Join me in a little trip to imagination land, if you don’t mind. Don’t worry, I’m wearing pants. Okay, I’m not, but it’s imagination land. You can pretend I am pantiliy clad. OH BOY THAT’S CLEVER.
Say you went to the grocery store, a place where you normally pay $3.99 for a bag of delicious potato chips. You’re walking down the aisle, when you see your normal chip selection is on sale this week, 2 for $5. Delighted, you might pick up 2 or even 4 bags, depending on how much you value your lack of cholesterol.
This comparison is made when it comes to value investing all the time, but most of the time it isn’t entirely accurate. For one thing, investors don’t exactly know what a company’s assets are worth. Perhaps they’re overstating the value of their plant, or the value of their equipment. And secondly, goodwill and intangible assets are almost always overstated. When a company pays $1 billion for $700 million worth of assets, where do you think the extra $300 million goes? This is why many value investors strip out intangible assets when valuing a company.
This isn’t the case with Urbana Corp (TSX: URB.A), which is essentially a closed end fund that looks at investing in stock exchanges and certain financial companies. Here’s what it holds, from the company’s latest portfolio report:
You’re probably more interested in the bottom value there, where the company’s net asset value is $2.84 per share. The current share price of the class A shares is $1.75. This means you’re buying a dollar for 62 cents, hence the title of the post.
Urbana Corp is ran by a company called Caldwell Asset Management, which gets paid a 1.5% management fee to pick its investments. You’d think this would encourage management to keep milking this bad boy for all they could, but they’ve made a few shareholder friendly moves over the past few years.
Firstly, the company has bought back shares pretty regularly over the years, generally whenever the share price was $1 less than the NAV. At the end of 2009, the company had more than 87 million shares outstanding. These days? Just 60 million. That’s a smart move by management, even though perhaps Caldwell would be more excited using money to make new investments.
The company has also recently implemented a 5 cent annual dividend, paid to shareholders each March. That’s nearly a 3% yield. Sorry, dividend growth investors, that dividend isn’t about to go up at any point soon.
Not only are investors getting assets at a 38% discount, but the company has a couple of interesting holdings.
The first one is the Bombay Stock Exchange, the second largest in India. It’s been plagued by increased competition and sort of crummy results, and Urbana has lost a bunch of money holding it. It plans on going public at some point, but nobody exactly knows when. Urbana Corp can sell its stake a year after Bombay goes public.
There are a bunch of small stock exchanges in India, and the nation is ripe for consolidation. This would obviously help Urbana if Bombay got acquired, but not hugely so. Even if it got acquired at a 50% premium, that would only mean a 4.4% bump in Urbana’s NAV. It’s helpful, but not a game changer.
The other thing that’s interesting is Urbana’s investment in Canada’s newest stock exchange, Canadian National Stock Exchange (CSX). Think of the CSX as Lending Club meeting the stock market. For a company to list, it must meet the following requirements:
- Must have revenue or working capital of $100k
- Must have 150 public shareholders who own 500,000 shares between them. That’s gotta be at least 10% of the company (i.e. 5 million total shares)
- Be willing to issue a prospectus and audited financials
- All for a cost of $12,500 as a listing fee, and just $500 a month ongoing.
These requirements aren’t really very cumbersome. I know many local businesses that could qualify, once they get the 150 shareholders part. $100k in revenue is nothing, and listing fees are a fraction of what it costs to end up even on the TSX Venture exchange.
Small-ish companies (I’m thinking revenue of ~$1 million) have always had trouble raising funds. Private equity doesn’t want to mess with companies that small. Banks would much rather lend against residential houses. Often, the owner is stuck borrowing against his house, or other assets. This new exchange is an interesting alternative.
This new exchange is 43.8% owned by Urbana, but only represents a little over 3.5% of assets. It’s a very interesting concept, but again, I’m not sure how much it’ll move the needle.
Okay, let’s assume you’re interested in Urbana and its… unique blend of assets. What’s the catalyst? How do you get paid at somewhere close to NAV? There’s the problem.
Management owns the class A shares, and with them all the voting control. Management isn’t about to let the company essentially take itself private (even though that would be great for all existing shareholders), since they want to keep collecting their 1.5% fee. The company may buy back more of its shares, but that’s it.
For investors to make money on this company, it must continue what it’s done before, and find a home run in its collection of privately held stock exchanges. It could happen, but you’ll have to be patient. This company is a great value stock with no potential catalysts, at least in the near term. If it interests you, I think you could wait a little while and get it closer to fifty cents on the dollar.