Tuesday, May 10, 2011

Urbana Update: The Shrinking Share Count


Urbana (URB.A) was featured on our site in March. The investment thesis was the non-voting shares traded at substantial 37% discount to its net asset value.

Barring a decrease in its investment portfolio (which can be mostly hedged) the investment could go one of two ways. 

1) The discount to its net asset value decreased and the shares moved higher (a possible 59% return).

2) The discount remained and Urbana's President, Tom Caldwell continues his consistent buyback which increases the net asset value.

It is too early to tell which outcome will occur but since the write-up, the shares have increased by 11% while the discount remains at a massive 32%.  

The most important variable in this investment is Caldwell's commitment to buying back his undervalued shares. There is an agency problem in this situation. Since Caldwell receives a percentage of funds under management as fees, he may be reluctant to reduces the size of Urbana.

When we questioned Caldwell back in March about the buyback he told us:

'Normal course issuer bids (buybacks) will be a continuing fact of life for Urbana.'

Thankfully, Caldwell is following through and continuing the steady buyback of shares. Total shares outstanding decreased by 1.41% since our write-up in March and more than 10% in the last year.

The agency problem listed above may be the reason why buybacks have been funded in part by debt. Although we would like to see future buybacks funded by selling down part of the investment portfolio rather than through bank loans, the relatively low leverage ratio (9.5% debt to equity) does not cause us concern at present. 

Like we said in March, given the massive discount in the non voting 'class a' shares we couldn't be happier. Let's keep this buyback going. 

Disclosure: Long Urbana

Update: No position

Update: The discount has increased even with a fairly strong buyback. There has been no substantial issuer bid, most likely due to the resulting decrease in fees payable to management. So far this has been a value trap. We continue to urge management to take more meaningful buyback actions. 

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Disclaimer: The content contained in this website represents only the opinions of its author(s). We, or clients we advise, may hold long or short positions in securities mentioned in the website. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision.


Anonymous said...

Looks like the latest share repurchase authorization expired at end of april... Just noticed they put up a repurchase summary on the website.

hardcore value said...

Hi Anon,

I don't see that it's expired. They had 2.5m shares outstanding under the buyback as of April 1, 2011. During April and May they repurchased approximately 1.03m shares leaving 1.47m shares for repurchase before the buyback expires August 27, 2011.

I expect this buyback to be fully used and a new one renewed after the expiry in August.

Anonymous said...

You are correct - my mistake. In haste I read april instead of august. great blog btw!

hardcore value said...

no worries, it happens to all of us!

Thanks Anon, I appreciate it. Researching full time now so hopefully I can get some great articles out but this bull market is making it harder than I would like. I'm still getting over this bonehead move from Microsoft for Skype! rrrgh.

hardcorevalue said...

Great write up from Saj Karsan on Urbana

Unknown said...

Looks like this one is a huge flop?

hardcore value said...

so far yes. they need to do a substantial issuer bid, mail Caldwell if you want. I've tried my best here.

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