 480 mil after the swap which is about $15 / share. Assuming the smaller bank is profitable, after 3 years they are going to recognize another $9 / diluted share in DTA, Bottom line is that if they can bring capital levels up enough with the PR court win and US mainland asset sale (which I think they can) to avoid dilution (other than an eventual pref stock swap) , book value is probably going to end up somewhere around $15 - $25 / share looking about 3 years out.
The par value of the preferred stock at PAR in millions according to my notes is 60 for DORLP, 92 for DORLN, 47 for DORLO and 203 for DORLL which is 402 million. For DORLL there is also more than 50 mil in deferred interest which gets added to the book value of the preferred stocks of about 450 mil in round numbers. Book value calculation assumes that all the preferred stock is worth par and Mr. Market says it's worth less than 40 cents on the dollar and might eventually get swapped at 50 cents on the dollar, adding to common book value significantly.
Yeah, it would have been a good trade a couple of weeks ago to bet on a preferred stock swap offer. The thing is that it the US mainland asset sale goes through, Wakeman could take that off the table for a couple of years. Won't need it and might just decide it's better to wait for the common to recover first.
I skimmed the seeking alpo article. They value the 300 mil Deferred Tax Assets (now being carried on the books at zero) as 0. Assuming that DRL becomes a profitable bank, they will start to ad that back to book after 2 - 3 profitable years. Most of the book value is allocated to the preferred shares which are valued at par value for purposes of the calculation even though they are actually trading at less than 40 cents on the dollar and might get swapped (say at 50 cents on the dollar) for common (adding almost 200 mil to common book value). So the calculation was great except it was potentially off by only 500 mil. That's only a factor of 15X difference to the calculated value. But at least the article was free (unless you are one of those seeking alpha pro suckers - LMFAO).
I trade many small microcaps. Just about every one of these companies has dealings with insiders. That's the nature of tiny microcaps. Dealings should be disclosed and maybe the standards for the US are tougher than the standards for Australia. An accountant focused on dealing with small microcaps getting listed would have caught this stuff much earlier and saved a lot of aggravation over ticky tack stuff like legal disclosures.
I thought the whole thing was overkill. Maybe that's how they do things in Australia. An independent Board Committee (Audit committee with the CEO not on it) would have seemed sufficient to me. Obviously they need an accounting firm better suited to dealing with microcap startups than large caps. Unfortunately shareholders are paying for that mistake. Here's the excerpt from the press release. Changes to legal disclosures only with no balance sheet or income changes. Major overkill:
In the case of the audited financial statements for Fiscal Years 2012 and 2013, the determination of non-reliance is related solely to uncertainty about the completeness and accuracy of disclosures with respect to related party transactions. It is anticipated that revisions will impact footnotes to the financial statements, and that no material revisions will be required to be made to the Statements of Operations or Balance Sheets related to those periods.
That trade would have made sense back when the common was at 7 and the preferred was at 5. Now that the common is 5.20 and DORLO / DORLN pref issues have traded as high as 10 recently it no longer makes sense. If they sell the US mainland assets at a profit, the bank has more options and less need to raise capital or do a near term preferred swap.
Thanks, frontline. My memory wasn't too bad then. $40 * 6.5 mil shares = 260 mil. They've probably added some more to it lately, so if it was 260 mil awhile back it's got to be close to 300 mil now. My experience is that it takes 2 - 3 years of profitability before you see the valuation allowances start to get reversed.
I believe that DRL management (look which paper reported it - LOL) leaked the accurate info themselves (helps if everyone knows publicly a deal is in progress to keep the regulators at bay) about the pending asset sale. It was reported a few months back by Bloomberg that the assets were for sale. They should close easily since we are talking about such "clean" assets on the mainland with virtually no non performing loans. Agree with you that it might be a hybrid type transaction with one buyer for the branches and another for the commercial real estate loans. Bank atlantic split things that way quite awhile back in FLA. They sold the branches to Wells Fargo and kept the non-regualted specialty lender themselves.
They left out some legal disclosures about related party transactions (which most small caps have). PCW did the same thing to MHR awhile back. They are a better accounting firm for large caps. Too expensive and overzealous for small cap startups. MHR eventually fired them, got a more suitable accountant and cleaned up the tick tack issues. I fondly remember buying those MHR par 25 preferred issues at around 16 - 17 on the selloff.
I'm perfectly happy holding this for 30 - 45 days until the sale closes. Took a few weeks for the preferred to move. In fact I started buying DORLN early at about 5.40 on that last trade and had it tank to 3.50 (bought more on the way down) before the big move higher. I often don't have great short term timing. I'll leave it to the day traders to get perfect timing and just do what I do.
The deferred tax assets which are being carried at zero on the books (this is a separate issue from the PR tax rebate case) alone are worth more than a couple hundred million (200 - 300 million if I recall correctly, but what's a 100 mil between friends). Assuming DRL completes the sale, becomes well capitalized and gets back on track to profitability they will put that back on the books in 3 years. That and path to profitability is what the long term investors will start looking at. The issue here was always potential dilution,as I've been saying. Show me 10 heavily shorted stocks that dodge the dilution bullet with a profitable asset sale and chances are good that 10 out of 10 are buys.
Red, it's not really that complicated. It's a simple buy now and sell after the sale closes trade. We will all know the exact value at that point. I have no doubt that the adjusted book value (including the deferred tax assets which are separate from the PR tax case) is going to be several times the current share price. I have no doubt that millions of short shares who were incorrectly betting on the FDIC to seize the bank are going to need to cover by the time the asset sale closes. Short case just went bye, bye. They will be able to use the DTA since the remaining stub bank is going to be profitable (with all the bad stuff gone) within about a year.
So why did the DRL common sell off ahead of such positive news? The day traders got the news first and don't really understand the implications of the news. They might see a smaller bank without those profitable US mainland assets as hurting the bank's eventual recovery. That argument has a grain of truth, but it's overwhelmed by positive aspects of the sale in raising capital levels, killing the short case, getting rid of the regulatory threat and vastly reducing the threat of dilution. Day traders got it wrong initially, but the serious investors who trade bank stocks understand the above.
Although I've been mostly trading the preferred issues, the pending mainland asset sale is very positive for DRL. With the preferred issues having more than doubled off the lows, I picked up some DRL this morning. Why is a sale of profitable US mainland assets hugely positive for the DRL common? This is not hard to understand. The sale will raise capital levels significantly both by shrinking the balance sheet and generating a gain. Higher capital level means that the bank does not need to dilute the common (at least not near term) with a capital raise. They might even hold off on a preferred stock swap offer until the common is trading much higher. It also kills the whole short case about DRL being seized by the regulators.
Chance of a reverse split (or consolidation as the Canadians call it) is 99.9%. Expect they will address that at the annual meeting later this year. Next step would be to move up from Venture exchange. As a larger more diversified company that's no longer a penny stock trading on the Venture exchange, Petroamerica can move up from looney Canadian retail investors to more institutional investors. That's how the company can get a higher multiple in line with larger peers like PXT.TO or GTE.TO.
They are primarily a UK and Australian company that just launched in the US. The press release was badly written. Should have mentioned how many jobs are in pipeline and stuff like that. The first completed install would probably be about 3 months after their first sale based on how long my system took. I would have liked to know how many states they are selling in, how many sales offices and reps have been deployed, etc.
I recommended to subscribers that they take profits on the preferred issues when they first spiked up to 10 on DORLO / DORLN and 20 on DORLP. That was more than a double off the lows and it's tough not to take that kind of quick profit in this market. Personally, I'm still in DORLL and took profits on the other issues. I'm usually not great at timing trades though. Tend to buy early on the way down and sell early on the way up. Assuming they close the asset sale and become a well capitalized bank, all of the preferred issues still have some room to the upside. Look at #$%$ like the par 25 NBG-PA which is trading at 17.50 and NBG is probably still a couple of years off from restoring a preferred dividend. Wouldn't surprise me to see DORLO trading at 15 in a couple of years assuming the bank turns profitable. Might get there sooner if there is a swap offer on favorable terms. Most of the easy money has been made though I think.