Titanium Asset Management TAM-LONDON
June 18, 2013 - 4:53pm EST by
dman976
2013 2014
Price: 1.15 EPS $0.00 $0.00
Shares Out. (in M): 20 P/E 0.0x 0.0x
Market Cap (in $M): 22 P/FCF 0.0x 0.0x
Net Debt (in $M): -14 EBIT 0 0
TEV ($): 8 TEV/EBIT 0.0x 0.0x

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  • Asset Management
  • Management Ownership
  • Insider Buying
  • NOLs
  • Highly Cash Generative

Description

Titanium Asset Management is a strange situation that provides for substantial upside in a relatively short time frame. The catalyst is extremely strong as management is bidding to take out the company at an absurdly low price and is likely to increase its bid substantially, we believe.

Titanium is an asset management firm that was formed in 2007 to roll up the industry. The subsidiary asset managers are all US based with US clients with the primary manager (Boyd Watterson) located in Ohio. They made a couple of acquisitions and overpaid resulting in large write downs over time. The stock has tanked from $7 down to current levels. Incidentally, we ran across this because Titanium bought one of our competitors. The Company manages $8.7 billion with 85% or so in fixed income. The managers they own have good local franchises (we have direct knowledge of this) and good reputations.

The stock currently trades around $1.15 per share. A control shareholder recently sold out its entire position (51%) to management for $1.75 per share (December 2012). That is not a misprint. Earnings have been very good post the control block purchase. Management owns an additional 9% for a total stake of 60%. The stock trades on a grey market in the UK and is only available to buy in the US to institutional investors managing over $100 million. Because of its market cap ($22 million), limited float ($9 million) and the need to be managing a sizable amount of money to buy, this thing has gone totally under the radar in the US and has been flat out missed by small international investors/funds. This is to our benefit.

I normally would not post something like this given the limited liquidity but I am aware that over 1 million shares are currently being shopped – we know Jefferies knows the seller. It is almost certainly Wellington who owned almost 2 million shares as of 12/31/12.

The Company trades at an absurd valuation. With a market cap of $22 million and net cash and investments of $14 million the TEV is $8 million. Annualized revenues are $24 million and EBIT is $3-$3.5 million (I am excluding large intangible amortization and write offs that obscure results and are totally non-cash along with one time legal expenses). Again, that is not a misprint. EBIT has been closely tracking FCF due to huge NOL’s. I believe management will cut out more costs now that they own the business and overhead related to the former large shareholder (who also had a CEO and board members as part of TAM who have been replaced – CEO now is the CEO of one of the rolled up companies so no incremental cost) is gone. Were they to take the whole thing private (which I think is a very real possibility) adjusted EBIT is probably closer to $4-$4.5 million. Obviously, buying an asset manager with a decent reputation and a good balance sheet for 0.3x revenue and 2-2.5x EBIT is a pretty good deal. Management’s purchase of a control block in December at $1.75 per share was around 1.07x Revenue, still pretty cheap. I have heard takeout multiples for small asset managers with decent franchises are 2x-3x revenue or $2.75-$3.83 per share. We can quibble about what a fair takeout multiple is but buying it here is a very good buy with a nice margin of safety. Below are some public comps (no takeout premium):

 

 

 

 

 

Ent

 

 

 

Current

Enter-

Val

Company

 

Closing

Market

prise

/

Symbol

Company Name

Price

Value

Value

Sales

 

 

 

 

 

 

PZN

Pzena Investment Management Inc.

6.72

450

455

5.6

TETAA

Teton Advisors Inc. Cl A

20.00

33

32

2.0

GROW

U.S. Global Investors Inc. Cl A

2.50

39

20

1.1

 

 

 

 

 

 

Average

 

 

 

 

2.9

GROW is primarily a gold investor so has been hammered recently – even still at 1.1x revenue with a 30%-40% control premium you would get to 1.5x revenue. At 1.5x revenue fair value of Titanium is around $2.25-$2.30.

In terms of catalysts I think we have a good one. Management recently bid to take out the rest of the shareholders at $1 per share via a tender. Stock is currently at $1.15 and the special committee is negotiating a bid bump presently. Management will eventually tender for the rest of the shares at a premium, do a top up and then squeeze everyone out, I believe. The firm with the largest control (Boyd Watterson – CEO is a Boyd executive) has sold itself and then bought itself back from another owner (banks, insurance companies, etc.) something like 3 or 4 times in the last 20-30 years. They know how to play this game – buy at 1x revenue, sell at 2-3x revenue, wash, rinse and repeat. We do not believe management likes the compliance costs of being public and feel that Sarbanes Oxley related expenses are prohibitive for a company of this size. We therefore believe they will be willing to pay up to get a deal done.

In terms of financing a deal it should be pretty easy for management. Buying everyone out at a small discount to where they just bought the control block could be done with cash and investments on the balance sheet. No reason for a modest sized asset manager to have a huge cash hoard (we distribute everything out). This would make a ton of sense for them.

I would encourage you to look into this. If this was a micro cap situation trading clean in the US that all of the guys like us were watching it certainly wouldn’t be trading at $1.15. Probably more like $1.65 given the buyout of the control block at $1.75 and the incremental $.07 per share of FCF since the buyout. With the catalyst of a future event such as management taking the whole thing out at something near where it bought out the control shareholder, this investment is very interesting. The Company is a Delaware Corp with US management/control owners with reputations as solid citizens so good protections. If they are able to get a deal done at only $1.25-$1.35 we would guess that one of the piranha plaintiffs lawyers in Delaware would be willing to go for a total fairness claim and try to squeeze out a fair amount of additional consideration. While typically these plaintiffs attorneys are trying to get a little bit of money for themselves by acting as an annoyance, in this situation they would actually have a case. This would involve all shareholders who don't tender being cashed out through a top up and then having a free call option on the litigation. Below is a brief financial overview of valuation that I hope is self explanatory:

Titanium Asset Management Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

@ Price

 

 

 

 

@ Current

 

$1.25

 

$1.40

 

$1.60

 

$1.75

 

$2.00

 

$2.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Out

 

 

19.7

 

 

 

 

 

 

 

 

 

 

 

 

Price

 

 

 

$1.15

 

 

 

 

 

 

 

 

 

 

 

 

Market Cap

 

 

$22.7

 

$24.68

 

$27.64

 

$31.59

 

$34.55

 

$39.49

 

$49.36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash & Investments

 

 

 

$14.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TEV

 

 

 

$8.2

 

$10.18

 

$13.14

 

$17.09

 

$20.05

 

$24.99

 

$34.86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premium to Current

 

 

 

 

8.7%

 

21.7%

 

39.1%

 

52.2%

 

73.9%

 

117.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro Forma Income Statement Annualized (ex. Amortization)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

$24.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Admin

 

 

 

$21.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBIT

 

 

 

$3.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legal Fees/Sarbox, etc.

 

$1.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBIT

 

 

$4.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multiples

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

0.35x

 

0.43x

 

0.56x

 

0.72x

 

0.85x

 

1.06x

 

1.47x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBIT

 

 

 

2.74x

 

3.39x

 

4.38x

 

5.70x

 

6.68x

 

8.33x

 

11.62x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBIT

 

 

2.05x

 

2.55x

 

3.29x

 

4.27x

 

5.01x

 

6.25x

 

8.72x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Owned by Mgmt

 

 

60%

 

 

 

 

 

 

 

 

 

 

 

 

Float (Shares)

 

 

7.9

 

 

 

 

 

 

 

 

 

 

 

 

Float ($'s)

 

 

$9.08

 

$9.87

 

$11.06

 

$12.64

 

$13.82

 

$15.80

 

$19.74

 In conclusion, at this price you have a very good fundamental margin of safety with limited downside. Upside is substantial.

Disclosure: We own a position in this security. Please do your own due diligence. We may buy or sell the stock at any time without disclosure on this website.

 

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Increased bid from management
Continued free cash flow generation - FCF/TEV around 25%
Potential deal litigation
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