Description
PhenixFin (PFX)
$44.30 as of January 18, 2024
Long thesis
PhenixFin (PFX) Is a publicly traded, internally managed business development company (BDC) trading at a substantial discount to NAV whose NAV itself is likely discounted due to the zero marks on two potentially valuable assets. PFX is a microcap with a sub $100 market cap as of the writing of this paper.
PhenixFin (f/k/a Medley Capital Corp.) was renamed in late 2020 after its founding management team that had destroyed significant shareholder value was ousted by an activist shareholder. Activist David Lorber of Front Four Capital became PFX’s new Chairman and CEO in January 2021. Since taking the helm, PFX has seen its NAV per share rise at a CAGR of 11.1% thanks to disciplined investing by the new management team and aggressive share repurchasing at substantial discounts to NAV.
In the 11 reported quarters since the management change:
Median and average net investment income have been approximately $3 per share per year. A modest mid-single digit ROE due to PFX’s sub optimal scale but a close to 7% return on the current stock price.
Total shares outstanding have declined by 24% due to share buybacks at discounts to NAV averaging in the high 30% range.
Leverage has remained relatively constant with Total asset value/ Net asset value holding consistent at ~1.6x.
The investment portfolio has been substantially repositioned and is now split ~75/25 between broadly syndicated and liquid first lien corporate loans (representing ~75% of total assets) generating net investment income, and Equity/warrants (representing ~25% of total assets) targeted to earn capital gains which could be offset by PFX’s deferred tax asset discussed below.
94% of PFX’s assets are rated 1-3 out of 5 where no loss is expected as of the company’s most recent 10-k filing.
Approximately 26% of net assets have been invested in a new asset-based lending subsidiary in the gemstone industry through a management partnership with a large strategic player in the industry.
PFX has two assets marked at zero:
Net operating loss carryforwards: Owing to the mismanagement of PFX’s predecessor, PFX has amassed $23 million (~25% of its market capitalization) of deferred tax assets currently marked on the PFX balance sheet at $0. It is PFX management’s goal to utilize their deferred tax asset against future capital gains to accelerate NAV growth. Because of PFX’s deferred tax position, company management has opted not to pay dividends and instead retain earnings to grow its balance sheet or repurchase stock opportunistically.
Gemstone lending partnership: While PFX earns an attractive rate of return on its capital deployed in the gemstone lending business, PFX also holds 50% of the management company alongside its strategic partner. The management company, FlexFin, LLC, earns fees for arranging new loans. While PFX reports these earnings, its stake in the manager is currently valued at zero.
Insider Buying: Since new management took the helm, management and board members have aggressively purchased stock for their own accounts. In the last fiscal year, CEO David Lorber purchased over 25,000 shares in open market transactions and now owns over 5% of PFX. In the same period, Director Howard Amster purchased over 35,000 shares in open market transactions and is now PFX’s largest shareholder with a stake of 13%.
Recent Development: In its recent 10-k filing PFX disclosed its intention to invest $49 million in the recapitalization of a 3rd party insurance business PFX intends to acquire called VR Insurance SPV, LLC. More diligence needs to be done to understand this future investment but this seems like an opportunity to continue to make use of their tax asset and grow its asset base creating value above fixed costs.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
The meaningful discount to NAV combined with a management team that is acquiring shares both for itself and on behalf of the company at a discount to NAV should either lead to a collapse in the discount; or lead to higher ROEs over time (which will also lead to a collapse in the discount).
Adding the DTA to the balance sheet will further highlight the discount to NAV
Turning back on its dividend
Another acquisition that makes use of the DTA