Monday, February 11, 2013

Checking in on Asta Funding

Asta Funding announced their fiscal first quarter earnings today.  No big surprises as the company continues to accumulate cash, repurchase shares, receive cash flow from their zero-basis portfolio, and invest in their personal injury financing business over their traditional credit card receivable business.

The most interesting part of the conference call was the surprisingly robust Q&A session, a few takeaways:
  • The divorce business (BP Case Management) is slow, Asta has put very little money into it, doesn't sound like they're committed to the business or just can't find the necessary scale to move the needle
  • Asta still hasn't made a lot of progress on their share repurchase plan outside of the one off-market block trade with Peters MacGregor Capital Management
  • The zero-basis portfolios total over $1 billion in face value which represents a large asset portfolio that is not on the balance sheet, Asta collected $8.1 million last quarter, and $35.9 million over the trailing twelve months
  • The Great Seneca portfolio's loan matures in April 2014, Gary Stern anticipates an extension, but has had no direct discussions yet with BMO
  • Asta is working on lowering overhead costs, but couldn't provide any further details
  • One caller asked about Asta's purchasing criteria and how other publicly traded debt collectors have been actively purchasing credit card receivables, why hasn't Asta been able to?  But Asta is holding firm on not changing their purchasing criteria standards, they would like to purchase additional credit card paper, just haven't seen attractive pricing, specifically, earning 2.7x purchase amount over 84 months would not clear Asta's required return hurdle
Asta is still just treading water, waiting out the current pricing cycle, and that doesn't bother me as I don't want to see them stretch for a large portfolio again.  Where I would like to see more progress is on the share repurchasing front, any additional repurchases would be highly accretive to current shareholders, especially if management doesn't see credit card paper pricing improve in the near term (why earn 1% in CDs when you can buy the stock back?).  Even so, I peg the adjusted book value of the company at $15.25 after deducting the carrying values of the Great Seneca portfolio's assets and non-recourse debt, then adding back an estimate of the zero-basis portfolio's NPV.  Based on the current quote of $9.47, a nice wide margin of safety here.

Disclosure: I own shares of ASFI


  1. Thank you for the great work, and I am enjoying your blog so far.

    Can you explain your BV estimate in detail?

    I'm not familiar with the space, what are the right comps and how are they trading?

    Are there any hidden liabilities that companies in this industry face?

    Do you know what the volume spike was at the end of June? Was this related to another privately negotiated share repurchase?

    1. My BV model basically removes the Great Seneca portfolio from the assets and the associate non-recourse debt from the liabilities, then I estimate the NPV of the zero basis revenue by taking an average of the last 8 quarters and then running that off at 5% a quarter, subtracting out 40% for taxes and using a 16% discount rate, and assume its all gone in 3 years.

      There are a few other publicly traded debt collectors, like Portfolio Recovery Associates, but they've been actively purchasing new consumer portfolios and use different accounting methods, so its hard to get an exact comp for Asta Funding.

      I don't know if any hidden liabilities, in this industry lawsuits or regulatory issues are always a risk.

      My best guess on the trading volume is Asta got booted from the Russell 2000, so it could have been index investors making adjustments. I know there's whole trading strategies about buying the deletions for a short term bump, maybe we'll see that here

      Thanks for reading, I'll probably post a longer update after the next 10-Q and conference call.