TGISVP – End-H1 2014 Snapshot

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I expect to publish a performance-related post or two, but timeliness dictates I first take a closer look at what’s hot or not in The Great Irish Share Valuation Project. This year’s valuation phase was a 10 post epic stretching from Feb to May – so end-H1 presents a good opportunity to update share prices (plus some underlying valuation-related variables, primarily FX rates), and re-rank all 80 Irish shares in terms of their current upside potential. Obviously, I haven’t updated my underlying intrinsic valuations on the fly – that was never the intention – so pay close attention to any subsequent results & news flow for shares that might interest you. [But I generally find intrinsic valuations change slowly/incrementally]. I do have two last minute exceptions though:

Company:   Kentz Corp

Prior Post(s):   2012 & 2013 & 2014

Ticker:  KENZ:LN

Price:   GBP 926p

Well, this update’s pretty simple: Just a week ago, Kentz announced a recommended cash offer by SNC-Lavalin Group (SNC:CN) at GBP 935p per share. This seems to have taken the market by surprise, but it’s only an 18% premium vs. the 792p price target I published 3 months ago – arguably, one would expect such an additional control premium. I’ve even heard some PI mutterings about other potential bids… Yes, that’s always a possibility, but it doesn’t seem very realistic in this instance: With two other suitors rejected last year, I’m sure management explored all other possibilities before dropping their drawers for SNC-Lavalin.

Despite that, ideally I’d like to re-assess my valuation to determine whether a higher bid could be justified. But there’s been no subsequent results, except for a 10% increase in the company’s backlog (to $4.5 billion, plus a further $125 million contract announced in June). Which is clearly encouraging, but not much of a tangible basis for increasing my price target significantly. At this point, the most likely & logical price target is the recommended cash offer itself…

Price Target:   GBP 935p

Upside/(Downside):   1%

[NB: There are two other pending takeover offers to consider: i) A recommended share offer for Fyffes (FFY:ID) by Chiquita Brands International (CQB:US) - I expect this to close & already incorporated it into my 2014 FFY price target, and ii) a rejected share offer for Kenmare Resources (KMR:LN) by Iluka Resources (ILU:AU). I suspect KMR management (& shareholders?!) would prefer to go straight to hell, rather than accept this offer - unfortunately, the company's current operating, cash & debt trajectory all suggest hell is actually a distinct possibility. I haven't re-considered my much lower 2014 KMR price target at this point.]

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Universe Group – Some Fresh Perspective(s)

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I first published a write-up on Universe Group (UNG:LN) almost 2 years ago: A Universe of Stocks… This was back when the shares were trading at GBP 2.375p, after a long & relentless 9 year decline. At that point, despite the scary chart, I believed the company had finally reached an inflection point…

This perception wasn’t just built on hope value:  The core HTEC division was an obvious jewel in the crown, a new management team was already delivering on its promises, and (if necessary) the shareholder register promised potential activist intervention. The company’s substantial undervaluation was obvious – and its evolution from manufacturing & product sales to a software/transaction solutions provider, focused on increasing recurring revenues, promised significant intrinsic value upside potential in the future. Based on the company’s metrics at the time (adjusted for somewhat excessive debt), I pegged Fair Value at 8.4p per share. I also predicted its loss-making CEM unit would be closed down, or sold – contingent on that, I suggested a Secondary Fair Value of 11.0p per share was also possible.

Just 2 weeks later, the story took a big step forward. Universe announced a placing & a GBP 0.2 million loan issuance – initially for debt reduction, which I was pleased to see. Unfortunately, the resulting enhancement of intrinsic value was relatively small (in my opinion), whereas the dilution impact was substantial: UNG’s undervalued share price/market cap meant a colossal 63% increase in outstanding shares was required to raise just GBP 1.7 M of equity funding. Which knocked my Fair Value targets back to 5.1p & 6.8p per share, respectively. However, management also stated they were ‘exploring a range of options’ for the CEM business – which I took as confirmation it would soon be shut down/sold off, so I was happy to merge/average my price targets into a new Fair Value of 5.9p per share. Despite the dilution, this still offered a highly attractive 164% upside potential! Fast forward two years, the company’s made steady progress…

As expected, the CEM unit was sold in Dec-2012, followed by two strategic bolt-on acquisitions (Indigo & RST) in 2013. A new & updated product offering was completed in 2012 & enjoyed a very successful 2013 customer roll-out. Revenue reached a H2-2013 run-rate of GBP 18.6 M, vs. continuing ops. revenue of 10.5 M in 2011. And with the turn-around complete, the CEO Stephen McLeod departed in Sep-2013 to pursue other projects (Robert Goddard remains as Chairman) – to be replaced by Jeremy Lewis, an ex-investment banker & a technology/software company CFO/CEO for the past 15 years. The share price has also lived up to its potential – it’s now trading in excess of my price target, at 6.125p – that’s a 158% gain vs. my original write-up at 2.375p per share! In fact, the shares almost reached my original 8.4p fair value target, with a Nov-2013 high of 8.25p per share. Which begs the obvious question – what’s an appropriate fair value target for UNG now?!

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European Islamic Investment Bank – Tender Offer/AGM Reminder

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I hope readers were just as pleased (as I was) to note the recent tender offer announcement by European Islamic Investment Bank (EIIB:LN). Even if you’re not an EIIB shareholder, it’s an excellent reminder activism isn’t simply a bloodsport practiced by US hedge funds. All investors, large & small, have rights & responsibilities as the owners of the companies they invest in – and sometimes they need to insist their voice is heard by management…

I proposed such a tender offer to EIIB management in my Jan-2014 letter (with the support of Guy Thomas, Ali Al Shihabi & a number of other shareholders). Of course, this letter was a follow-up to my previous 2013 letter. Some might argue I’ve been far too sedate/polite in my activism – that’s understandable – I could definitely have taken a far more aggressive activist stance, but in this instance my approach reflected my underlying (positive) perspective on the business. As I’ve detailed before, I believe EIIB offers investors a compelling triple play on frontier markets, Islamic finance, and Middle Eastern oil wealth & resources. Unfortunately, in its previous incarnation, that potential was wasted…

However, the arrival of HBG & the appointment of Zak Hydari as CEO stabilized the business, led to the acquisition of Rasmala & re-focused operating strategy on becoming a leading GCC asset manager. Which has, to date, been a great success – not that you’d notice from the share price – Assets under Management (AUM) have doubled in just 2 years (to USD 1,176 million at year-end 2013, from USD 600 million in Jan-2012). This is clearly a high margin business, with attractive economies of scale, but that’s not yet apparent due to the restructuring of Rasmala/EIIB & the rapid expansion in AUM. Unfortunately, as things stand, it’s unlikely this operating progress/potential can deliver a decent return on equity for shareholders in the foreseeable future – because any likely return will end up swamped in a sea of equity! [EIIB currently has GBP 123 million of equity, mostly in cash & liquid securities].

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2014 – The Great Irish Share Valuation Project (Final – Part X)

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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.]

OK, it’s the final furlong..! This should be my last TGISVP post – that will make it a grand total of 80 Irish companies, all covered in very random order since February. Except this last post – I deliberately withheld DCP:ID & ZMNO:ID ’til I got around to posting separate write-ups for each, plus I’ve only just added another 3 (recent) Irish IPOs. I also debated including 3 other vaguely ‘Irish’ stocks, but decided (somewhat arbitrarily) against them in the end…

[FYI, my 3 rejections were:

- Kennady Diamonds (KDI:CN):   Dermot Desmond has long been involved here - he currently owns a 17.5% stake & the Chairman Jonathan Comerford's actually an investment manager with IIU. However, the company has no other Irish connections, and I've never noticed any kind of Irish PI/institutional following for the stock.

- Kennedy Wilson Europe Real Estate (KWE:LN):   KWE's a new fund launched by Kennedy-Wilson Holdings (KW:US), focused on investing primarily in real estate & real estate loans in the UK, Ireland & Spain. While the fund's already completed a chunky Irish acquisition, one would expect Irish assets will ultimately be the smallest component of the portfolio (considering the relative size of the UK/Spanish economies & property markets).

- Metro Baltic Horizons (MET:LN):  MET's another of those funds launched back in 2006 - focused on property development in the Baltic States & St. Petersburg, and targeting a minimum 25% IRR. Aaah, those were the days, eh..?! Garrett Kelleher & Dermot Desmond/IIU (again!) originally backed the company (with a 27% stake between them), and after some farcical/fraudulent events along the way, the board's now comprised of a senior IIU executive & two other Irish directors. MET has become a cash/litigation shell & a suspension of its listing's now imminent - but we should hopefully see some new proposals (inc. a continuation of MET's listing) from the board shortly.]

So, without any further ado – let’s dive right in & finish up:

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Zoom, Zoom…Zamano!

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Zamano plc (ZMNO:ID, ZMNO:LN) is a leading Irish/UK provider of games, videos, music, apps & other digital content to mobile users (D2C, Direct-To-Consumer), and mobile messaging/marketing solutions for businesses (B2B, Business-To-Business). It’s also terribly misunderstood & neglected – the share price is down 25% in the past six months (vs. the ISEQ up 4%). So, loath as I am, we should first tackle some:

Risks & Misconceptions

i) ‘They just sell ringtones?!’:   No, they sell all kinds of digital content. Especially to Millennials, whose attention span’s as fleeting as Lee Evans between twitches – which means they’re a perfect target for the cheap impulse buys Zamano offers.

ii) ‘Oh, and porn!’:   No. No. No, they bloody well don’t…

iii) ‘What about smartphones?’:   Zamano primarily interacts with users via SMS (plus MMS, WAP, etc.), so smartphones must be killing them, right? Er no, as Portio Research points out: ‘SMS is not dead. SMS is still the king…’. For Zamano, smartphones represent more opportunity than threat:

- The SMS share of the pie may shrink, but the pie keeps growing. More & more people are forgetting their laptops & and are now living online 24/7 via phones (& tablets) – they’re all a potential target market for Zamano. And smartphones have allowed the company to upgrade & customize its D2C content, and to migrate its advertising online, thereby enabling more effective customer acquisition. Like so many tech companies, ZMNO’s really a sales & marketing company – so management’s ultimately agnostic, they’ll embrace whatever technology(s) deliver the best revenue/profit opportunities.

- If that’s via apps, that’s OK too… Because people have to get paid eventually, free/dollar apps won’t hack it, especially when it comes to regularly updated content. Maybe in-game/app purchases & advertising become the norm, but I suspect we’ll see an inevitable migration (back) to a subscription model – a far more stable/valuable revenue stream for companies. Just look at the evolution of online music: Downloading’s dead now, streaming’s where it’s at…maybe even Apple’s finally got the message!

- As for Zamano’s B2B business, SMS will be an attractive marketing tool for years to come. I mean, when did you last read your spam email? But we all still love that little dopamine fix when a new text message pings…we can’t help reading it! For companies, SMS is a simple, immediate & compelling medium for reaching out & marketing to customers. Combine it with geolocation and/or mobile payment technologies, and it offers intriguing new opportunities.

iv) ‘Don’t they have a crap reputation?’:   Sure…if you want to believe the trolls. Yes, how dare they charge for that sub. you forgot about? Why don’t you complain about the skinny jeans you bought last week too, or the hangover you spent good money on last night? I blame the chattering classes – they tut-tut over the hoi polloi buying such chavtastic tat. Then we have nanny regulators like Comreg, who act like they’re waging a holy war to atone for the sins of the Irish banking regulator… Yes, Zamano has to compete with some dodgy rivals, but it also has a fiduciary duty to its investors. Shady practices might appear tempting, but when you consider the risks for a listed company…it’s never worth it. And because ZMNO’s listed (& highly visible), the regulator inevitably targets them first. I’m confident we can rely on management to maintain standards & compliance accordingly.

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Donegal Investment Group (DCP:ID)

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Time flies… I published my Donegal Creameries – Low Fat Diet write-up just over a year ago. Quite obviously, it’s been a successful call :-) :

Donegal Chart

In my original post, I referenced the closing DCP:ID share price (on Fri, May-3rd, 2013) of EUR 3.63. The following Tuesday (the Monday was May Day), the stock rallied 28%, before closing up 18.5% at EUR 4.30. [Another endorsement: My very first suggestion was a name change...which occurred just 2 months later!] A subsequent march higher, at periodic intervals, culminated in the stock doubling after 10 months (i.e. in Mar-2014). Since then, we’ve suffered a 17% retracement – so today’s EUR 6.00 share price seems like a bargain, eh?!

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

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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:   First Derivatives

Prior Post(s):   2012 & 2013

Ticker:  FDP:LN

Price:   GBP 1,070p

It’s been a wild ride for investors in the past year:  A year ago, FDP looked fairly valued to me – and for much of 2013, I wasn’t far wrong, with the shares clocking modest gains. But FDP took off abruptly in November…by January, the shares had almost doubled within 2 months & tripled within 6 months. With profits down in the interim results, I suspect this rally was more of a delayed response to FDP’s Aug-Nov news flow (with new contracts reported with Republic Wireless, the NYSE & ASIC). These all highlighted the capability & flexibility of the company’s Delta products/platform to deal with Big Data, both financial and non-financial. That’s a sexy pitch right now for investors & they responded accordingly… As usual, the mugs were the last to be sucked in – it’s no great surprise to see they’ve lost a third of their investment since January, with no particular reprieve in sight.

Even at these less elevated levels, I suspect the shares remain over-valued. While FDP continues to rack up attractive revenue growth, the rest of its accounts don’t paint such a pretty picture. Operating margins continue to compress (now between 11-12%), earnings growth is non-existent & the outstanding share count is mounting steadily. More troubling is the lack of operating free cash flow (cash generated from operations, less PPE & intangibles). However, this has been offset by residential property sales in the past couple of years – unfortunately, this source of cash should dry up fairly soon. Perhaps more troubling is the continued reliance on consulting (almost 75% of revenue), rather than software sales. This is in response to the industry’s need for further cost-cutting, consolidation & compliance, rather than renewed secular growth. But it’s 5 years now since the end of the financial crisis. Perhaps there’s more of the same work to come, but I worry it’ll dry up & the company will suddenly have a death valley to cross…before we see a genuine return to growth in the finance industry.

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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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