Ambase (OTCQB:ABCP) - $1.21 - is a special situation equity that currently trades at 63% of cash, 76% of book value and a negative enterprise value. The current discount is excessive on an absolute basis and relative to the Company's prior trading range. The discount can be attributed to Ambase's status as an under-followed security which is exacerbated by timing issues relating to interperiod cash flows and the updating of financial databases which obscured Ambase's undervaluation to the casual (or mechanistic) observer.
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Ambase negotiated a large settlement ($181MM, after-tax) from the US government in August of 2012 relating to a supervisory goodwill suit dating back to 1991 on a seized thrift they owned. They received the cash payment in October of 2012 and paid out a $2.00 dividend ($86MM) in December, 2012. The Q3 balance sheet - which does not reflect the settlement received in Q4 - has been the operative balance sheet reflected in the financial databases until recently. When viewed in relation to the Q3 balance sheet, ABCP does not present as immediately compelling: a market capitalization of $52MM is supported by $9MM in book value, inclusive of $7MM cash.
As Ambase's December 2012 financials become widely disseminated, even the cursory viewer will see that a market cap of $52MM is supported by $68MM in book value ($1.59 per share) - inclusive of $84MM in cash ($1.92 per share). In addition, Ambase has classified $79.8MM of US Treasury Bills as Long-Term Investments. Many databases - including Bloomberg - exclude LT Investments from their enterprise value calculation, making Ambase's undervaluation harder to detect without some effort.
The primary liability on the balance sheet is a tax reserve created in Q412 relating to the settlement, which is a fairly soft liability. The company has filed an appeal relating to carryback claims on its 1992 tax return for $96MM in net operating losses which it would then apply to recover taxes paid in prior years. This could generate up to an additional $34MM in cash ($0.79 per share) and is not reflected on the balance sheet or in our valuation analysis. It is a free option to the upside.
Ambase has no current operations. Their primary long-term asset is a 15,000 sq. ft. office building in Greenwich, CT that is vacant but for the 3,500 sq. ft. occupied by the company. It is carried on the balance sheet at $2.4MM.
While Ambase has not indicated what their intentions are for the cash balance, there are effectively three options: liquidate, sit on the cash, or invest the cash. The Bianco (CEO) family owns 39% of the stock, so there is an alignment of interests between management and shareholders.
Until investors get an understanding of how the cash will be deployed, it is likely that ABCP will trade at a discount to cash. Examining the trading of ABCP from August - December 2012 reveals that ABCP traded for roughly 75% - 80% of cash after the settlement was announced. ABCP is currently trading at 63% of cash - a number that we believe is unreasonably low. We expect that this discount will be repriced once the 12/31/12 balance sheet is more widely disseminated.
A shareholder proposal to liquidate the Company will be considered at the annual meeting on June 6, 2013. This may serve as a catalyst for value realization if the current discount persists.
The major downside risk is that management instigates actions contrary to the interests of shareholders. However, we feel that this risk is mitigated by management's 39% interest in the equity. Ambase's CEO received $14MM in compensation in Q4 tied to a contractual formula relating to the settlement. Given the 22 year fight and the amount recovered, we do not find this to be egregious.
A repricing of Ambase at 75% of cash would yield a price of $1.46, 21% above the current price, while a valuation at 80% of cash would yield $1.56 - representing a gain of 29%. On the downside, if ABCP traded at 0.75x book value - below historical averages, it would yield a price of $1.19, -2% below the current price. Rarely does one find such a highly asymmetric reward-to-risk profile.
MC = 75% Cash
MC = 80% Cash
MC = 75% BV
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