Aberdeen International (TSX: AAB)

Aberdeen International (AAB) is an combination investment bank, merchant bank, and venture fund that provides financial services, financing, and direct equity investments to small natural resource companies predominantly out of Canada.  AAB is a smaller image of the private merchant bank Forbes & Manhattan which AAB has a managerial relationship with.  The stock is attractive at a share price around $0.35-$0.40 for the following reasons.

• Trades at roughly 1/3 of book value with no debt and few liabilities.  (See Figure 1)  Since the majority of its assets are investments in publicly traded stocks as well as accounts & loans receivable, only a small discount would necessary to reconcile the book-value with a conservative fair-value that you may choose.
• Competent Management: Management has shown themselves to be adept at increasing shareholder value by both issuing share when they trade at a premium to book value and repurchasing them back when the shares trade at a discount to book value.  In 2007 the issuance of 75m shares at a P/B~2 more then doubled the book value per share.(See Figure 2 & Table 1)  Furthermore, when the share price collapsed in 2008-2010 and the P/B<0.3 they were able to repurchase 15% of the shares outstanding and intend to repurchase a further 8% of the shares outstanding before 2011.  This is an excellent case where the management is using share-price volatility and turning it into an asset.  Great job! 
• Good Insider Ownership: Management owns 13% of the shares outstanding which gives further assurance that they will be acting in the best interest of shareholders.  This is enhanced even further by the insider's ownership interest in Forbes & Manhattan which shares many of the same investments with AAB.
• Good Exposure to Precious Metals:  Most of their equity investments are with precious metals junior miners and some of these companies have an undervalued share price in their own right.  I am a firm believer in precious metals prices have a strong tail-wind and a lot more room to sail.  More can be said on this in further posts.  Their top publicly traded investments include:
• Crocodile Gold (TSX: CRK) - A junior gold producer with operations in Australia.
• Sulliden Gold (TSX: SUE) - A development stage junior gold company with a deposit in Peru.
• Avion Gold (TSX-V: AVR) - A junior gold producer with operations in Mail, West Africa.
• Dacha Capital (TSX-V: DAC) - Company that solely buys rare earth metals and stores them in anticipation of future price appreciation

As for the downside risks:

• Since the companies that AAB invests with and finances tend to be small and not necessarily cash-flow positive, the risks exists that the value of these investments will be unnecessarily dilute on a per share basis if the company 1) does not perform operationally and/or 2) is forced to finance itself by selling stock at inopportune times.  The AAB management has attempted to control these risks by participating at the director and/or management level of the companies they invest in.
• Like management fees at closed-end funds, it is a good idea to keep tabs on the equivalent management fees they are paying themselves to make sure they do not become unreasonable.  As shown in Table 1, the SGA expense (selling, general, administrative which is inclusive of all booked management compensations) to total asset ratio gives us an upper bound on booked management fees relative to assets.  Averaging over the trailing 3yrs this ratios ranges from 2.7% - 4.9% per year.  I say booked management fees because with the share price trading at deep discounts to book value and the management issuing themselves quite a few options with strike prices at these very low levels, the booked stock-based compensation expense will be underestimating the true expense if fair value had been used instead.
• There is litigation involving C$10m of AAB's loan receivables that it currently has on its balance sheet.   If this were to be fully written-off the P/B would still be quite low at around 0.4.

Interviews:
Here are a couple good interviews with the management of AAB and its associated company Forbes & Manhattan

• theaureport.com 
• investingthesis.com 

Charts & Tables:

Figure 1: Simple visual representation of AAB's balance sheet exemplifies its strong nature and the large discount the market is placing on it.

Table 1: A table which includes the values from Figure 1.

Figure 2: Here we see how management has been able to increase the book value per share by opportunistically issuing shares when P/B is high and repurchasing share when P/B is low.

Stock Screening Method:

• One can use FT.com's international stock screener 
• Criteria would be
• Canada listed stocks
• P/B < 1.0
• ROA (avg. 5yrs) > 3%

Conclusion:  Based on the above I think the downside risk is limited and the upside potential is attractive.  In a future post I will break-down each of AAB's  balance sheet items in more detail.

Disclosure: I own shares in AAB