Aminex, Aryzta, Connemara Mining, Continental Farmers Group, Independent News & Media, Irish shares, Irish value investing, iShares MSCI Ireland ETF, Kenmare Resources, Kerry Group, TGISVP, The Great Irish Share Valuation Project, Tullow Oil, UTV Media
I finished my last post with a question: ‘So, shall we continue with this TGISVP experiment in 2013..?!‘
Despite the relative comment silence, an emphatic ‘Yes!‘ appears to be in order. The success of the series was evidenced by the strong surge in Q1-2012 page views, and the significant level of out-performance enjoyed by each of the TGISVP Alpha & Beta Portfolios last year. I’d first recommend a quick review of my first TGISVP post last year as a primer, but we need to cover some important points here:
- I’m planning to (briefly) review & set a price target for all Irish companies.
- An Irish company is any company which conducts a major portion of its business in Ireland, is (genuinely) headquartered in Ireland, and/or whose management/directors/shareholders/history are predominantly Irish.
- Sure, it would be marvelous if I covered all companies simultaneously. But life (& investing) are never so convenient… I reckon there’s about 70 companies to cover, so I’ll give myself an end-March completion deadline.
- This is TGISVP-Yr II, so perhaps this will all move along much quicker this year – who knows?! To add some spice, I plan to cover companies in random order this time ’round.
- For each stock, I’ll include their website link & most active ticker for reference. I’ll also link my 2012 TGISVP post (and/or a more recent post). May be worth a look – the more I wrote last year, perhaps the less I’ll write this year. Hmm…
- I’ll actually include my price target & upside potential in each post this year (not just in the accompanying Excel file – but plse consult it for more detailed figures & calcs.). I was amazed to see readers argue with me last year, when they clearly hadn’t even bothered to check my actual price target!?
- Most importantly, please read the Disclaimer again! This is purely a research exercise, designed to construct & track the performance of a no. of notional Alpha & Beta Portfolios. All valuations are rough & ready – I’d perform far more detailed research if I was actually planning to buy a share. You should too!
- I’ll highlight any companies I own. You should note: I may not own, or even dream of buying, some of the highest upside potential stocks. There are always other equally important quantitative/qualitative factors to consider with a stock (or your portfolio) before making a purchase.
- I’ll always include an (evolving) Excel file with all figures/calcs., so feel free to review it, agree/disagree with my assumptions, and/or revise my valuations in any way for your own personal use.
I suspect many TGISVP readers were from Ireland (& the UK) last year. Since then, Ireland’s chalked up an impressive +17.1% 2012 return on its ISEQ index and, more recently, it’s garnered increasingly positive international commentary & reaction. [Fresh news last week - the government sold a Bank of Ireland (BKIR:ID) note, at a premium (I should CoCo..!). Hopefully this is a first step towards a gradual state disengagement from Irish bank support].
The size & diversity of the blog’s readership has also grown by leaps & bounds since then. Hopefully, the series will enjoy a much more international readership this year, as folks come searching for some potentially attractive Irish stock opportunities (and/or perhaps a lower-risk play on Europe). All comments & questions are, of course, v welcome – or feel free to email me instead, if you prefer. Let’s begin:
Company: Connemara Mining
Prior Post: Here
Price: GBP 7.625p
Oh God, what a place to start…CON’s another John Teeling venture. Primary focus is on zinc – which Ireland actually possesses in economic quantities, as evidenced by the interest/ownership of Xstrata (XTA:LN), Vedanta (VED:LN), Boliden (BOL:SS), etc. But attention’s increasingly being diverted to Ireland’s newest prospecting craze: Gold, in Wexford & Wicklow!? Or should I say its oldest craze – this was last popular 200 years ago. CON has no reserves/resources – last year, valuing it solely on net cash less 1 year of estimated cash-burn, I deemed it worthless. Since then it’s been sliced in half, and it’s still worthless.
Price Target: Zero
Company: Tullow Oil
Prior Post: Here
Price: GBP 11.86
I offended quite a few people with my TLW price target last year. I must confess, I was surprised myself at how over-valued it appeared to be – needless to say, the share price is 23% lower this year! Tullow has a broad constituency of shareholders, so a multiple perspective valuation makes sense again. LTM underlying diluted EPS is approx. $0.715 – being mindful of potential oil price/earnings volatility, I’ll stick with a 12.5 P/E. Underlying operating margin remains at 40%+, while net interest’s improved with the Uganda farm-out & their $3.5 bio re-financing. This deserves a 4.5 P/S ratio, based on their indicative $2.35 bio of 2012 revenues.
Finally, year-end reserves are expected to be substantially upgraded (to 380 mio boe – I’ll presume a 50:50 proved/probable split), with total reserves & resources much unchanged at 1,150 mio boe. I’ve assigned my usual $10 per boe (in the ground) valuation, with a 50% haircut for probable reserves, and a 75% haircut for resources, less an estimated $1.0 bio of net debt. Tullow’s an excellent/aggressive producer – not surprisingly, its P/E & P/S valuations are similar, but it falls down on the value of its reserves & resources. Its valuation & prospects are therefore increasingly dependent on its future replacement ratio – risk profile’s also elevated by the fact that it’s becoming increasingly Africa-centric. It continues to look significantly over-valued by all measures.
Price Target: GBP 5.11
Prior Post: Here (no comment, see file valuation)
Price: EUR 40.35
Lo & behold, Aryzta’s trading almost bang-on last year’s target! Business appears to have gotten tougher for Aryzta, somewhat surprising for a market-leading bakery company. The fact they’re speciality bakery would, I guess, explain it – consumers have been trading down. I also don’t find Aryzta that investor-friendly, and I suspect much of their longer-term progress has been quite dependent on their roll-up strategy. With the balance sheet still somewhat stretched, acquisitions remain pretty much on hold.
We’re seeing earnings suffer accordingly, with FY 2012 underlying diluted EPS up +8.8%, and 2012 EPS growth indicated at +5-10%. That suggests a lower P/E ratio this year – we’re still talking about a large-cap, relatively low-risk company, so I’ll limit this downgrade to a 12 P/E. EBITA margin (post minorities) remains around 9.5%, and interest coverage has improved somewhat, so we’ll continue to peg it at a 0.875 P/S (but with no debt adjustment). [I won't break out the 68.8% interest in their agri-inputs sub., Origin Enterprises (OGN:ID) - it's a relatively small component of Aryzta's market cap now & earnings are consolidated anyway. Of course, they'll need to determine an appropriate exit solution here at some point]. Aryzta looks fairly valued.
Price Target: EUR 41.14
Company: Continental Farmers Group
Prior Post: Here
Price: GBP 24.125p
[In turn, Origin Enterprises owns 24.2% of CFGP]. I was more than kind to CFGP last year, and all they’ve done is continue to piss away cash… I’ve written about this very problem here & here. Despite that, unlike most of their peers, the share price remains unchanged – they’ve managed to fly completely under the radar! That will change, especially now they’ve amassed a EUR 21.2 mio net debt position. This radically alters their valuation.
I continue to value their Ukrainian land at $1,250 per ha & their Polish land at $2,500 per ha. These values appear low from a Western perspective, but reflect local values – particularly as most of the acreage is on (long-term) lease. Factor in net debt, and the excessive (annual) cash-burn rate, and Continental Farmers is worth about as much as the typical Ukrainian peasant’s savings a/c…
Price Target: Zero
Prior Post: Here
Price: GBP 4.75p
The majority of Aminex’s quantifiable value comes down to its US reserves, which I reckon are worth nearly $50 mio. But it’s obviously proving difficult for them to keep focused on this value, when there’s more exciting prospects elsewhere – like East Africa! Aminex has now indicated 1.9 bio boe of Gas Initially-In-Place for its majority owned Nyuni & Rumuva prospects. Oh Christ, I’m sure the muppets have already had a field day with that – Aminex must be worth billions! But it’s not…
‘Prospects’ like these are ten-a-penny – I’m sure there’s a million boe, or two, in my back garden if you’d like to make an offer? Most never realize their potential – but if by chance they do, it’s very clear a hell of lot of cash burn, debt, farm-outs & share dilution will be needed to get anywhere near 3P reserves. Perhaps you violently disagree with me? Well, the market values AEX around $63 mio, broadly in line with my valuation of their US assets (plus $5.4 mio of net cash). Now, if you’re a foaming Aminex bull, who do you think is right? Me, plus the entire market – or you..?
Trouble is, resource stocks tend to burn cash worse than a meth whore, and often have just as little to show for it afterwards. It’s prudent to factor a year’s cash-burn into my valuation (AEX has confirmed it needs to borrow against, or sell, its US assets to actually fund its plans). Aminex will look increasingly over-valued, unless it can produce a timely step-change in the status of its African prospects.
Price Target: 1.5p
Company: Kerry Group
Prior Post: Here
Price: EUR 38.75
I considered Kerry to be slightly over-valued last year, and here it is up over 40% since! Clearly I can’t see the forest for all those pesky value investing trees. Why bother with this stock-picking lark, when buying the Irish large-caps is probably the most profitable approach? Sigh… Sure, Kerry’s business has a lower risk-profile, but even here I get frustrated. All we ever hear about is the advanced technologies & innovation of their ingredients & flavours division – for God’s sake, they even trumpeted the 100 mio opening of their new Global Innovation Centre last year.
It all sounds delectable - so why is the division barely earning a 10% operating margin?! Seems a little unpalatable to me. Overall, that puts Kerry on a 9.5% margin, which deserves a 0.875 P/S, and an EPS that’s perking up (with the aid of acquisitions) from a medium term 8% growth rate to something more like 10-11%. I’ll assign a 12 P/E. That happens to drag my price-target up to the share price – well, I mean last year’s price! I guess I may end up playing catch-up each year – meanwhile, Kerry looks pretty over-valued again.
Price Target: EUR 27.42
Company: Independent News & Media
Prior Post: Here
Price: EUR 0.043
OK, here’s one for the rubber-neckers… Investors finally grasped old media & excessive debt was a pretty fatal combination – the share collapse came pretty quickly in the end (once EUR 0.20 was breached). Yes, before anybody reminds me, my price target last year was marginally higher than the share price. But distressed shares always look cheap from a quantitative perspective…which doesn’t stop the rot. So, despite that target, I emphasized to readers a couple of times that I wouldn’t dream of investing in Independent News, even if my wallet was on fire.
Let’s try again: Since things (mostly) keep getting worse here, I’ll focus on grossing up their H1-2012 results. As with all distressed companies, I’ll studiously ignore the P&L – claiming certain expenditures are exceptional every single bloody year is even worse than a bad joke [OK, here's one: I had such fond memories of Jimmy Savile when I was a kid - all these revelations just leave a bad taste in my mouth. Or maybe he was just eating asparagus...]. Cashflow’s all that matters – let’s focus exclusively on that:
Annualized revenues are EUR 544.4 mio, while operating free cashflow grosses up to EUR 34.2 mio, a true/underlying 6.3% operating margin. Unfortunately, this cashflow’s almost entirely consumed by an annualized interest bill of EUR 31.8 mio! Let’s be kind & argue the business is still worth a 0.6 P/S multiple. Of course, that’s only true if debt levels are sustainable – that margin will only reasonably support about 11% of the current EUR 443.5 mio of debt. The EUR 187.8 mio pension debt is another liability that has priority. The only bright spot is their 29.5% stake in APN News & Media (APN:AU). Well er, not really, it should have been sold off years ago – now it’s only worth a measly EUR 41 mio.
I won’t predict how this will end up, that’s as rewarding as second-guessing politicians. INM was a vanity project for many years, and may well end up as another vanity project again. The king is dead, long live the king… INM will very likely prove worthless for the average punter who’s even now thinking ‘God, it’s only 4 cts now – I mean, how much could you lose…?!’
Price Target: EUR 0.00
Company: UTV Media
Prior Post: Here
Price: GBP 1.33
UTV’s share price has only traded about 10% higher in the last year. With a lot of value investors liking old media stocks, UTV appears pretty neglected. Then again, I’d perhaps disagree with the old media label. Newspapers were always the easiest medium to substitute, and they’ve participated far less in that substitution process than they would have hoped.
TV’s now really facing up to the same challenge, but I think the decline will be far slower – most people will remain attached for a v long time to the idea of watching TV channels on a big screen in their living room. And TV companies & content providers should earn a far larger slice of any substitution process – if they’re smart about exploiting multiple-channel distribution, that is, and we’re already seeing signs of that (particularly in the last year). I believe radio faces less risk…
Radio will continue to be a welcome companion when driving, working, playing & relaxing. [This is observation - I mostly hate radio myself!] Moving it on-line doesn’t really add or subtract from that proposition at all. Ever increasing segmentation is the trend in the past few years, as this tends to enhance core audience loyalty, and it pro-actively offers an attractive menu for satellite & a la carte users. [I think UTV's done a pretty good job here - for example, talkSPORT has become an immensely successful UK (& global) sports radio channel]. At the end of day, perhaps the crucial difference is that TV & radio still offer a social/interactive proposition that newspapers don’t – I mean, when did you last sit down to read the newspaper together?! 1912 perhaps ?
Radio now accounts for almost two thirds of UTV’s revenues, a marvelous re-direction of strategy over the years as it has 25%+ operating margins, vs. more like 15% for TV. Admittedly, revenue growth’s been slow, but the steady paydown in debt (net debt’s been sliced in half in the past 3 years) should now begin to allow some prudent radio/new media expansion. Overall, slow growth may be a blessing – to run UTV private equity style (i.e. focus on margins, cashflow & invest in a regular share buyback programme) might actually offer the best shareholder return. I suspect that explains the significant presence of TVC Holdings (TVCH:ID) & Organo Investments (an FL Partners vehicle – though they’ve trimmed their stake in the past year) on the share register… I see no reason to change my 2.0 P/S & 12 P/E multiples on UTV – upside remains v attractive.
Price Target: GBP 2.46
Company: iShares MSCI Ireland ETF
Prior Post: Here
Price: USD 25.51
I’ve nothing against this fund, but ETF portfolio construction certainly doesn’t lend itself to the Irish market. The Top 5 holdings account for over half the portfolio – and they’re not particularly domestically focused, or cheap. A closed-end fund offers more active management, which can potentially out-perform in what I think is a stock-pickers market. And I can’t help myself! I loves me a good closed-end discount, and New Ireland Fund (IRL:US) currently offers a 12% discount. [But bear in mind, ETFs can be a lot less of a tax headache than a CEF, for both US & non-resident investors].
My target pricing may appear unduly harsh, but I’m not going to anticipate gains for an Irish fund ETF. Obviously, you might still want to note my bullishness on Ireland elsewhere in the blog…
Price Target: USD 25.51
Company: Kenmare Resources
Prior Post: Here
Price: GBP 34.95p
Last year’s post is pretty relevant here. Revenues (at $220.6 mio) are increasingly steadily, while the operating margin has expanded much faster than I expected (now 40%+). [However, it should be noted net cash generated from operations (excluding all capex.) falls well short at about 31% of revenues].
The interest bill remains disproportionate, at 14.2% – unfortunately, that’s expressed as a % of revenues, not operating profits. Essentially, Kenmare’s still in start-up/expansion mode, and it’s pretty geared to global economic growth (housing & construction demand from US & China are v important). While it’s begun to generate operating cash, it continues to maintain a significant annual cash burn of over $100 mio net, after capex. Which will prompt the banks, in the near-medium term, to continue considering KMR primarily on an asset basis (i.e. reserves & resources), rather than on a revenues & earnings basis. We should do the same as investors.
Considering the prices Kenmare’s currently achieving, my in-the-ground prices (approx. 10% of medium-long term average spot prices) from last year continue to make sense. I’ve used per tonne prices of $18 for ilmenite, $100 for rutile, $133 for zircon, a 50% haircut for probable reserves, and 75% for measured & indicated resources. Totting up reserves, plus the annual cash burn, and the latest net debt of $239 mio, Kenmare continues to look severely over-valued & perhaps vulnerable to financial shock.
Let’s put it another way, if you prefer to focus on the operating business: An average 3.0 P/S multiple might be expected for a mature/large-cap mining company – Kenmare presumably offers faster growth, but does that really warrant a current 6.5 P/S multiple?!
Price Target: GBP 6.7p
2013 The Great Irish Share Valuation Project I (xlsx file)