The Bull Case For Tetragon Financial: Whitney Tilson

Value investor Whitney Tilson believes he has discovered another gem-in-the-rough in closed-end investment company Tetragon Financial Group Limited (AMS:TFG), according to the latest issue of Value Investor Insight, a copy of which was reviewed by ValueWalk. Lakewood Capital has a long position in the company, as previously reported.

Also see Value Investing Congress – Tetragon: A 60-Cent Dollar?

Tetragon is a global alternative-investment company headquartered in Guernsey, with offices in the U.K. The majority of the firms assets are U.S.-based loans and securities, most of which are collateralized loan obligations (CLOs). The firm has practically no sell-side coverage and trades in dollars on the Euronext Amsterdam exchange. Moreover, even though the market cap is greater than $1.2 billion, trading is illiquid, with less than $1 million worth of shares trading on the average day.

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Whitney Tilson: Tetragon offers 40% discount to intrinsic value

Tilson says his investment thesis for Tetragon Financial Group Limited (AMS:TFG) is that the shares currently trade at a more than 40% discount to intrinsic value, and furthermore, that value is growing steadily. Management is somewhat controversial and clearly overcompensated, but has an excellent investment record and is highly incentivized to create value over the medium term. In addition, Tilson notes the firm has returned a great deal of cash to shareholders over time in the form of significant buybacks and substantial dividends. Of note, the trailing 12-month dividend yield is greater than 6%.

More detail on Tetragon Financial

Tetragon owns both a $1.8 billion investment portfolio and an asset-management business with more than $10.5 billion in assets under management. Just over 50% of the investment portfolio is invested in CLOs, most of which were issued prior to the financial crisis. The rest of the portfolio is invested primarily in cash, private loans and hedge fund-related investments.

Valuation

When you do the math, you get a $17.08 per share pro-forma fully diluted net asset value of Tetragon Financial Group Limited (AMS:TFG)’s portfolio, compared a current Tetragon stock price of $11.35.

Next Tilson rhetorically asks whether you can count on Tetragon’s valuation of its portfolio given the intrinsically “squishy” nature of CLO valuation. He replies in the affirmative. “My short answer is “yes.” In fact, given that the discount rates the company uses to value the underlying cash flows are higher than those typically used in the CLO market today, I believe Tetragon’s valuation of the portfolio is likely conservative.”

In closing, Tilson suggests that Tetragon Financial Group Limited (AMS:TFG) shares could have an intrinsic value north of $20 per share, value he expects to unlocked by the end of 2017 as a large number of insider options expire at that point.