Updates (May 2017)

Updates on recent investment ideas



PennTex Midstream (PTXP) +32% in 4 months

Back in Oct 2016 Energy Transfer Partners acquired 65% of PTXP and hinted its intention to buy-out the remaining public shareholders. Despite this PTXP was still trading significantly below the value at which ETP made the purchase and also at discount to its fair valuation. At the time when I published this idea (Feb 2017) ETP was pre-occupied with the merger of Sunoco Logistics and I reasoned that as soon as this merger is completed, the announcement will be made regarding the remaining public equity stub of PTXP. That is exactly what happened – SXL/ETP merger was completed at the end of April and just yesterday ETP announced buyout of the remaining PTXP shares at $20/share.

Tangoe was a company in a bit of a turmoil – financials were non-current, previously filled financials had to be restated, there was a pending class action lawsuit as well as ongoing SEC investigation. Despite this couple parties have expressed the interest to acquire Tangoe and shares were trading with a narrow spread relative to the expected acquisition price. However, in March TNGO delisted from NASDAQ and forced selling caused shares to drop 20%. This created a great buying opportunity. I reasoned that TNGO acquisition offer is still on the table as one the potential acquirers expressed their full awareness of financial mess TNGO was in and suggested that this situation did not reduce their interest. At the same activist investors were pressing the company to sell itself. Just few weeks later, it was announced that Marlin Equity Partners have agreed to acquire TNGO at $6.5/share.
Wingstop share price jumped +14% to all time highs after release of Q1 earnings due to good looking headline revenue and EPS numbers. However, the headline figures were misleading and were driven purely by non-cash accounting changes and one-time revenue item. In reality Q1 earnings showed hardly any positives with first ever decline in same store sales and continued deterioration in growth. I reasoned that such exuberant trading was likely caused by algorithmic robot trading or completely superficial retail investors who misread the headline numbers for huge improvement in operational performance. And due to that I shorted WING and expecting fast share price correction at least towards pre-release numbers. WING shares started dropping the next day and now stand close to the levels before the earnings release. All worked out exactly as expected with short position generating 10% in 2 weeks (option buyers generated multibagger 4x).

AP Alternative Assets (AAA:AMS) +5% in 3 weeks
AP Alternative Assets is a partnership listed in Amsterdam and has only one asset – shares of Athene, US listed life insurer. Partnership is aiming to gradually distribute all ATH shares to AAA unitholders within one year and then liquidate. Couple distributions have already taken place and a further distribution has just been announced. Actually it seems that these distributions are happening at a faster pace than initially planned.  Despite seemingly zero risk the spread between AAA and ATH shares stood at 8% at the time of write-up. Over the the next few weeks the spread narrowed to 2.6% and I have closed the position. Following the announcement of the latest distribution the spread has now fully closed. The spread might increase again, so it is worth continuing to track this situation.

Zweig Fund (ZF) +4% in 1 week

Two closed end funds (CEFs) were merging into one and both were trading at different discounts relative to their NAVs. Both funds were administered by the same asset manager and shareholders of both funds had already approved the merger so the risk of cancellation was very low. This created an arbitrage situation with a spread of 7%. The spread quickly narrowed over the next few days and I closed the position with 4% gain (the spread of further 2% remained for those who waited till completion of the merger, i.e. another two weeks)



Destination Maternity (DEST) +22% so far (36% M&A spread remains)

This is a cross border all stock M&A deal with a large spread and high likelihood of being closed (planned by Q3 2017). I did not have any position in this trade due to no possibilities to hedge (the other side of the trade – KAZI – is microcap in France). The spread has remained volatile and at couple points increased to >50%. However, so far the unhedged trade is performing well with 27% return in a month. This was driven by sudden appreciation of KAZI share price (potentially due to an agreement to expand in Saudi Arabia, which judging from limited details provided hardly adds any value) as well as increased awareness of this M&A opportunity.

Local Shopping REIT (LSR.LON) +15% so far (24% discount to NAV remains)

UK based REIT that is currently in liquidation mode and is gradually selling down assets. Operations remain cash flow positive and assets are being liquidated close to BV. Estimated NAV stands at 43p vs 28p share price at the time of the write-up. The discount to NAV started to narrow after LSR announced a number of successful asset auction, majority of which were done at a premium to BV. Despite the run up in share price the discount to BV still stands at 24% and I continue to hold the position.

Tejoori (TJI.LON) +2% so far (40% discount to NAV remains)

Following the sale of all the assets Tejoori is currently cash shell trading at huge discount to book value. Management expressed a number of times the intention to return a portion of cash (amount not specified) to shareholders. My expectation was/is that distribution announcement would at least partially close the gap between cash on the balance sheet and the share price. The latest land-plot sale was finalized at the end Feb 2017 and so far there have not been any further announcement (besides half year report, which did not provide any further info re distributions). So now we are in the wait and see situation.

Advanced Emission Solutions (ADES)  -4% so far (expected 20% upside)

This is a recent write-up, so not much happened since (except for small share price decline). Company is due to initiate quarterly dividend of $0.25/share in June (10.6% yield) which is my main catalyst for the short term share price appreciation. The downside here  seems to be well protected by the contractual cashflows + royalties from RC business (worth more than the current market cap). And at the same time there is free upside from potential extension of tax credit regime, further growth in chemicals division, potential leasing of the remaining 14 facilities or any cash distribution announcements.

Prospect Japan Fund (PJF.LON)  -20% so far (expected 30% upside if the deal closes)

This one is disappointing so far and in the base case scenario probably has a chance to breakeven rather than produce the upside relative to write-up prices. The acquisition of PJF by its asset manager (Prospect Co, listed in Japan) is still pending – discussions have been extended a number of times and the latest deadline is 30th of May (likely to be extended again). The drop in share price of PJF was driven by couple of factors. (1) The share price of Prospect Co declined by 25% reducing the value of warrants held by PJF; (2) The prices of other securities held by PJF also depreciated reducing the reported NAV by 5% even after inclusion of some of the value of Prospect warrants; (3) Prospect Co was accused of insider trading, which seemed quite immaterial event.

New York REIT (NYRT)  -8% so far (7% upside in base case remains)

Management announced estimated liquidation value of $9.25/share (vs $11+ expectations), which surprised the whole market and contradicted previously communicated valuations. The $9.25/share might still prove to be a conservative figure although during the conference call CEO repeatedly stated that this is the most realistic liquidation scenario. I am holding my position at a loss. With sale of most assets expected by the year end, share price should approach the distribution estimate over the next couple of quarters.


3 thoughts on “Updates (May 2017)”

    • I have closed QQQX back in Feb as the discount did not narrow in the ST and borrow was/is expensive (see QQQX comments thread). Premium now stands at 4%, so market is even more irrational than at the time of the write-up. However, as long as we are in the bullish market this irrationality might persist – it already takes longer than historical examples.


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