Asta Funding: Safe and Catalyzed

by: Saj Karsan

Asta Funding (NASDAQ:ASFI) purchases consumer receivables at large discounts to face value, and then tries to collect more on those receivables than it paid for them. Asta was first discussed on this site as a potential value investment about eighteen months ago due to the significant discount to book value at which it traded. Today, it looks much more attractive.

The problem eighteen months ago was that virtually all of the company's assets were in the form of receivables. Despite the company's history of successful receivable purchases and collections, the high unemployment rate and the country's housing situation was making it hard to collect. Asta lost $90 million in 2009; meanwhile, the company's book value was only $157 million! Without knowing how much the company could actually collect of the receivables on its books, investors would be taking a big risk, despite the large discount to book at which the company traded.

Today, the situation is much improved. A significant portion of the company's receivables have been converted to cash. This lowers the investor's risk, as the company's book value is no longer totally based on uncertain receivables. As of the company's latest release, it has a cash balance of over $100 million. In the company's last quarterly release, it had a receivables balance of $133 million and total liabilities of $81 million. This company trades for only $120 million, however.

Furthermore, the company's book value appears understated due to how the company accounts for its receivables portfolio. As a result, the company is "profitable" as it is collecting on receivables which have already been written-off and are therefore not included in the company's book value.

The biggest risk to this company appears to be management's intentions with the large cash balance. Management noted in its latest quarterly filings that "we are actively seeking investments in, or acquisitions of, companies in the financial services industry." The good news for shareholders, however, is that the company's CEO does own more than 10% of the company, so he is probably more concerned with getting a good deal than growing just to increase his importance and salary.

To that end, the company just announced a $20 million buyback program as share prices fell. The company's stock price is 10% lower than it was last year even though the company's risk is substantially lower (due to its cash collections in the last year). For investors who prefer investing when a catalyst is present, this represents an opportunity, as the company may buy back as much as 15% of its shares at current prices.

In Asta, investors are offered a cash-rich company with management ownership that trades at a discount to a conservative book value. If management does go ahead and buy back shares, this could turn out very well for shareholders, with downside protection in the form of cash and receivables.

Disclosure: Author has a long position in shares of ASFI