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

Tags

Allied Irish Banks, Clontarf Energy, Fastnet Oil & Gas, ICON, Irish shares, Irish Stock Exchange, Irish value investing, ISEQ, Kerry Group, portfolio performance, Providence Resources, Ryanair Holdings, TGISVP, The Great Irish Share Valuation Project, Total Produce

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?! 🙂

Kerry’s currently earning a 9.9% adjusted operating margin – this masks an improving 12%+ margin on Ingredients & Flavours, versus a sub-8% margin on Consumer Foods. Continued investment & revenue growth should see further operating margin improvement – but it promises to be a hard-won battle, as revenue growth remains anaemic. [2012 revenue growth of 10.3% seems an outlier – 2008-2011 revenue growth was only 3.5% pa, while the latest interims confirm a mere 1% growth rate]. Noting the never-ending exceptional expenses, plus continued shortfalls in operating free cash flow, a 0.875 Price/Sales multiple remains perfectly adequate. Net interest’s currently at 11.0% of operating profit, so Kerry could easily take on another EUR 470 million of debt (for example, to fund acquisitions) without impairing its financial stability, or impacting its valuation. As usual, let’s cut that figure in half (to be conservative), and add it to our P/S valuation as a (positive) debt adjustment.

For a large blue chip stock like Kerry, a P/E ratio’s also appropriate. Earnings growth has picked up to 11.5% in the last 18 months, but medium term growth was previously closer to 8% (surprisingly high when you consider the company’s corresponding revenue growth). A 12.0 Price/Earnings multiple is still quite generous here – which gives us:

(EUR 2.45 EPS * 12.0 P/E + (5,882 M Revenue * 0.875 P/S + 470 M Debt Adjustment * 50%) / 176 M Shares) / 2 = EUR 30.02

No big surprise really, Kerry still looks way over-valued to me. Despite its current 21.1 P/E multiple (and a rather amazing 33.2 P/E, based on diluted basic EPS), I’m sure shareholders will be reluctant to change their minds here, unless the business runs into some kind of trouble…

Price Target:   EUR 30.02

Upside/(Downside):   (42)%

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Company:   ICON

Prior Post(s):   2012 & 2013

Ticker:   ICLR:US

Price:   USD 48.70

As anticipated, ICON’s recent (large) contract wins are now feeding through the P&L very nicely. The company enjoyed 15% Q4 net revenue growth in Q4, and even better 20% FY growth. This has been accompanied by the expected expansion in margins – at 11.2%, ICON’s Q4 operating margin’s finally back to normal. It also booked $446 million of net new business, for a 1.3 book-to-bill ratio in the latest quarter, and a backlog of 3.1 billion.

Considering the company’s very healthy cash flow & revenue growth rate, its current operating margin now deserves a 1.2 P/S multiple. ICON’s also got 321 M of net cash on hand, and huge scope to lever up its balance sheet (particularly with a 3.1 B backlog). I calculate 385 M of debt would put net interest expense around 15% of operating profit – let’s count just 50% of that debt, plus 100% of available net cash, and include it as a (positive) cash/debt adjustment to my P/S valuation.

We’ll also assign a P/E multiple: With its current rate of revenue growth & margin expansion, the company’s enjoyed massive earnings growth in the past year (+56% in the latest quarter, and +77% FY!). That obviously isn’t sustainable – but annualizing Q4 diluted EPS of $0.53 & applying a 20 P/E multiple (reflecting the FY revenue growth rate) may appear high, but seems quite appropriate in this instance:

(USD 2.13 EPS * 20.0 P/E + (USD 1,336 M Net Revenue * 1.2 P/S + 321 M Net Cash + 385 M Debt Adj * 50%) / 61.2 M Shares) / 2 = USD 38.61

Currently trading on 22.9x FY-2014 guidance (of $2.125), ICON looks fairly over-valued to me – but with US big pharma stocks generally back in favour, and the biotech sector on fire, it’s no great surprise to see a high valuation here also.

Price Target:   USD 38.61

Upside/(Downside):   (21)%

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Company:   Total Produce

Prior Post(s):   2012 & 2013

Ticker:   TOT:ID

Price:   EUR 0.94

There’s actually been no changes to my TOT analysis/price target since this updated Oct-2013 post. For easy reference, here’s my fair value calculation:

(EUR 0.088 * 11 P/E + (3,074 M Revenue * 0.125 P/S + 100 M Cash/Investments) / 330 M Shares) / 2 = EUR 1.22

Despite doubling in past 16 months, Total Produce still offers some decent upside. I actually added to my position last month, once TOT broke clear of its EUR 0.83-0.88 resistance zone. The stock’s been slow to build on its gains since, but final results are due in a couple of weeks & there’s little in the way of technical resistance overhead (aside from the psychological EUR 1.00 level).

Price Target:   EUR 1.22

Upside/(Downside):   30%

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Company:   Ryanair Holdings

Prior Post(s):   2012 & 2013

Ticker:   RYA:ID

Price:   EUR 7.32

Ryanair’s passenger count is now running at an incredible 81.6 million pa! With the approval in June of its new Boeing order, the company’s now targeting 110 M passengers pa by early 2019. This launches a new growth phase that’s long been anticipated by investors – actually, they can have their cake & eat it here, as management also committed to returning up to EUR 1 billion to shareholders (via buybacks & special dividends) over the next 2 years. This step-up in its growth plans also heralds – if you can believe it – a new/more cuddly Ryanair! They’ve introduced better customer service, a new digital strategy & website, and are even wooing the business traveller by accepting corporate/group bookings & the Amex card.

While Ryanair can be counted on to produce relentless passenger growth (running at 3-6% yoy right now), its fares & yields are the bane of investors’ lives – they’re often heading in the opposite direction. We saw this last September, as management first warned FY-2014 net profit would be at the lower end of guidance (570 M). This was quickly followed (in November) by a full-blown profit warning, with guidance reset to 500-520 M, due to lower fares & yields. [Which I calculate should produce a diluted FY EPS of approx. EUR 0.36]. Funnily enough, November also marked the recent nadir in the share price, which has since bounced by 40%!

Ryanair’s operating margin has retraced accordingly, currently standing at 13.2%. While I’m pretty confident of continued passenger/revenue growth, it’s not necessarily clear RYA can expand margins on a sustainable basis either. I’ll continue to assign a 1.33 P/S as a fair multiple. Noting net interest expense is currently at 10.3% of operating profit, we can also incorporate a debt adjustment to our valuation. I calculate a further 621 M of debt would keep this ratio within 15% – as usual, let’s use only 50% of this additional debt figure. This is more than conservative – the balance sheet actually boasts over 2.8 B of cash right now, which earns precious little income (i.e. a large cash payout would be pretty immaterial to net interest expense). [Obviously, this cash will be mostly retained for upcoming Boeing purchases]. For this reason, I’ll ignore the 55 M (approx.) of cash spent on share buybacks since Q3, but recognize the reduced share count. Let’s also add in the value of Ryanair’s 29.8% stake in Aer Lingus (AERL:ID) – as expected, it now seems pretty certain they’ll be forced to sell out eventually.

Despite the EPS reversal, Ryanair obviously remains a potent earnings machine – particular with the new 5 year capex & growth plan laid out in front of us. On balance, it still seems reasonable to value RYA using my prior 15.0 P/E multiple (and relying on my EUR 0.36 diluted FY EPS estimate). Which all adds up to:

(EUR 0.36 EPS * 15.0 P/E + (5,028 M Revenue * 1.33 P/S + 621 M Debt Adjustment * 50%) / 1,382 M Shares) / 2 + (159 M AERL Shares * EUR 1.609 / 1,382 M Shares) = EUR 5.42

I’ve owned Ryanair, on occasion, but it usually looks fairly over-valued to me – as we see here. Frankly, I’m surprised how strongly the share price has bounced back in the past 3 months, as the company hasn’t flagged any kind of turn-around re fares & yields. With final results not due ’til May, I wouldn’t be surprised if we see better buying opportunities…though investors may end up competing with the company’s own buybacks.

Price Target:   EUR 5.42

Upside/(Downside):   (26)%

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Company:   Clontarf Energy

Prior Post(s):   2012 & 2013

Ticker:   CLON:LN

Price:   GBP 1.225p

OK, where’s the hidden camera – this is a joke, right? But Clontarf’s a listed company, it must have some shareholders. But how on earth did they end up invested here?! Well, it’s not really an investment, it’s more like a global magical mystery tour… Which stops off in Peru, Bolivia & Ghana – all that’s bloody missing is maybe North Korea. Oh wait, believe it or not, that’s already been done – by another Irish junior resource company, of course! Hmmm, maybe Myanmar would fit the bill instead – definitely a hot market right now.

The company’s been talking up its prospects in these far-flung lands for a few years now – Bolivia’s just a legal Morales-mess, they signed what seems like an an entirely notional royalty agreement in Peru, and Ghana hasn’t even begun to be a money-pit yet (yeah, just give it time). In fact, about the only tangible result in the past few years has been a GBP 0.6 million legacy legal bill in Texas! But don’t you know there’s still some muppet investors crying dreaming themselves to sleep…with the notion CLON might somehow earn $5-20 M eventually from its Peru deal. In the harsh light of day, I reckon that’s about as likely as someone caught smuggling 24 lbs of yayo out of Peru actually being bloody innocent…

The value of this company’s so far past zero, it’s not even worth calculating. Sigh…but here goes: CLON has EUR 59 K of cash on hand (yes, you read that right!), 1.8 M of net payables, and not even a whisper of resources (let alone reserves). We should also incorporate a year’s worth of cash burn – rather astonishingly, the company’s cash on hand is actually sufficient (easy when you accrue bills, rather than pay them!). Then there’s a recent GBP 600 K in loans to cover the Texas legal bills, which all amounts to:

(EUR 59 K Cash – 1.8 M Net Payables – GBP 0.6 M New Debt / 0.8241 EUR/GBP – EUR 57 K Annual Cash Burn) / 207 M Shares = Zero

Clontarf is very obviously worthless. Care to disbelieve me..? Enjoy the chart:

Price Target:   Zero

Upside/(Downside):   (100)%

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Company:   Allied Irish Banks

Prior Post(s):   2012 & 2013

Ticker:   ALBK:ID

Price:   EUR 0.137

So, what’s crazier than a junior Irish resource company valuation? Yes, you guessed it…AIB’s valuation! I’m amused to look back & see I asked ‘who the f**k is buying the shares on a EUR 31 billion valuation?!‘ two years ago. Er, silly question really – I now realize it was the investing geniuses who knew AIB would end up trading at a EUR 70+ billion valuation in 2014! Oh Lord, I’m not sure which is more difficult – taking CLON or AIB seriously? As usual, it’s quite satisfying to say: I blame the bloody government, and their 99.8% stake. But I also despair of the investors who trade in that last 0.2% sliver of the bank. How many arbitrarily decided to invest in AIB instead of Bank of Ireland (BKIR:ID), for example…maybe just because the share price looked ‘cheaper’?

The bank continues to make some balance sheet improvements – its loan-to-deposit ratio’s now down to 106%, while total equity’s at 8.8% of total assets. [In my opinion, this is the key bank equity ratio you should always focus on – look for a minimum of 8-10%. And you’ll have to calculate it yourself – just ignore all those other (superior) ‘risk-adjusted’ ratios banks love]. Net interest margin also improved to 1.28% (1.42% if you exclude the effect of ELG & NAMA senior bonds), but unfortunately this still falls way short. Despite significant staff cuts, this means underlying profit (exc. another cool billion expensed in H1-2013 on loan losses/provisions & exceptionals) still equates to a sub-5% return on equity. [Exclude tax credits, and it’s a mere 3.1% RoE].

Impaired loans are now a whopping 29.2 billion, which I expect will ultimately suffer a cumulative write-down of 60%. Past due (but not impaired) loans are another 3.7 B, on which I expect a 30% haircut. [If you think this unfair, note vulnerable loans actually exceed this total by a couple of billion. And if you think the implied write-downs are ridiculous, you should also note AIB’s total provision has now reached 16.5 B!]. This means we’ll need to adjust equity above & beyond the current provision, plus we must allow for the 3.5 B in preference shares outstanding. We should be encouraged by the (slowly) improving Irish economy, but often that’s not enough to bail a business or householder out of an over-leveraged debt situation. Noting the uncertain loan outlook, and poor return on equity, I’m sticking with a 0.67 P/B multiple here:

(EUR 10.6 B Total Equity – 3.5 B Pref Shares – 29.2 B Impaired Loans * 60% – 3.7 B Past Due Loans * 30% + 16.5 B Provisions Addback) / 521.3 B Shares = EUR 0.006

AIB’s still insanely over-valued – its shares should carry a bloody government health warning…

Price Target:   EUR 0.006

Upside/(Downside):   (95)%

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Company:   Providence Resources

Prior Post(s):   2012 & 2013

Ticker:   PVR:LN

Price:   GBP 234p

Providence was a bit of fun last year – the latest set of O’Reilly muppets were suitably outraged by my call for a 41% share price decline. [From a long-gone GBP 615p…ooh, that smarts!] I was kind – in the end, PVR collapsed by a gob-smacking 64%! So the muppet chorus about Providence & its blockbuster assets, which I was obviously incapable of understanding (or valuing), is that much funnier now… They completely missed the point – I wasn’t necessarily disagreeing with the substance of the company, I simply (& emphatically) disagreed with the market valuation of its assets. [And they might have remembered I was actually bullish on PVR in 2012!] That’s the problem with mumpty chumps – they believe every little seismic whisper’s a bloody winner, and then compound their error by wildly over-valuing each supposed windfall.

I found the ‘green jersey’ attacks pretty amusing too, but I must lodge an objection: As usual, to be labeled unpatriotic simply confirms the accuser detests what you’re saying – nothing more, nothing less. And the notion it’s unpatriotic to question the valuation of an (over-valued) Irish stock is even more absurd. Frankly, it’s the opposite – what’s more bloody patriotic than suggesting investors (foreign, or domestic) consider redeploying their capital into other more deserving & under-valued Irish companies? Remember, if they win, they keep coming back. And if they lose, they’re gone – perhaps forever…

Anyway, despite the millions & billions of barrels Tony O’Reilly keeps throwing around, Providence has made precious little progress in the past year: The Dunquin North exploration well was a bit of a dud, and there’s been little headway with the farm-out of Barryroe (or proving up its resources). Clearly, it’s all a disappointment for news-hungry investors – as evidenced by the share price. At this point, I still see no reason to incorporate anything beyond my previous P50 figures in my valuation – I’ll assume a 50:50 Proved & Probable split, and my usual (respective) $10 & $5 per boe in-the-ground seabed valuations. Fortunately, PVR’s in much better financial shape after the Singleton sale – it has EUR 24 million cash on hand & zero debt. However, we’ll adjust for a year’s worth of cash burn, using the current run-rate of 19 M (which may prove too low):

((EUR 24 M Cash – 19 M Annual Cash Burn) * 1.3716 EUR/USD + (48 M + 1.875 M Barryroe & Helvick P50) * $10 * 75%) / 1.6645 GBP/USD = GBP 354p

Now would you look at that, PVR’s offering some very decent upside again! But hey, as the muppets would opine, what the hell do I know about resource stocks? And presumably we remain in diametric opposition…so um, out of sheer bloody-mindedness, does that mean they’ll now be rooting for a lower PVR share price?!

Price Target:   GBP 354p

Upside/(Downside):   51%

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Company:   Fastnet Oil & Gas

Prior Post(s):   2012 & 2013

Ticker:   FAST:LN

Price:   GBP 11.5p

Actually, I was also chastised for my poor opinion of FAST’s valuation last year. Here, have a look at its sad little chart ever since:

I’m quite disappointed with management here – if a junior resource stock could achieve a billion dollar valuation purely on hope value, it bloody well should have been Fastnet! I mean, their portfolio literally boasts billions of contingent & prospective barrels of oil. Of course, the fact FAST only shelled out around $20 million (mostly in shares) for the bulk of those billions, and sports a market cap that’s only triple that figure, tells you something about the true (discounted) value of such resources… Have the muppets learned a lesson here? Probably not – I’m reminded of the old property joke here: ‘Yeah, he just paid 12 million for it. Jesus, it’s an incredible property…I wonder how much it’s worth?!’

But I suspect even the muppets were a little taken aback at the scale of the dilution here. The share count’s actually exploded from just 8 M to an astonishing 345 M shares…in less than 18 months! Unfortunately, this hasn’t delivered any kind of proved-up reserves. The best news we can focus on is their Foum Assaka permit (Offshore Morocco) – the operator, Kosmos Energy (KOS:US), completed a farm-out with BP (BP/:LN), while Fastnet also managed to close on a farm-out agreement with SK Innovation (096770:KS). This is encouraging news, but no reason to treat (what are) contingent resources any differently at this point. Plus we also see Fastnet’s participating interest’s now down to 9.375% – of course, this is another form of dilution junior resource investors suffer constantly. However, the company will receive $3.2 M from SK & will no longer have to fund its share of Foum Assaka costs. The only logical valuation here is cash – to include the recent $16 M (gross placing), plus the farm-out payment – less the current cash burn rate:

(USD 10.9 M Cash + 16.0 M Placing * 95% + 3.2 M Farm-Out – 23.7 M Annual Cash Burn) / 1.6645 GBP/USD / 345 M Shares = GBP 1.0p

FAST is now hopelessly over-valued. And in about 15 months, it will be sucking on fumes again – at that point, shareholders better pray they’ve made some progress on producing some kind of reserves…

Price Target:   GBP 1.0p

Upside/(Downside):   (92)%

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OK folks, ’til next time… I’ll add my usual TGISVP file here. [As usual, I’ve updated share prices (plus FX rates, etc.) for all previously reviewed stocks, and then re-ranked all stocks according to their upside potential]:

2014 – The Great Irish Share Valuation Project – Part III