Argo Group Ltd – HY 2016

LON:ARGO – 15,00 GBX

1kr50öreArgo Group Limited is an investment company. The principal activity of the Company is that of a holding company and the principal activity of the Company, along with its subsidiaries, is that of an investment management business. The Company operates through the asset management business segment. The Company’s investment objective is to provide investors with absolute returns in the funds that it manages by investing in, inter alia, fixed income, special situations, local currencies and interest rate strategies, private equity, real estate, quoted equities, high yield corporate debt and distressed debt, although not every fund invests in each of these asset classes. The Company’s subsidiaries include Argo Capital Management (Cyprus) Limited, Argo Capital Management Limited, Argo Capital Management Property Limited, Argo Property Management Srl and North Asset Management Sarl. – Google Times.

1. The company is currently a net-net with an adequate margin of safety: 


  • P/NCAV < 1x
    • 0,39x 
    • MoS = 61 %

Assessment of why I think the margin of safety is adequate in relation to NCAV:

ARGO is a classic deep value stock, i.e. you can buy a dollar for fifty cents. In this case it is even better since you can actually buy a dollar for 43 cents (P/Net cash = 0,43x). With that in mind it is important to note that ARGO is an investment management company with an NCAV consisting of no inventory and only a small amount of accounts receivables (10%), the rest is cash (38%) and cash equivalents (52%). What I like about these types of net-nets is that the NCAV-burnrate (or more specifically the net cash-burnrate) tends to be quite low and/or directly beneficial to shareholders. What I mean by that is that the burnrate to a large extent can be controlled and managed by the company (employee costs for example) and/or benefit shareholders directly (dividend and/or buybacks). In the case for ARGO they have over the years used their cash to invest in their own market funds but also used significant amounts to pay dividend and buy back own shares. Nonetheless, ARGO’s NCAV-burnrate for the last twelve months has been positive , +49%.

So ARGO is a big pile of cheap cash, but what about earnings and profitability? Actually, the profitability has been quite good over the eight years that data exist for. On an operating income level ARGO has been profitable for seven out of those eight years, P/EBIT8y = 5x. Also, ARGO is selling for a P/E-ttm of 2x while not taking into account that the company has an negative enterprise value. In other words, ARGO is not only cheap on an asset basis.

When it comes to ARGO’s management there is quite a bit to be said, especially on the negative side. Both Alpha vulture and Wexboy have written about this so I won’t go into any details (see links to their posts below). Nonetheless, management today own about 54% of the shares outstanding and therefore control the company. Because of the of the current share buyback program that amounts to £2 million this position could materially increase in the future.

Source: Regulatory share information

Even though management today has control over the ARGO I would still argue that their interests are somewhat aligned with minority shareholders. The reason behind this argument can be found in the 4,840,000 options outstanding with an exercise price of 24 GBX (se picture below). In order for these to have any value for management the share price would have to increase by 60 % from the current price of 15 GBX. So even though the options would dilute minority shareholders with about 10% I don’t see this as negative factor given todays circumstances.

Source: Half-year report

I would argue that the buyback programs that the management has implemented is one attempt to make these options valuable. With the current buyback mandate of £2 million the company could given todays market price in theory buy back ~28 % of the shares outstanding.  However, it seems that there has been some difficulties finding shares for sale as only 375,000 shares has been bought back as of current date. My speculation is that if this continuous to be a problem we might see a tender offer from ARGO to minority shareholders at a price at least in the range of the exercise price of options.

2. The risk of permanent loss is low:

2.1 The risk of bankruptcy is low (criterion a) or b) must be met):


  • Debt/Equity < 25 %
    • 0 % 


  • Z-score ≥ 3
    • 18,4 

2.2 The company’s business model has historically been profitable (criterion a) or b) must be met):


  • Positive retained earnings:
    • -1,4 M$ X


  • Positive aggregate operating income for the last five years:
    •   3 M$ 
      • Operating income data exist for the last eight years = 13,5 M$

3. The company does not have a shareholder unfriendly capital allocation (i.e. not diluting shareholders):

  • Shareholder yield TTM ≥ -2 %
    • Dividend yield TTM = 0 %
    • Net buyback yield TTM = +29 %
      • =  +29 % 


Other analysis of Argo Group Ltd:

Disclosure: The author is long LON:ARGO when this analysis is published. Also note that LON:ARGO is a nano-cap stock (9 M$ in market capitalization). The trading is very illiquid.