2014 – The Great Irish Share Valuation Project (Part VIII)

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Continued from here:

[NB: Worth revisiting Part I if you're a new reader, or you'd like a refresher on TGISVP & my approach to the whole project.]

Company:   Fyffes

Prior Post(s):   2012 & 2013

Ticker:  FFY:ID

Price:   EUR 1.27

Seems like I picked the wrong horse, choosing Total Produce (TOT:ID) instead of Fyffes…but I can live with that, you can’t pick ‘em all & TOT’s been good to me. But maybe not good enough – because FFY popped 46% in early March, on the news of a definitive merger with Chiquita Brands International (CQB:US). [CQB also closed 11% higher on the day - since then, on average, each stock's held onto its gains]. I think we can comfortably assume the deal will go ahead (unscathed):  Shareholders love it, the DoJ doesn’t give a damn what happens in Europe, and the Irish Competition Authority is presumably asleep at the wheel, as per usual. [A study confirmed the ICA has a rejection rate of just 0.7%!] Anyway, what deal dissenter would relish the possibility of mercenaries dropping in for tea & a little chat..?! ;-) At this point, let’s just rely on the merger terms for our valuation:

USD 12.25 CQB Share Price * 0.1567 CQB Share (per 1 FFY Share) / 1.3841 EUR/USD = EUR 1.39

Fyffes is marginally undervalued – it offers an attractive arbitrage for the big boys, or a cheap entry price if you’re interested in going long the new ChiquitaFyffes.

Price Target:   EUR 1.39

Upside/(Downside):   9%

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2014 – The Great Irish Share Valuation Project (Part VII)

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Continued from here:

[NB: Worth revisiting Part I if you're a new reader, or you'd like a refresher on TGISVP & my approach to the whole project.]

Company:   Tullow Oil

Prior Post(s):   2012 & 2013

Ticker:  TLW:LN

Price:   GBP 800p

Well, I’ve definitely offended TLW shareholders in the past two years – particularly in 2012, when I predicted a 339p price target (vs. a share price of 1543p at the time). WTF..?! But I must admit, their response was far more dignified than that of the junior resource hoi polloi – clearly a better class of people. [The other day, I was amused to read about a US small-cap CEO lamenting his shareholder base used to 'include those nice guys at Fidelity', but now it was 'just guys in muscle tees from Jersey!'] Hmmm, maybe they just weren’t taking me too seriously? But at this point, I bet they’re taking their bloody losses seriously. ;-) Ouch, down nearly 50% in the past two years (after bouncing from a recent 736p low).

Well, Tullow obviously needs to pick up its game on the exploration front, results were decidedly mixed in 2013. [It's interesting to see how exploration drilling success (or failure) is still such a primary share price driver for a company the size of Tullow]. At this point, continued exploration success in Kenya has become increasingly important for the company, with estimated gross recoverable resources of 600 million boe (potentially a billion boe plus) to tap. I suspect we’ll also see a continuing secondary focus on Atlantic Margins exploration, but other non-core exploration (& mature production) assets will be likely disposal targets. Which explains the latest annual report cover: Africa’s Leading Independent Oil Company - current production in West Africa, future potential in East Africa.

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2014 – The Great Irish Share Valuation Project (Part VI)

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Continued from here:

[NB: Worth revisiting Part I if you're a new reader, or you'd like a refresher on TGISVP & my approach to the whole project.]

Company:   Green REIT

Prior Post(s):   2013

Ticker:  GRN:ID

Price:   EUR 1.20

Since I first wrote about Green in August, not a lot’s changed fundamentally. But boy, it’s been a fun ride! The share price actually traded up to a EUR 1.479 high since then, an astonishing 53% premium to NAV. In fact, I’m bemused to see GRN’s all-time closing high (of EUR 1.442) was set on December 31st. [And has suffered a steady decline since. Same for Hibernia REIT (HBRN:ID)]. It’s so obvious, it’s laughable… Hmmm, if you already owned a decent slug of shares, wouldn’t it be sooo tempting to spend just a little more driving the price higher? Sure, it would raise your average entry price marginally, but also do wonders for your year-end mark-to-market! ;-) Unfortunately (or fortunately!), the Irish market’s a good venue for this type of fun & games – prices can sometimes be pushed around with surprising ease. It’s not like anybody expects the Irish exchange will ever bother doing anything about it…

Then there’s the problem of over-enthusiastic & naive investors. God forbid I compare property & junior resource stock investors, but sometimes I wonder… When it comes to real assets, too many investors seem to think something magical happens when they’re acquired by listed companies. A resource CEO throws together a rag-bag of exploration licences (acquired for a few million), IPOs the company, and minutes later the same assets are worth 50 million plus! As for property, there’s the old joke: ‘Yeah, they just bought it for X million. Wow, that’s an amazing property, you won’t see another like it…I wonder how much it’s worth?!’ Yes, I actually get emails like this: ‘The Green REIT portfolio’s on a tasty 8.7% yield – what do you think it’s worth?’ Er, pretty much what they fucking paid for it three months ago, I would think!

[I'm really not trying to mock Irish/UK investors here. The real lunatics are in the US, of course - where investors are willingly sucked into that other great blood funnel, the REIT/MLP machine. All too often, valuations bear little relationship to actual asset values, but nobody cares... Kennedy-Wilson Holdings (KW:US) is a great example - now a much-vaunted name on the European side of the pond, but how many investors have actually checked out the parent company listing? It trades on an astonishing 2.3 times book!]

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2014 – The Great Irish Share Valuation Project (Part V)

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Continued from here:

[NB: Worth revisiting Part I if you're a new reader, or you'd like a refresher on TGISVP & my approach to the whole project.]

Company:   Trinity Biotech

Prior Post(s):   2012 & 2013

Ticker:   TRIB:US

Price:   USD 26.55

First up, I should remind readers TRIB used to be a large holding for me. And I bloody well hung on for as long as I could – bailing out of my final tranche of shares last August, with a near 700% gain on my average net entry price & almost an 1,100% gain on my initial purchase price. Of course, I ended up leaving money on the table – it’s rallied another 30% since then! But I’m not sure I understand the investor who’s buying at today’s price… I much prefer being the investor who bought TRIB at a tenth of the price, when it was truly despised & neglected! But let’s keep an open mind – what’s a sensible valuation for the company today?

In reality, Trinity’s transformed itself (& its investor base) from value to growth in the past couple of years. Most of its cash pile has now been spent on acquisitions. [But it remains in rude financial health - generating healthy cash flow, with $22.3 million of cash & zero debt]. The Fiomi Diagnostics acquisition is coming to fruition – the company’s now ramping up sales & marketing for the actual/expected European & US approvals (in 2014/15) of its Troponin I & BNP cardiac tests. In 2013, they added a UK-based blood bank screening business & Immco Diagnostics, a US (autoimmune) diagnostics company. These are complementary businesses, they add another $16.5 M of revenue, and Immco’s business/pipeline can be quickly leveraged up (using TRIB’s existing resources) to a 20% pa growth trajectory.

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Cheap & Interesting!

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There’s one category of email I receive ’bout every second day. A typical example will thank me for the blog (yes, always good to hear!), stress they’re a regular reader, often cite a share we own in common, but then we reach the real meat – usually a somewhat impassioned plea:

Please tell me…where & how exactly do you come up with your ideas?!

All appear to be from genuine readers & investors – I certainly don’t think anybody expects some kind of get-rich-quick answer. [Though it gives a taste of how such a desire is so regularly exploited by the unethical & downright criminal]. I suspect this plea reflects a pretty common frustration for investors – where & how do I find new ideas…and how do I know if they’re actually bloody good ideas? Of course, I’ve no magic short-cut to offer here. My definitive answer’s still:

Read, read, read & then read some more…

I covered this ground in ‘Why I Read…’ (Parts I, II, & III - probably my most popular blog series ever). ['Why I Write...' may be a useful companion piece]. Looking back, I think these lines (from my final post) nicely sum up the challenge & benefits of reading:

‘I’m talking about territory where the greatest opportunities, and the greatest investors & traders, reside….For them, you can probably chalk it up to pure innate talent. For the rest of us, I think huge swathes of reading is the inevitable toll you pay to get there – however you go about it:

But reading annual reports will give you the figures. Reading non-fiction gives you the facts (& the right context). And most importantly, reading fiction allows you to recognize the fear & greed in yourself (& others), and enables you to see & imagine the world very differently.

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2014 – The Great Irish Share Valuation Project (Part IV)

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Continued from here:

Company:   Grafton Group

Prior Post(s):   2012 & 2013

Ticker:   GFTU:LN

Price:   GBP 665p

Revisiting last year’s post, I see this prediction: ‘don’t be surprised to see Grafton suggesting a GBP re-denomination later this year…they might just go the full hog & dump their Irish listing in favour of the UK.’ Six months later, that’s exactly what they announced! Which makes sense really – over 75% of Grafton’s revenue now comes from the UK. On the other hand, you’d think the bloody Celtic Tiger was back, considering how the share price has behaved – a triple in just 18 months!? I was pretty bullish originally on Grafton, but my valuation estimate’s certainly been marking time ever since…

In the latest trading update, FY-2013 revenue reached GBP 1.90 billion & like-for-like sales were up nicely across the board. Recent reports suggest the 4.2% operating free cash flow (cash generated from operations, less net capex) margin’s still running well ahead of underlying operating profit – let’s assume that’s still the case on a FY basis. And I continue to believe Grafton will, in time, revert to its prior 7.0% peak operating FCF margin. For valuation purposes, averaging the two seems fair – a margin of 5.6% still deserves a 0.5 Price/Sales multiple, in my opinion. With net interest hovering ’round 15% of operating profit, no further debt/cash adjustments are necessary. [At this point, I don't believe a P/E multiple's a practical (or effective) valuation alternative to also incorporate here]. Which gives us:

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2014 – The Great Irish Share Valuation Project (Part III)

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Continued from here:

Company:   Kerry Group

Prior Post(s):   2012 & 2013

Ticker:   KYG:ID

Price:   EUR 51.60

So, here I am again – eyeballing Kerry’s valuation, and searching for supporting evidence in its accounts. But it’s nowhere to be found… Now I think about it, maybe all the big Irish food/agri companies will end up looking wildly over-valued to my jaundiced eye? This investor homage perplexes me – surely someone recalls how little respect these companies commanded in the past?! Well, perhaps they were different beasts then – but I don’t believe they’ve (fully) delivered on what they promised, when they embarked on this multi-year process of portfolio rationalization & re-configuration. And I certainly don’t believe they’ve grown into their current valuations either.

Then again, maybe I shouldn’t look a gift horse in the mouth! Now Donegal Investment Group (DCP:ID) has ditched its dairy business, and is looking to shed non-core assets & move up the value chain, surely it’s on the verge of a similar multiple? Hmmm, so what’s a 20 P/E worth to DCP?! :-)

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2014 – The Great Irish Share Valuation Project (Part II)

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Continued from here. As usual, I encourage you also click on the 2012 & 2013 links for each company, to add some valuable colour/background. Now, let’s jump right in:

Company:   Circle Oil

Prior Post(s):   2012 & 2013

Ticker:   COP:LN

Price:   GBP 20.625p

Look at Circle Oil’s latest interims, what’s not to like? Revenue up 20%, EBITDA up 34%, and cash generated from operations (after working capital changes) up 69%. And if you annualize net profit, Circle’s trading on a 6.6 P/E! But it’s not as simple as that… Focusing on a P/E ratio’s a rather pointless (& misleading) exercise when it comes to junior resource companies. [Well, most don't have any 'E' anyway!] Even if they’re fortunate enough to be producers, they’re often melting ice-cubes – i.e. they’re exploiting a (sometimes rapidly) depleting reserve base. Basically, they haven’t diversified enough, spent enough, and/or mastered the art of reserve replacement. That’s how the majors play the game, of course – but for the juniors, it’s much more of a lucky (& lumpy) game. This is one of the main issues Circle faces right now.

[Well, two other big issues: i) About 27% of its shareholder base remains a potential stock over-hang - Libya Oil Holdings owns 18%, while Kaupthing Bank owns 9% - not surprisingly, both stakes are essentially 'frozen'! And: ii) Investors are still leery of the fact a majority of Circle's production is in Egypt. Maybe a little unfairly, as the company doesn't appear to have suffered any disruption/interference to date. But it does suffer from another long-standing Egyptian problem...getting paid! Fortunately, the situation's stabilized somewhat, but Circle continues to have more than 6 mths of trade receivables outstanding].

At the current production rate, Circle’s only got about 6-7 yrs of reserves left. That’s not something you can tag with a P/E ratio! And despite a $42 M pa exploration/capex spend, it hasn’t managed to put new reserves on the board recently. OK, I’m probably being a little harsh here – despite this spend, the company’s actually generating positive free cash flow. Far better than most junior resource companies out there…OK, we all know 9 out of 10 juniors are rubbish anyway! Because of this reserve depletion, and COP’s current (relatively small) market cap, I’ll continue to value it on an asset basis.

As of mid-2013, net 2P reserves were down to 16.3 M boe. No allocation between proved & probable is provided, so let’s assume a 50:50 split & my usual $10 & $5 per boe (respective) in-the-ground valuations. There’s $30.6 M of cash on hand, and let’s include net trade receivables of 20.2 M. [That's being kind - Egyptian receivables will likely remain a semi-permanent & illiquid asset]. We then offset 11.6 M of bank debt, and a 30 M convertible loan. [This may ultimately become equity, but the share price continues to trade below the loan's conversion prices]. That gives us:

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2014 – The Great Irish Share Valuation Project (Part I)

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Thanks, I’ve received some great feedback & encouragement from readers in the past couple of weeks…so why not, let’s rock this TGISVP bitch all over again! Despite the exclusive focus on Irish stocks, I’m also hoping to see a lot of international readers checking in (& commenting) on these posts. For two good reasons, I hope:

i) Regardless of my individual price targets, many readers have highlighted their appreciation of the wide variety of valuation techniques & perspectives I’ve employed here across a broad spectrum of companies. I’ll try to place even more emphasis on the valuation process this year, so hopefully this project will prove interesting to a far wider readership.

ii) I mean, have you noticed the Irish market – it’s bloody on fire! The ISEQ was up +17.1% in 2012, and nearly doubled that return in 2013 (+33.6%) – um, like wow! And to top it all, my TGISVP portfolios actually out-performed the index, across the board in 2012 & on average in 2013. Uhoh, I think I’m scaring the value investors away…

However, it’s worth remembering I’ve been bullish on Irish stocks for a couple of years now – but a lot of investors really only started to pay attention last year. And much of the overseas interest to date, for example, has been primarily focused on (distressed) property & loans – rather than equities. So, arguably, we may only be reaching a point now where sentiment & interest in the Irish market’s fully blossoming. It’s also worth highlighting the rather unique economic & fiscal abyss the market’s rallying out of – in fact, the ISEQ remains 55% below its May-2007 highs.

Now, I hasten to add – I’m not actually making a specific ISEQ call here. I usually don’t think about indices in that manner (& often find the main indices too expensive anyway). I prefer to get comfortable with the current macro backdrop – as opposed to making macro predictions. [A fool's game - noting current growth forecasts, and historical error ranges, all those highly-paid forecasters are really telling you is that developed market growth may be positive...or, um, negative!] Presuming a market passes enough macro hurdles, I’ll usually ignore the index & simply focus on stock-picking. Exactly as I’ll be doing here – though it will surely prove tempting to draw some overall market conclusion(s) near the end of the valuation stage (of this project).

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A Letter to the CEO (& Board) of European Islamic Investment Bank

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Here’s a copy of a letter I’ve forwarded to EIIB’s CEO & board:

‘January 26, 2014

FAO:       Zulfi Caar Hydari, CEO

CC:         H.E. Abdallah Yahya Al-Mouallimi, Chairman

                 Mohammed Abdul Aziz Ibrahim Al Sarhan, Sr. Ind. Director

                 John Robertson Wright, Non-Exec. Director

                 Michael Willingham-Toxvaerd, Non-Exec. Director

                 Martin Gilbert Barrow, CBE, Non-Exec. Director

European Islamic Investment Bank plc (EIIB:LN)

Milton Gate

60 Chiswell Street

London EC1Y 4SA

United Kingdom

Dear Zak,

I’m writing this letter with the full support & active input of Guy Thomas (CIO, Hazell Carr Edwards FURB) and Ali Al Shihabi (founder & former Chairman of Rasmala Holdings Limited (‘Rasmala’)). You’ve obviously spoken & emailed with each of us, jointly or separately, on numerous occasions. We currently own an aggregate stake of between 4% and 5% in EIIB. In the last annual report, you stated ‘in 2013 we will begin to focus attention on translating our success into improved share price performance’. We’re disappointed by the subsequent lack of progress, and disturbed by a number of recent developments. To summarize:

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