It’s not a normal situation for a closed-end fund that owns a portfolio of publicly listed stocks to trade consistently above its net asset value (NAV): Most investors shy away from buying a stock that costs more than its worth. As well, such a stock would attract the interest of short sellers.
But there is at least one TSX stock that has consistently traded above its NAV and that shows no sign of returning to its proper value. That stock is Cymbria Corp., which also ranks as one of the TSX’s more unusual companies. On Thursday, the shares closed at $52.75; on its website Cymbria listed the NAV at $45.57.
Toronto-based Cymbria, which went public in 2008, is unusual because it offers its owners an interest in a portfolio of public securities as well as an interest in a money manager, EdgePoint Wealth Management. (A group of managers, all of whom worked together at Trimark, now known as Invesco, formed EdgePoint.)
In its IPO, Cymbria raised $233.9 million, of which $142 million (at $10 a share) came from the public and the rest from a private placement. At the time, Cymbria had a 22 per cent stake in EdgePoint.
“The Manager believes the wealth management company has the potential to be a material contributor to the long-term value of the company, however, this investment will only require a minimal amount of capital as a proportion of the size of this offering,” Cymbria said then. Cymbria’s original EdgePoint investment was a tad over $500,000.
Since then Cymbria hasn’t been in the public markets raising additional capital, although on a regular basis it announces a normal course issuer bid. And it doesn’t talk much: messages sent to two of its management team weren’t returned.
But EdgePoint, which now accounts for 15.48 per cent of its portfolio, has been the big winner.
For instance, at the end of 2017, retail assets under management were about $15 billion while institutional assets were about $3.2 billion. Those assets come from a concentrated source of providers: at the retail level, 20 per cent of advisors represent about 83 per cent of the assets; at the institutional level, 20 per cent account for 93 per cent. “We look forward to building wealth for our investment partners over the long term,” said Cymbria.
Given the growth of EdgePoint’s business, what is the stake worth? Last December, Cymbria determined it was worth $185.9 million. (It has also received a total of $33.5 million in dividends.)
Given that Cymbria originally invested only $509,000, the returns have been rather spectacular. Cymbria said it determined that valuation “with the assistance of an independent valuator and the Valuation Committee.”
One year earlier, (December 2016) EdgePoint was valued at $110.3 million. At end of 2013, it was valued at $35.6 million. But over the years, Cymbria, according to its annual information form, has used a number of valuation approaches. While it’s now mainly a discounted cash flow model, “as circumstances dictate, alternative valuation approaches to determine the fair value of EdgePoint may be utilized.”
For the period 2012 to 2014, the methodology was a combination based on metrics (a percentage of assets under management, or a multiple of EBITDA) as well as a DCF model.
So what gives? It would seem investors are prepared to pay up based on the strength and quality of EdgePoint, which, could for example, realize full value by going public. In rough terms, Cymbria’s 15.48 per cent stake accounts for about $7 of Cymbria’s NAV and Cymbria trades around $7 above NAV. Accordingly, EdgePoint would have to double to bring NAV and trading price in line.