Description

Simply put, Mongolia Growth Group (MGG) has been a disaster since its IPO. The original intent was to capitalize on the “growth” of the Mongolian economy by investing in real estate. However, the growth never came and MGG has been stuck holding money losing, mostly illiquid properties. Founder, Harris Kupperman (Kuppy), has been slowly selling off properties where he can and has even reduced prices below what he considers fair value in an effort to extricate himself from the predicament. Still, even with these discounted prices, he has been unable to sell most of the properties. Due to COVID, MGG lost tenants and had to reduce rents leading to negative cash flow for the company as a whole. The stock bottomed at 16 cents USD in October 2020 and MGG seemed to be in a slow death spiral into bankruptcy and oblivion.

 And then something interesting happened: Kuppy took the company’s cash hoard and starting growing it and growing it and growing it. How did he do this? Well, one hint is that the cover of the 2020 Annual Report has a picture of a yak with laser eyes…..

 At year end 2019, the portfolio was worth $4.275 million and then at year end 2020, the MGG portfolio was worth about $10 million with 32% in crypto. As of end of 2Q21, the MGG portfolio was worth $22 million. So yeah…Kuppy has been on fire….. and I don’t think he is done yet. In fact, I think Q3, which is slated to be released on Friday could be one of his best quarters yet.

 The stock has moved up in the last year to just over $1, but I think it will become apparent that the stock is still substantially undervalued when Q3 results are posted on Friday. There are two reasons for this: the first is a likely large gain from the securities portfolio and the second is the appearance on the income statement of a newly incubated business that is far exceeding even the most optimistic projections.

 Before I get into why I think the portfolio did really well last quarter and talk about this new business, let’s take a quick back of the envelope look at the current valuation based solely on Q2 numbers:

Securities value of $22 million CAD

Property book value of $13.7 million CAD

 The stock basically trades in-line with book value at today’s price ($35.7 million CAD market cap).  As of Q2, there isn’t a whole lot more to the valuation. They are cash flow negative and we could quibble on whether the properties are worth book or not, but the most recent property sales were done at a very slight premium to book value. My main point is that I don't think there are already expectations built into the price for what I am about to explain.

 So what happened in Q3? Let’s start with the portfolio. Luckily Kuppy is very public about many of his personal/fund investments and in the past these have mostly mirrored what he has done in the MGG portfolio. Needless to say we have a good window into what is happening in the MGG portfolio.

 On September 2^nd Kuppy sent an email to his Adventures in Capitalism group discussing his investment in Sprott Physical Uranium Trust (SPUT). Full write up here, but his thesis boiled down to : “The squeeze is on.” And squeeze it did, rising from mid to low $8 range before Kuppy’s write up to a high of $15 before sliding back down to $11.22 at quarter end.

 Having watched Kuppy from afar for a long time, my thesis boils down to this: He likely put a large percentage of MGG’s portfolio into SPUT and took out huge profits as he helped whip retail investors into a frenzy around the uranium squeeze spiking the price of SPUT. It is impossible to know exact numbers, but he had 32% of the portfolio in crypto at one point so I wouldn’t be surprised if this was a 20-30% position that nearly doubled. Kuppy is not afraid to take big bets and usually reserves his Adventures in Capitalism email listserve for things where he has high conviction. This has all the hallmarks of a big bet. Again we will see the results of this trade will show up in the financials when MGG reports. Hard to be precise, but I’m predicting the securities portfolio went from $22 million at end of Q2 to $24-$26 million at end of Q3.

Second, earlier this year Kuppy launched a newsletter called Kuppy’s Event Driven Monitor (KEDM). I’m sure some of you have seen a copy and maybe some have subscribed. For those who don’t know, it is basically a massive list of event driven situations. I personally think it is a pretty useful and interesting product. It is probably worth the $2k per year for many funds and individual investors to have a quick index of upcoming special sits.

 What many people do not know is that KEDM is actually a subsidiary of MGG. I think the original intent of KEDM was to generate a few hundred thousand in positive cash flow to offset the slow bleed of the MGG property portfolio. It was supposed to be a small net positive, emphasis small. However, I think Kuppy hit a bit of a vein with this idea and execution and may have a winner on his hands. Here is what he has said publicly a few months back: “The reception to the free trial has dramatically exceeded our expectations, both in terms of total number of users and engagement.”

As you may know, Kuppy has a pretty big reach with 33k twitter followers (KEDM alone has 3k followers). I think the combination of a quality newsletter hitting an unmet need combined with a founder who has a sizeable microphone can lead to a pretty successful business. By all accounts, KEDM seems to be on that path.

 KEDM was free for several months to start the year, but put up their paywall on July 1, 2021 (the first day of Q3) and I think the initial batch of subscribers and corresponding revenue could shock investors when it is unveiled on Friday.

 We do have some figures which were buried in the footnotes of the Q2 filing which is that in June alone, KEDM generated nearly $1.4 million CAD in subscriptions and then another $150,000 “subsequent to quarter end.” That is $1.55 million in subscription revenue on basically day 1. I have to think they finished the quarter with $2 maybe $3 million or more in subscriptions.

 I also think there is some reflexivity to this newsletter. The more winners Kuppy has (like the uranium trade in September), the more followers he gets and the more likely he is to convert  some of them to KEDM subscriptions. I wouldn’t be surprised if KEDM had a big September given Kuppy's success with the uranium trade.

 And just to put the revenue that KEDM is generating into perspective. In 2Q21, MGG as a whole only had $180k in revenue. KEDM is seriously material to MGG already. 

 The market is implying zero value for KEDM right now and I think the business could already be worth several million dollars.  Let’s say they can get to $4 million run-rate revenue by the end of the year which I don’t think that is unreasonable since they already got $1.55 million in just the first few weeks of the paywall launch. I think subscriptions probably accelerated after the uranium trade in September as well. 

I’ve seen newsletter multiples all over the map. More seasoned ones have been acquired at over 10x revenue and smaller ones closer to 2 to 3x. To be conservative, I’m applying a 3x to 4x multiple on KEDM. This is a $12 million to $16 million boost to the intrinsic value that nobody is factoring in. 

 I think the Q3 earnings release is going to be a real catalyst for the stock. Not only are we going to see the fruit of the uranium squeeze trade hit MGG’s security portfolio, but we are also going to see KEDM hit the income statement as well.

 A post Q3 release back of the envelope valuation:

Securities value of $22 million CAD  $24 to 26 million

Property book value of $13.7 million CAD  $12 million

KEDM  $12 million to $16 million

Intrinsic value = $48 million to $54 million CAD

Market cap of $35.7 million CAD

I think you are reasonably looking at a current discount to intrinsic value of 37% to 55% once Q3 numbers make this picture clear. Based on the MGGF price, that’s a target price of $1.44 to $1.62 (USD).

Other key points:

·      Kuppy has been buying shares including a filing on 10/21/21

·      Kuppy looks to have profited from the DWAC mania but we won’t see that hit the portfolio until the following quarter. Unclear if that was in MGG too. https://twitter.com/hkuppy/status/1451226640344887302

·      MGG has been buying back stock including 433k shares in July after buying back 1.1 million in Q2.

·      Subsequent to quarter end, the Company sold 5 properties in Mongolia with a book value of approximately $1,300,000 for a gain of approximately $75,000.

·      On November 7^th, Kuppy sent out another email noting that he had reloaded the SPUT trade. He wrote the following: “When a situation comes around, one with defined risk and exponential upside—I max it out. For the right situation, I get positively piggish about it. There are so few great opportunities, so few times where the risk is negligible, yet the upside is exponential, that when I find one, I push my chips across the table. Over time, what separates the real winners in this game, from the benchmark huggers, is the ability to really max out those special opportunities that come around occasionally. It comes down to knowing your craft, knowing your history and being realistic about when a setup is special. Sometimes, it just makes sense to be a pig and gorge on exposure.”

Catalyst

Q3 earnings announcement

Security portfolio performance driven by uranium squeeze trade

KEDM revenue hitting income statement