I use a general rule that a single digit ROE company is not worth BV and that an ROE of about 10% will support BV. (A 15% ROE is usually good for about 2 times BV). I would quickly be drawn to a valuation of about $20 if I could see an ongoing annualized EPS of about $2.00 per share. .
I want to be sure that I understand your reasoning. You appear to be saying that ACAM, which is valued on the books at $925 million , or about $3.43 per share, might be worth in a spin off at about $4.00 per share ($1 to $1.2 billion).
This is not much of an uplift so I assume you believe that there will be a considerable narrowing of the discount on the $16.69 remaining assets held by ACAS.
If this is your conclusion then I hope you are right. The market continues to express increasing skepticism about the possible reorganization. What catalyst do you think could change the markets view: 3rd quarter earnings release, announcement of reorganization plan, year-end earnings release, implementation of the reorganization, a year or more track record for the reorganization? Is it possible that the discount won't be contracted until we go through another market cycle?
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.
With ARCC at a 9% yield and PSEC at a 12.5% yield it is difficult to believe ACAS could yield under 10%.
This would require $1.50 annualized EPS to support a price higher than about $15. I hope that I am wrong but fear that reality may set in after the upcoming earnings report.
You are entitled to your valuation. I also have concerns as to whether ACAM will have a market value greater than $3.45 on the books. This is no TROW or BEN with a double digit PE. It looks more like a KKR with a single digit PE. Understand, I am not disagreeing with ACAS, I am just cautious and taking a more conservative wait and see approach.
Recall that many of the "true believers" on this board said that when ACAS disclosed restructuring plans the discount to NAV would be gone.
You could have over 17.50 right now if you had sold earlier this year at the January 21st price of 16.37 and reinvested in the S&P 500. The stock is lagging the market badly just when the reorganization is becoming more obvious. This is troubling. Yes, money is made by betting against the market but the gap usually closes not widens over time.
The catalyst expected to close the gap has become a moving target; it was expected to be when the market first learned about the reorganization, then it was when it was discussed by management, then when the 2nd quarter earnings report was released, now its Q3 or year-end results or implementation of the reorganization. If the benefits of the reorganization are so clear then it appears that the market participants must be brain-dead.
One plan clearly works over time and may have to be reinstated: stock buybacks.
The last minute today showed about 250,000 shares sold aggressively. The same pattern yesterday.
The seller could have offered theses shares earlier but chose the close to force the price down.
The market is being manipulated with final minute sells in volume to drive the price lower. The pps will not recover until the market sees that these trades cease. It is now 3:45. Let's see if this is the end of "painting the tape"..
We have already seen major reorganization moves. What the market wants to see is NOI. Market appears to be saying that reorganization will result in a single digit ROE ($ie !.50 NOI) and ,therefore, the pps is worth about where it is now. My concern is that many "true believer" holders, like some on this board, will then become disillusioned and sell.
That's one computation. Mine is an 11.4% discount (at $15.25 price) to a tangible book value of $17,81 after deducting $1.61 OF deferred tax asset and $.70 of other non-earning non-cash assets. Most financial analysts would be drawn to a valuation closer to mine than the $20.12.
Eight analyst's projections for 2015 range from a low of 73 cents to a high of 1.05 with an average of 84 cents.
Are you saying that if the discount fails to narrow after a reorganization you would continue to patiently hold? If so,
what event or time period would have to occur that you would change your mind?
Thank you for your reply. I continue to accumulate and hold a very large position and hope you are correct. As expressed, I am mystified why the market skepticism appears to grow in the face of the upcoming reorganization.
Also, if the reorganization fails to materially narrow the discount then hopefully buy-backs will be resumed.
This is the first day in the past 5 days without dumping in the final few minutes on hundreds of thousands of shares.
I am perplexed as I now see about 10,000 options outstanding compared to my recollection that there were previously about 15,000 shares outstanding.
Bottom line: it appears that the 5,000 option trade today was a sale by a holder closing out a long position.
ACAS is up about 2% from its year ago price of 13.87. ARCC is off 1.78 from its year ago price of 17.94. This nets to a .16 loss or about 1% after factoring in 1.78 of dividends. PSEC is off 1.31 from its year ago price of 11.21. This results in a nearly unchanged position after factoring in dividends of 1.33.
Conclusion: ACAS is caught up in a general selloff in BDC's.
I am not an option trader but have a question for you. The probable catalysts for increasing the pps are the earnings reports. The November 22 calls would be after the 2Q and 3Q earning releases. The January 15 calls would expire before the year-end results. Therefore, why not buy the November 22 calls and save about 16+ cents?