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The Long Case For Alliance Global Group, Inc. ADR

|Includes: Alliance Global Group, Inc. ADR (ALGGY)

Overview:

AGI (Alliance Global Group), a Filipino holding company, has risen by 10% in the last three months, but it still maintains a large gap to the market value of its holdings. The rise in stock price has mostly been related to the market value of its holdings increasing. Since the middle of March, the market value of AGI's public holdings (which make up ~90% of its assets) has risen almost 18%, resulting in the gap to NAV widening from PHP 3 per share to PHP 4.8. The stock has opportunity to move up to PHP 17 per share within a year with conservative assumptions.

Company Description:

Alliance Global Group (PSE:AGI, OTC:ALGGY) is a Filipino holding company ($2.9b market cap) run by a successful Filipino businessman with business activities spanning the F&B, gambling, and RE development industries. Below are AGI's major holdings:

EMP: Emperador is a publicly-listed domestic holding company which operates an integrated business of manufacturing, bottling and distributing distilled spirits and other alcoholic beverages from the Philippines and Europe.

MEG: Megaworld is a publicly-listed domestic company and one of the leading property developers in the Philippines. It pioneered the "live-work-play-learn" lifestyle concept for large-scale, mixed-use master planned communities or townships that integrate residential, commercial, leisure and entertainment, office and educational/ training components.

RWM: Travelers is publicly-listed company and the developer and operator of Resorts World Manila ("RWM"), an integrated tourism resort in the Philippines. RWM is the first integrated leisure and resort property in the Philippines that combines privately-operated gaming facilities with hotel, retail, dining, entertainment and other leisure amenities.

GADC: Golden Arches Development Corp is a domestic corporation engaged in the operations and franchising of quick service restaurant business under the McDonald's brand in the Philippines.

Thesis Details:

The stock currently trades at 13x TTM earnings at a price of PHP 14.14 (75% of its book value). A conservative sum of parts analysis (see NAV Methodology below) would value AGI at approximately PHP 19/sh as of June 16, 2017. The large majority of AGI's holdings are public and can be easily valued using the market price. The remainder of AGI is conservatively valued at book value, which on net comes in negative due to debt.

The stock price movements over the last two and a half years are shown below, including an estimate of AGI NAV:

Alliance Global Group Stock Price

Sources: Wall Street Journal quote data, AGI SEC filings

AGI stock has risen by 10% over the last three months, largely due to the market value of its holdings increasing. Since March 27th, AGI's public holdings (which make up ~90% of its assets) have risen almost 18% in market value, resulting in the gap to NAV widening from PHP 3 per share to PHP 4.8.

Holding companies can trade below the Net Asset Value of their holdings due to various discounts (liquidation, lack of control, lack of marketability) so the gap will likely not close entirely but the current gap presents opportunity. Historically, the gap to NAV for AGI has wavered between $0 and $6 (as seen in above chart), though the level has not been below $2 since late 2015.

There is also surprisingly little correlation between the daily % price change of the market value of AGI's holdings and the daily % price change of AGI stock. The correlation between January 5, 2015 and June 16, 2016 is approximately 43% which is low given how much of AGI's valuation is driven by public stocks. In the long-term however, you can see that the two series in the chart track each other more closely. Market efficiency is not a given for the Philippines Stock Exchange (PSE). Waiting for the gap-to-NAV to return to low levels may require patience.

However, I feel strongly about the outlook of AGI's holdings and find that having long exposure to this stock is desireable. While there isn't much data available on the stock (institutions only hold half a million USD of its ADR), I've done an exhaustive search on both the holding company and its holdings, leading me to believe that its growth prospects are very healthy.

Valuation:

The price target of PHP 17/sh is based on the gap to NAV/sh closing to PHP 2.5 as well as the NAV/sh rising 5% from its current level due to the value of its holdings increasing.

NAV Methodology:

The NAV of AGI was calculated using a sum of parts analysis based on the market valuation of the publicly traded stocks AGI owns and the book value of GADC and AGI corporate. See below for a summary table:

The book value of GADC was used as opposed to an estimate of market value for conservatism and simplicity (small business). The book value of GADC is approximately 4.6x LTM earnings. AGI corporate's negative book value is mostly due to its debt. Past 12/31/2016, the book value of GADC and AGI corporate are increased/decreased based on extrapolating on 2016 earnings. AGI corporate gradually decreases because of debt interest payments. Note that entity-level balance sheet information is based on the most recent form 17-C filed with the SEC, which was as of 12/31/2016.

Risks to the investment include:

(1) Currency risk - A large part of the revenue is denominated in PHP and the holdings valued in PHP, but it is unlikely the exchange rate will leave the 50 level anytime soon

(2) Political - While its Travellers International holding has been hit by a lower demand in tourism in the recent year due to terrorism and political instability, these issues are being solved

(3) Fraud - Having a less developed financial regulatory system, financial fraud is a bigger concern for Philippines

Disclosure: I am/we are long ALGGY.