Description

A-Mark is a specialty metals trading company that was spun out of OTC listed Spectrum Group ("SPGZ") and up-listed on the NASDAQ under "AMRK". Shares of AMRK were distributed on 3/17. 

AMRK trades at a trailing PE of 7.2 and an ex-cash P/E of 6.4. AMRK has averaged a ROE of over 25% the last 5 years. The company’s market cap is $93 million, while over the last five years it has paid out over $46 million in dividends and by my estimation has a pro-forma dividend yield of 11 to 13%.

AMRK has a very sophisticated board. Its members have effected multiple transactions to increase their ownership in AMRK (from under 10% in 2012 to over 40%), while also enhancing value for all shareholders.

Business Background

AMRK (http://www.amark.com/) is a full-service precious metals trading company, and an official distributor for many government mints.

In their coin & bar segment they offer gold, silver, platinum and palladium in the form of bars, plates, powder, wafers, grains, and coins. In their industrial segment they service manufacturers that utilize precious metals.

AMRK takes no price-risk. All of their inventory is hedged, and they generate income by making a market in physical metals. In 2012, revenue was $7 billion with gross profits of $20 million. Once a customer places an order they drop-ship the physical metal or allow their customers to pick it up at a secure storage facility. 

Inventory is financed through a demand credit facility. The total size of the facility is $170 million with $100 million outstanding. The facility is provided by 5 banks and has consistently been up-sized as metal prices rose from 2009-2011. The facility requires that they maintain a minimum tangible net-worth of $25 million with current TBV of approximately $50 million.

AMRK has a unique competitive advantage in their coin & bar segment. They have the largest network of precious metal dealers and are able to service them through their relationships with mints across the globe. These relationships may explain why executive compensation is very high (touched on below).

Over the last few years, AMRK has increased their value proposition. They have expanded their core trading and distribution services and are now operating on 5 continents. They have also moved into ancillary business lines such as financing and storage. In 2012, they opened a trading desk in Vienna, allowing customers to purchase metals 17 hours a day. In mid 2014 they will introduce an electronic platform.

The company has two main subsidiaries, CFC and TDS. Transcontinental depository service “TDS” offers customers the ability to store their metal. Impact of this business line is not broken out and it accounts for less than 1% of revenue.

Collateral Finance Corporation “CFC” enables customers to get a loan secured by their metal. This business is significant and has annually contributed between $4 and $8 million in interest margin to AMRK. As of December 31^st they have a loan portfolio of $32 million. The majority of loans are below 75% of asset value, and there have been no material impairments since they have been running this business. The size of the loan is a function of the price of gold. As gold prices rise a loan to finance a fixed amount of ounces increases which drives up interest income. This business is a nice compliment to the core distribution business, because when prices are a bit soft demand for physical from collectors is very strong (http://www.bloomberg.com/news/2014-01-25/gold-mint-runs-overtime-in-race-to-meet-world-coin-demand.html), and when prices are high they earn more on their loan portfolio. This has removed a lot of the cyclicality from the business.

Overall, the main drivers of their business are volatility, demand for ounces, and the market price of metals. This means the business performs best in times of fear and macro instability, which allows AMRK to be almost a natural hedge in a portfolio.

SG&A is generally flat with some variation based on incentive compensation, which provides for a lot of operating leverage.

Gross Profits (in million) (fiscal year end 6/30):

09: $43.2, 10: $20.3, 11: $29.8, 12: $26.4, 13: $30.3

SG&A:

09: No information 10: No information $, 11: $13.4, 12: $15.6, 13: $14.1

Operating Income:

09: $26.2, 10: $7.1, 11: $21.7, 12: $18.9, 13: $20.6

Net Income:

09: $16.7, 10: $6.5, 11: $12.7, 12: $10.6, 13: $12.5

Dividends:

09: $0, 10: $17.5, 11: $3.7, 12: $0, 13: $15, 14: $10

Total: $46.2 million

These dividends were declared to the parent company to finance losses in SPGZ and to fund the multiple corporate transactions that I will describe below.

AMRK has a strong balance sheet. It has shareholder’s equity of approximately $50 million. In a very downside case scenario where overtime the business makes no money, it should be worth at least tangible book as they could always just liquidate the inventory and return the cash.

AMRK requires no additional equity capital maintain or grow their business. If they are able to grow internationally they will be able to finance the necessary inventory through the excess capacity in their credit facility.

AMRK is in a unique niche that has consistently produced excellent returns and has the opportunity to return future capital to shareholders. 

History, Board & Transactions

Prior to 2008, SPGZ was known as Escala Group. Escala was majority owned by a Spanish company named Afinsa. Afinsa held a 57% stake in SPGZ. In 2006, Afinsa was exposed for perpetrating a Ponzi scheme where-by they guaranteed Spanish savers a 7% return on their money for investing in Afinsa’s stamp collections. Escala Group, through its CEO and founder Greg Manning, was accused of aiding the scheme by controlling the main directory of stamp prices, and inflating stamp prices. This enabled Afinsa to show on-paper gains to their stamp investors and attract more deposits etc. Full read (https://www.sec.gov/litigation/complaints/2009/comp20965.pdf)

In 2005, Escala in-conjunction with Auctentia, a subsidiary of Afinsa, respectively purchased 80% and 20% of AMRK.

In May 2006, Spanish authorities raided the offices of Afinsa and charged them with the above described Ponzi scheme. Escala was implicated in inflating their revenue through various transactions with Afinsa. They ultimately de-listed and were forced to restate multiple years of filings.

In 2008, Greg Manning a director since 2000 and the President of the Numismatics division became CEO and the company changed its name to Spectrum Group.

In 2009, Jeffrey Benjamin, a Senior Advisor to Apollo and Cyrus Capital, and Jess Ravich, Founder of Libra Securities, and the head of alternative products at TCW joined the board.

Transactions

In September 2012, SPGZ and Afinsa, now in Spanish liquidation proceedings, came to an agreement to repurchase 47% of their stake in SPGZ and Auctentia’s entire interest in AMRK.

SPGZ offered each shareholder (excluding Afinsa) 1.4 transferable subscription rights for each share of common stock for the opportunity to purchase up to 19 million shares of SPGZ.

Prior to the transaction insider ownership was as follows:

Greg Roberts 1.0m shares (3.1%)

Jeffrey Benjamin – 1.2m shares (3.55%)

Jess Ravich – 324k shares (.96%)

At closing, the company re-purchased 15.6 million shares and Auctentia’s 20% stake in AMRK for $51.17 million.

12 million shares were acquired at $1.90 per share for $22.8 million via the exercise of the rights offering, 1.4m shares were sold in a private placement at $1.90 and the balance of shares as well as the AMRK stake were acquired from the company’s cash (which was funded via a distribution from AMRK to SPGZ). These shares were retired.

After the transaction insider ownership was as follows:

 Greg Roberts 3.7m shares (12.1%)

Jeffrey Benjamin – 3.0m shares (9.6%)

Jess Ravich – 1.0m shares (3.3%)

Joel / Charles / Harold Anderson – 2.9m shares (9.4%) (They appear to be friends with Greg Roberts)

William Montgomery – 994k shares (3.2%) (Former MD at Salomon and connected to Ravich through Libra Securities)

Ellis Landau – 700k  shares (2.3%) (Former CFO of Boyd Gaming)

Insiders used the rights offering to take their ownership from less than 10% to greater than 40%.

Transaction 2:

On February 26, 2014 the company acquired the remainder of Afinsa’s stake in SPGZ.

They repurchased their 10% stake at $2.10, a substantial discount to the market price. This purchase will come in two tranches with the first tranche already closed, and the remainder will close on or before July 1st.

For AMRK, there are now 7.4 million shares outstanding, but after the second repurchase in July, which is being funded by SPGZ, there will be 7 million shares outstanding.

Valuation

This business requires no additional capital, and I imagine these boards members want to start putting some money back in their pockets.

My assumption is that they are going to pay out all net income and AMRK will trade on a yield basis.

The company has earned an average of $12 million in net income over the last 5 years, and although there will be a reasonable amount of cash (last filing $16 million) on the balance sheet to support quarterly fluctuations lets be conservative and say they consistently pay out $10 million, and leave the extra as an opportunity for special dividends along the way.

At a 6% yield the market cap would be $166 million. Accounting for the future share repurchase (which will be funded by SPGZ) there will be 7 million shares outstanding by July.

This gives us a price per share of $23.81 vs a current market price of $13.30

On a P/E basis, I think 12.5x (no growth) 5 year average earnings is conservative

$150 million or $21.41 per share

At 15x:$180 or $25.71 per share

For context there are 52 companies on the NASDAQ that have averaged an ROE between 15 and 40% for over 5 years that pay a dividend. Knocking off the highest and lowest 5 dividend yields (mostly mortgage REITS at the high-end) you would get an average dividend of 2.93%, an average P/E of 19.5, and an average P/B of 4x. Average payout ratio of these companies was 57%.

At these numbers AMRK would have to following valuation

2.93% dividend yield: $341 million 48.76 per share

P/E of 19.5 $253 million or $36.21 per share

P/B of 4 $200m or $28.57 per share

All in all own a pretty good business at a silly price with multiple catalysts - spin, up listed, dividend pay out, opportunity for IR.

Note on compensation

Compensation is aggressive at AMRK but it does align the executives with shareholders.

CEO Greg Roberts gets:

12% of pre-tax profits up to $8 million PLUS

15% of pre-tax profits between $8 to $10 million PLUS

18% of pre-tax profits in-excess of $10 million

So in a year when the firm makes $20 million in operating income, Greg has made $3.06 million.

Greg has been in the metals and collectibles business for a long-time. My belief is that a lot of their dealer network comes from personal relationships, which is why he can command such an aggressive pay package.

Thor Gjerdum the COO seems to have responsibility of CFC as he gets 15% of CFC’s pre-tax profits as well as .5% of pre-tax profits up to $10 million + 2.75% of pre-tax profits in excess of $10 millilon.

David Madge, the President, 1% from $18-$25 million escalating up to 6% of profits in excess of $35 million.

The fact that they are not compensated on EPS seems to underscore that they will dividend out excess capital.

Note on SPGZ

After the transaction SPGZ will be reversing splitting their stock 1-1000. The will cash out shareholders with fewer than 1000 shares at .65 cents, which values the business at approximately $20m. This is at a 50% discount to book with the company expecting to receive a tax refund after the separation. Although this business was losing a fair a bit of money annually, a lot of losses will be curtailed by going dark. The auction business generates a good amount of gross profits and it will be interesting to see if they will now be profitable. They will still file regular, albeit unaudited financials.

Insiders still have a fair amount of money tied up in SPGZ and I doubt they are just writing it off. And as an interesting side note, as part of the February 28^th repurchase, SPGZ also repurchased the Washington collection for $350k.

From same SEC report as above

Washington Collection

The Washington Collection was a collection of items purported to have belonged to George Washington that Escala had purchased in 1996 for $1.2 million. The collection was appraised in 1997 at $2 million. Escala could not sell the collection for many years. By June 2003, after holding the collection for seven years, Escala wrote down the value of the collection to $96,000 pursuant to Company policy because the collection had not been sold.

I have no idea what the Washington collection is worth, but it seems like an interesting collectible. I don’t they would go through the pain of re-purchasing it if they didn’t have a strong belief than it was worth significantly more than $350k.

Risk

Very reliant on credit facility

The risk of Afinsa owning 10% of A-Mark post spin is now no longer an issue

The Afinsa administrator is suing SPGZ for abetting the Ponzi scheme, but there is no mention of this as a risk in the AMRK prospectus. AMRK describes why this is not a risk in a response to the SEC comments on the AMRK Form 10

Fair amount of concentration from year to year in individual customers, but the customers vary

Catalyst