market folly

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes and the presentation of Glenn Tongue of Deerhaven Capital.  His talk was entitled 'Time Arbitrage.'

Tongue used to be Whitney Tilson's investment partner at T2 Partners, but they've separated their funds but still share the same office.  Here are his two ideas:

Long AIG (AIG)

"Even better investment today."  Trading at 50% of book value, multiple catalysts to get them there in the next 12-18 months.  Opportunity because of the lingering taint from the crisis. Book value up by 11% since May, stock up only 5%.

$33.26 stock, $52B market cap, $104B book value.  1.4% short interest.  In Jan 2011 90% owned by US Govt.  June 2011 down to 82%, down to 65% in 2012. Then in Sept 2012, Treasury sold $21B, now only 16% owner today.  $8.5B stake owned by US government now. AIA sale is $5B cash inflow, ILFC $6-8B, and CFO of about $5B.  They can use half of that to buy in the US government stake, which would add 10% to book value.  An accretive exercise.

Of the $21B sold by the treasury, AIG bought $5B back. A while back the problem/bear case was "it's too complicated, hard to understand." 

Now, 2 segments are 90% of the business:
- P&C insurance Chartis.  45M clients, diversified across geographies and products.  Comps are ALL, CB, CNA, Travelers.

- US Life and Retirement SunAmerica.  19M clients, annuities and life insurance products.  Comps are LNC, MET, PRU, UNM. Typically trade at 0.7x book.  

Sum of the Parts Valuation

SOTP analysis gets $49 to $77 per share for AIG, 50-130% premium to market price.

Chartis: $48 book value, value $43 to $62
SunAmerica $36 book, value $25 to $40
United Guaranty   value $1.73 to $2.48
ILFC  value $7 to $10
AIA stake value $5
Other value minus $5 to plus $1 Total $49 to $77 value for all.

Risks: Highest scrutiny of any company, no incentives to overstate book value. Derivative risk, the old AIGFP, was $1.8 trillion of exposure, now down by 97%.  Some Europe business, CEO may leave soon, Super Cat risk, some derivatives

Catalysts: Treasury sales overhang Sale of non-core assets Use some leverage to boost returns Shift to offense from defense: AIG can focus on growing the business fading of institutional taint 

Another way to play it: 75M warrants.  Strike $45; expire 1/19/2021 Also subject to anti-dilution adjustments for various events, including adjustment if cash dividends exceed $0.67 per year.

We've highlighted how numerous prominent investment managers own AIG in size (most notably Bruce Berkowitz's Fairholme Capital) and recently disclosed how it's one of Dan Loeb's top holdings.

For more on AIG, head to the latest issue of our Hedge Fund Wisdom newsletter for further equity analysis on this name.


Long Iridium (IRDM)

Listed at $9.00 through a SPAC transaction, stock fell to $8, but business value may have doubled. Deeply misunderstood, attractive business, competitive advantage, new optionality through Aireon, compelling valuation, recent financing removes uncertainty. 87M shares, $730M market cap, $500M net debt, EV $1.24B, EV/EBITDA 5.9x, while comps trade at 8-9x Rev $384 in 2011, op EBITDA of $190, in 2012 Rev/EBITDA $393M/$210m. 

Owns 66 in-orbit satellites.  Serves 576k customers.  DoD is 23% of revenue.  This is only a niche product, for maritime, aviation, and government markets. Cover 100% of the earth's surface.  Other player is Inmarsat, twice their size.  Iridium stronger in handset, Inmarsat is more on the land-based.

Rev growing 15-24% over last 5 years. MSS market is $1.4B market.  Different competition: Thuraya GEO no polar or hemisphere coverage. LEO technology, lower earth orbit, so the satellites spin around the earth, smaller, faster communications with the handsets.  M2M (Machine to machine) is fastest growing area.  Strong leverage in model, key is to drive service revenues and subs. 

Must replace current satellite which will cost $3B! Tongue says "they'll never have $3B of debt, they are generating cash flow."  He says debt level peaks at 4-5x EBITDA in 2015.  At that point, company can drop a multiple point per year in leverage. Is the $3B investment worth it?  Should grow about $10-19B of EBITDA through 2030.  

Aireon: new business opportunity; a global air traffic control system. Possible $4 per share for Iridium on this alone. 

Stock recently collapsed from $9 to $7.  Due to a filing in which the company said in a 10q that they would have to raise $100M in amount equal to the unexercised portion of the warrants.  This was a short-sellers dream, but they fixed it last week with a $9.43 strike $100M convertibles. Swapped out the old warrants.  Convert arb players are causing short-term pressure on the stock. 

Price targets? If trading at 8x EBITDA, $12.50, up 60% from today's price. By 2016, or 2017, on those multiples, $17.50 to $22.50.


Embedded below is Tongue's slideshow presentation from the Value Investing Congress:





Check out the rest of the hedge fund presentations from the Value Investing Congress.