Senvest Capital - 40% Discount To NAV With A Significant Near-Term Catalyst

| About: Senvest Capital (SVCTF)
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Investment management firm Senvest Capital (OTCPK:SVCTF) offers investors an incredible risk-return trade-off (the Toronto Stock Exchange shares under ticker SEC are more liquid). Shares are trading at a 40% discount to a very liquid net asset value (NAV) which consists primarily of investments in the firm's funds, Senvest Partners and Senvest Israel Partners. In addition to this, and what I think is completely overlooked by investors, is that the 5-year track record of the company's flagship fund, Senvest Partners, will change in a dramatic way once we enter 2014 and allow the firm to build a lucrative fee generating investment management business. Investment management businesses tend to trade at high P/E multiples and this value will be in addition to the value of Senvest's liquid NAV. As the investment management business grows and the market re-appraises Senvest, shares could rise 200%+. Share repurchases (at a significant discount to fair value) could drive further upside. I believe this is one of the most asymmetric investment opportunities in the market today.

Unlike most fund management companies, small & mid-cap specialist Senvest has retained its earnings (rather than paying a dividend to shareholders/partners) and invested them into the fund. The tremendous YTD performance has caused net asset value per share to increase from C$117.50/share at December 31, 2012 to $169/share at June 30, 2013. The company doesn't report for another couple of weeks but given that its main fund is up another 11% in the three months from June 30, 2013 through September 30, 2013 (and October has seen US small caps up another 3.8%), I conservatively estimate that NAV is currently between $180-185. As you can see below, the share price has followed the upward trajectory of book value.

Senvest shares are 50%+ owned by insiders, primarily its Chairman/CEO Victor Mashaal and key portfolio manager Richard Mashaal. In addition, insiders own 40% of the investment management subsidiary (shows up as minority interest on balance sheet & income statement) which houses the hedge funds Senvest Partners & Senvest Israel. Senvest Partners charges clients (including its own money/public shareholders) a fairly typical hedge fund fee of 1.5% of assets under management and 20% of profits. Up until now, most of the funds managed by Senvest have been its own money. When it comes to raising money from third party clients, Senvest has been in the penalty box given the huge volatility in its performance. Small caps (and in particular small cap financials where the fund had made substantial investments) performed terribly in 2008 and then again in 2011. Prospective clients look at variety of metrics when deciding on which investment manager to hire but typically focus on the 5-year performance number as well as volatility. Up until now, Senvest has had two rough years (2008 & 2011) included in its 5-year performance number which has no-doubt deterred clients. Importantly, the 2008 number will roll off the books at the beginning of January 2014. Equally important, this terrible number will be replaced by 2013's exceptional performance. Going into 2013, Senvest Capital's 5-year annualized performance number was 13.4%. However, dropping 2008's -54% performance and adding in 2013's performance of ~59% will change the fund's five-year performance figure to 45.3% (not an error - see table below). When combined with the company's 16-year return of nearly 19%, this has to be one of (if not the) best performance for a Long-Short fund over this horizon (this is stated net of fees). While the volatility is still higher than average, this is still a great investment vehicle (as Buffett says, I'd take a lumpy 15% over a smooth 10%). Further, including Senvest Partners' performance into a fund of funds would enhance the return of the overall fund of funds product (and be able to tolerate the volatility of Senvest given the inherent diversification of the fund of funds structure). One way or another, I expect this track record to be monetized.

2008

2009

2010

2011

2012

2013e

Performance net of fees

-54.0%

229.0%

39.0%

-34.0%

35.0%

59.0%

Annualized 08-12

13.4%

Annualized 09-13e

45.3%

This will dramatically improve Senvest's ability to raise capital from investors as it will have an incredible track record to market. Importantly this is coming at a time when clients are beyond eager to invest - optimism is high at this stage in our bull market. The fortunes of asset management firms can turn on a dime and I expect that Senvest will be able to raise a significant amount of capital from third party clients - charging 1.5% on assets + 20% of profits along the way. It isn't far-fetched to think the company could be managing upwards of $5 billion within a year or two (capacity for a small-mid cap fund is probably $7-10 billion). Should this occur, this could add significantly to the value of the business:

5,000

Assets under management - base assumption

75.0

Base Revenue - 1.5% of AUM

130.0

+ Incentive revenue - 20% of assumed 13% return

205.0

Total Revenue

102.5

50% operating margin

-35.9

35% taxes

66.6

Net income

-26.7

Minority interest

40.0

Net income to common

3.05

million shares outstanding

13.11

Earnings per share from AM business

P/E multiple

Value of Asset Management Business

10

131.07

12.5

163.83

15

196.60

17.5

229.36

20

262.13

The above table is referring only to the fee business. The company still has a pile of securities valued at ~C$185/share. This means the total value per share could be around C$380/share (even if it were only able to raise $2 billion of client money, this would still be C$260/share). I believe the discount attached to NAV (highlighted in chart above) will fade as Senvest will have a greater ability to pull capital out of its business - it is important to be aware that Senvest needed to keep its own capital invested in its funds up until now as it had to show that the track record was achieved with critical mass (similarly, the company was aware that it held a bunch of cheap securities and did not want to sell them). In its most recent quarterly report, Senvest noted that it doesn't believe that markets are as attractive as they had been and interestingly the company has the authorization to repurchase shares. If the capital is used to buy back shares anywhere near current levels, this will create tremendous additional value for shareholders (buying back at a 70-75% discount is incredibly accretive). If shares aren't repurchased, it is possible we could see a large special dividend. This could push the value toward C$450/share.

A key risk is that we see a significant downturn in markets (I think markets are overdone and in particular think small caps could be 30-40% overvalued). That said, I think that Senvest is still incredibly attractive and believe investors can effectively hedge market risk by shorting shares of the Russell 2000 ETF (NYSEARCA:IWM) against their positions in Senvest. In full disclosure, I have hedged part of my position in Senvest by shorting IWM.

As we sit today, this is the best risk/reward on my radar. If things work out, this could be an absolute homerun - a multi-bagger in an 18-24 month time frame. If nothing happens (which doesn't seem likely), an investor is buying in with a 40% margin of safety.

Disclosure: I am long OTCPK:SVCTF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.