Is VSL a wee foxy lass?

July's update at VPC Speciality

Dear reader

VPC is in a period of wind down. Its dividend on a “headline” basis is one of the strongest on the market at an alleged 19.51% per annum (according to HL).

But is that good value for money? Is it “real” and sustainable? And should existing shareholders hold on, average down, or exit?

For a start, the true dividend is 18.3%. That’s because the dividend is/was/has been 2p per quarter (backed by strong returns on VSL’s loan portfolio) but due to a 0.11p/share B shares capital return this has now been reduced to 1.89p per qtr. 7.56p on a 41.2p ask price is 18.3%.

Still, a chunky old divvy covered by earnings!

VPC’s monthly report for July 2024, its 1Q24 report and 2Q24 report as well as the 2023 annual report give little scattered clues but each are partial pictures to the mechanics driving the share.

The NAV 31/12/23 was £225.1m since then we know as at 31/07 there’s been a chunky YTD reduction in the NAV. 80.9p a share 31/12/23 to 66.34p at 31/07. 14.56p reduction.

Of course dividends soften the loss by 5.78p YTD. And a capital return by 4.28p YTD so 10.06p a share YTD.

So a -4.5p per share net loss. 2023 was no kinder. A net -4.33p loss in FY23.

2023 Return Return and Capital Return for VSL

Today NAV is £184.6m or 66.34 pence per share which is a 42.6% discount to NAV compared to today’s share price (40.7p bid / 41.2p ask)

VSL continues to deliver a strong “revenue return” from loans. On a 41.2p share price 9.23p is a 22.4% gross return, or 13.7% net of expenses and fees. It’s a growing proportion too, growing from 67% at Y/E22 to 73% at Y/E23 and 78% today.

The growing amount of debt is due to a mix of write downs and realisations on equity.

But eagle-eyed sceptic readers might say Ah hah, but what about the -22.2% capital return suffered over the past 12 months. Well, let’s examine the NAV a bit further.

The NAV is made up of four components:

• Cash/Current Assets (possibly with some remaining level of debt)

• Loan (Assets)

• Equity (Assets)

• Current Liabilities

Cash/Current assets is 7% of NAV is more or less “in the bag” so discounting that would be strange.

We then have £144m of Loans and those are largely what drives the revenue returns (about 90% of returns). Equity drives 10% of revenue returns i.e. via dividends and these comprise £27.7m of assets.

The estimated VSL balance sheet as at 31/7/24

Debt at 3.95% + 1m SOFR was 8.5% interest and now equates to a £2m/year saving assuming that all debt is now repaid. Higher interest rates obviously have been a slight drag on performance for VSL.

£24m of £39m of Debt is the credit facility

Equity

Turning to equity the remaining equity is much reduced in 2024. We see two realisations in dark green which turned to cash at a slight gain, while we see 4 gains and three losses. Pattern Brands isn’t spoke of by the investment manager but it appears to be a 100% write off. WeFox is a well-publicised recapitalisation due to a rapid overexpansion and now a retrenching.

As revealed by Donald Pond on Pond Life Mark Hartigan was brought in to help grow WeFox but instead was a fifth columnist and attempted to repeat the panic he allegedly created at LV (London Victoria) back in 2021 to a PE house where he would personally benefit and receive £20m if he had been able to force a sale of WeFox. He failed and is now on the way out. Quite how the recruiter didn’t know about LV is beyond me. I have recruited a number of people in my years and every time I’ve googled them. This chap was headline news with Sky, it wasn’t hard for me to corroborate Donald’s view.

From here, WeFox is actually not a bad business. Is that £6m remaining equity as good as gone. I don’t think so. I follow WeFox as this is also a large CHRY holding and I rate the investment manager at CHRY to make sensible choices. They have participated in the funding round and restructure so stabilises WeFox and a future is still possible (but also a potential sale of shares from VSL to CHRY).

Also notice numerically most equity holdings are gains YTD but admittedly three major losses which outweight those smaller gains.

If we assume 100% of Caribbean is a goner, and 100% of “other equity” is a goner too (I’ve absolutely no reason to think that’s the case but I want to illustrate the very limited downside). That’s £7.61m or 2.7p a share.

I’m making the reasonable assumption that increasing equity suggests diminishing risk and a recapitalisation at WeFox the same.

Deducting that from 66.3p/share gets us to 63.6p a share.

Let’s now consider the 51.7p/share of debt:

Deinde and Perch merged to become Deinde and an approximate £10m loss occurred on that merger. Juvo and Moonshot also merged to become Infinite Commerce, and HeyDey went into chapter 6 bankruptcy which wiped out the equity holding but the debt appears to retained at around 90% of its former value.

Otherwise all we see in reductions is the orderly pay down of the capital with a little bit of FX loss in the YTD. In other words, the remaining 51.7p/share feels quite solid.

In fact when you consider about half (~£70m) will be repaid over the next 15-18 months leading to a circa 25p per share capital return (via B shares). This would reduce dividends to about 1.1p per quarter.

Between now and then Investors should be able to enjoy 1.89p x 5 = 9.45p of dividends plus at least a 25p capital return. If we assume the equity investments turn to cash (7.7p of 10p) that gets us neatly to 42.15p or about 1p above today’s buy price.

2026-2028

The remaining circa £87m (~£74m of loan book and ~£13m cash) should still generate a further 10p-12p of dividends (at around 1p-1.2p per quarter after costs) and a further up to 30p per share of capital return. Essentially everything after 2026 is upside.

42p would be a 100% return over three or so years.

Conclusion

A 25.1p per share discount assumes 100% of the equity and 30% of the remaining loans are worth zero. It further assumes there are no further dividends. Those assumptions are extremely pessimistic to be almost impossible.

My analysis shows 1.89p a quarter is affordable from current income over the next 15-18 months; and 1p-1.2p after that until this is wound up in late 2028 or 2029.

In early 2026 as dividends reduce I foresee a large capital return is likely and that this will largely or wholly cover today’s share price.

After that there is only upside and that could be up to 100% upside, albeit a large chunk of that upside only appearing in late 2028 or early 2029. I am quite optimistic that WeFox now has a plan to thrive and its chances to IPO, in time, are still there. Meanwhile there’s a growing cash pile at VSL, reduced costs and probably not much more bad news which can happen here, probably much to the relief of investors.

In considering whether to buy in and/or average down there appears to be a path to a nice reward and the large part of that is fairly near term through dividends and capital returns, with lots of downside already priced in too.

Regards

The Oak Bloke.

Disclaimers:

This is not advice

Micro cap and Nano cap holdings including those held in Investment Trusts might have a higher risk and higher volatility than companies that are traditionally defined as "blue chip"