2016 – The Great Irish Share Valuation Project (Part I)

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Um, apologies, the blog’s been quiet since early last month – though I’ve certainly been keeping up with readers via Twitter…Good Lord, I’m now up to 25K+ tweets!? Actually, I’ve been more than usually focused on stocks both old & new in my portfolio. Which seem to be increasingly bifurcated between special situation stocks where I continue to engage with/push management to enhance and realise shareholder value, and growth stocks (at the right price) where I can sit back & watch smart management compound shareholder value over time.

Hmmm, put it like that & growth stocks seem like the far more compelling choice..!? Though in reality, each presents their own unique risks/opportunities. And for me, somewhat perversely, one tends to inspire the other…dealing with recalcitrant management can inspire me to seek out smartly managed growth stocks, but actually seeing it done right, such companies also highlight the compelling value lurking out there just waiting to be tapped (sometimes, literally, overnight) if only management would come to their senses (or a third party steps in & does it for ’em).

Anyway, a little break’s a good thing – and we’re all feeling much better now, with most markets recovering their Jan/Feb losses this month. Hopefully, this new-found momentum will continue (at least ’til the usual ‘Sell in May & go away’ debate!), as markets generally remain flat/down over the past year – it’s been a tough period for nearly all concerned (spare a thought for those poor billionaire hedge fund managers!), clearly exacerbated by oil’s elevated volatility & influence.

And as promised, a good time to kick-off The Great Irish Share Valuation Project, with the ISEQ on a breather for the past year (down 0.6%) (but still over 40% off its all-time high, as set nearly a decade ago now), and the Celtic Phoenix offering more opportunity than ever… Long-time readers will be familiar with TGISVP (here’s my kick-off posts from 2012, 2013 & 2014), where I attempt to analyse & value every listed Irish stock out there (and usually piss off some tired & emotional shareholders in the process). The great thing about the Irish market is its size…one of the few globally (with about 70-80 stocks, in total) which actually presents investors with the opportunity to really get down & dirty with every single stock. And it’s a real stock pickers’ market, as I’ve previously highlighted:

‘And it’s worth noting brokers often segment the Irish market into very different sector/exposures. And so, accordingly, it tends to attract pretty dissimilar investor constituencies, who may only focus on: i) a handful of the largest caps, regardless of valuation & exposure, ii) stocks which (may) offer cheap/alternative access to overseas growth (a surprisingly large number of Irish companies are UK/Europe/globally focused), iii) stocks offering domestic exposure (notably, economic pure-plays are actually pretty rare), iv) a listed commercial & residential property sector that’s only emerged in the past couple of years, and finally (& perhaps most notoriously) v) a (junior) resource stock sector that’s been decimated in the last few years.

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Zamano – Time For A Dividend & Your Support…

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Here’s a recent letter I sent the board of Zamano plc (ZMNO:ID, ZMNO:LN) – it proposes the company now commence paying an annual dividend. I’m also now actively seeking the support of my fellow shareholders:

27-Feb-2016

FAO:   John Rockett, Chairman
            Ross Conlon, CEO

Cc:      Pat Landy, NED
____- Colin Tucker, NED
______Fergal Scully, NED

zamano plc
3rd Floor
Hospitality House
16-20 South Cumberland St
Dublin 2

Gentlemen,

Pursuant to my last Zamano post, I want to thank Ross for responding to the shareholders who contacted the company regarding my annual dividend proposal. A number of shareholders have also contacted me directly to confirm their support – I now speak for 13.1% of Zamano’s outstanding shares. Noting this support & the upcoming Mar-10th release of Zamano’s final results, this is a good opportunity to write to you more formally & reiterate my dividend proposal:

– Zamano’s been profitable for the past four years now. Since 2011, the company’s revenue has increased by 55% to a €23.3 million annual run-rate, annual EBITDA has averaged €2.6 million, while annual free cash flow has averaged €2.5 million (for FYs 2012-14). This has now resulted in net cash of €5.4 million on the balance sheet, versus €4.4 million of net debt in 2011, a near-€10 million swing in the company’s financial position.

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Recommendation: Vote AGAINST the Argo Group Share Buyback Proposal

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Here’s the recent RNS from Argo Group (ARGO:LN), notifying shareholders of a March-3rd EGM seeking authorisation for a £2 Million Share Buyback & Rule 9 Waiver. [Here’s the actual EGM Circular]:

– Argo Group’s AUM has now declined by a cumulative 85% (to $166 million), the $3.5 million Argo Local Markets Fund remains its only new fund-raising (since the credit crisis), it continues to write-off virtually all the management fees accrued & owed (now totaling $6.2 million) by the Argo Real Estate Opportunities Fund, and it’s also tied up a majority of shareholder funds in illiquid loan & fund investments. Management’s obvious inability to stabilise & increase AUM, plus its wilful neglect of shareholder value, are clearly to blame here for the 50% collapse in Argo’s share price just in the last 3 years.

– Judging by local press reports (for example, here & here), Andreas Rialas originally received a substantially higher offer for Argo’s Indonesian refinery investment (TPPI), but ended up spending another couple of years negotiating (or refusing to negotiate) with Pertamina…to ultimately realise a far lower exit price for fund/shareholders. [Which is consistent with a near-25% write-down (in the last interims) of Argo’s stake in The Argo Fund].

– Pursuant to this letter, in 2014/2015 I introduced and/or referred to Andreas Rialas a number of trade & financial buyers who were interested in potentially acquiring Argo Group, its asset management business, or its fund investments. Since then, I’ve had no meaningful feedback or reason to believe he/Argo have seriously engaged with any of these potential buyers.

– The EGM Notice process was both unprofessional & inappropriate: While most investors learned of the Share Buyback from Argo’s RNS (released after close-of-business on Mon, Feb-8th), the Notice was actually posted the prior week & received by some shareholders on Sat, Feb-6th.

– The Indonesian sale & proposed return of capital is Argo’s first major value-creation event in a number of years. Some level of (prior) consultation with a representative group of external shareholders, plus some additional time to adequately consider & discuss the proposal, would have been appropriate.

Kenneth Watterson is a director since Argo’s original 2008 Admission. As is David Fisher, who’s also been an AREOF director since 2010. While Michael Kloter has a much longer history with Andreas & Kyriakos Rialas, Absolute Capital Management (which acquired Argo back in early 2007), not to mention Florian Homm (also, see here & here)…and received a post-Admission bonus, while billing Argo for legal services over the years. In aggregate, these directors have earned an estimated $1.4 million in total remuneration from Argo. I must say, I struggle to understand how they still qualify as Independent Directors..?!

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The Celtic Phoenix…Five Consecutive Years of Market Gains & 6.6% GDP Growth!?

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A picture’s worth a thousand words – here’s a 5 year chart of the ISEQ:

ISEQ

Truly, a thing of beauty…

And over the life of the blog, the Irish market has delivered four consecutive years of gains:

2012:   +17.1%

2013:   +33.6%

2014:   +15.1%

2015:   +30.0%

Cumulative Gain:   +134%

[And yes, the title of the post’s correct…the ISEQ also managed to eke out a small gain in 2011: +0.6%.]

And here’s the cumulative gains (over the same period) of the other major indices I use as portfolio benchmarks:

S&P 500:   +63%

FTSE 100:   +12%

Bloomberg European 500:   +46%

Wow, even the S&P’s performance looks positively pedestrian…

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Wexboy – Top 14 Tips for 2016!

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This ain’t no party, this ain’t no disco, this ain’t no fooling around…

Yeah, it’s January, the most miserable time of the year. And already half of us regret we made no New Year’s resolutions…while the other half regrets they did. The market’s no help either, with many investors ending a frustrating 2015 in the red, and greeted in 2016 by another global dump. [Let’s discard the odd notion the Chinese market’s global impact is simply due to its hyper-volatility. It’s not…the market’s only the tip of the spear for the entire Chinese economy, which has obviously evolved into the key marginal driver now of the global economy. So for 2016, a great resolution is to pay far less attention to the US & far more attention to China!]. But still, there’s a whole bunch of new tips out there to inspire us…:-)

Trouble is, I don’t necessarily have much faith in them, ‘less I know the tipster’s got his money where his mouth is. Which offers no guarantees, but it means I’ll tackle the 2016 tips season just like I did last year – inevitably, my top holdings are also my top tips! [And judging by my traffic, people definitely want tips first & performance later…so I bow to the vox populi, my FY-2015 performance post will have to wait a little longer!] And so, without further ado, here’s my Top Holdings as of Year-End 2015:

Wexboy Top 10 Year-End 2015

Hang on a minute, isn’t this s’posed to be a Top 14 Tips? You’re bloody well short-changing us here, mate!? Well, sort of, I’ll explain later…😉 Now, let’s start pulling together a few different elements here… First, you might want to check out this July post, which includes my last (brief) updates on most of these stocks (& hopefully offers a taste of my upcoming performance post!):

‘Smokin’ the S&P…H1-2015 Wexboy Portfolio Performance!’

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So, Just Average Is Best…

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It’s New Year’s Eve…and in the end, it’s been a pretty tough & frustrating year for many investors out there. [‘Less you’re Irish & stuck close to home – just look at this friggin’ chart!] And while the holiday season’s all about celebrating the year gone by & ahead, it can be tough (as the booze kicks in) not to get a little disheartened and experience some real doubt about your portfolio & your stock-picking prowess.

And the financial media’s no help – the talking heads & market strategists chatter about the biggest winners of the past year, and opine on the stocks & trends to focus on in 2016. How on earth are they be so confident & so prescient? It’s simple…’cos that’s how they get paid & promoted! Just like CEOs, just like politicians, just like your boss, the big bucks are paid almost inevitably to the big swinging dick. Not the fidgety little guy in the corner, analysing stacks of data & second-guessing himself to death. Truth is, they don’t need to be right, that’s irrelevant. Because they’re looking to attract attention, earn fees, increase AUM, etc…and ultimately, confidence sells.

Trouble is, you need to be right.

But you don’t feel confident, like they do. And so the dance continues… They go on TV, and dish out all the confident narrative & commentary you crave. Except the only obvious market truism (‘stocks go up, over time…’) isn’t a good soundbite. Instead, they analyse monthly data points. And speculate about a possible Asian pandemic. And worry over an escalating Middle East war. And hyperventilate about a junk bond-induced economic melt-down. Or a terrorist attack, or maybe even an assassination, if they get lucky. And so on, ad infinitum.

But almost inevitably, it’s all just noise…

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Zamano…So, What Now?!

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It’s 18 months since my original Zamano (ZMNO:ID, or ZMNO:LN) write-up:

‘Zoom, Zoom…Zamano!’

Maybe I should kick off with an update…but if you’re a current (or potential) shareholder, how can we avoid the elephant in the room? Yeah, I’m talking about the early-Aug announcement of a possible EUR 0.20 per share offer for Zamano. The one where investors were subsequently left in the dark for nearly three months, only to learn in late-Oct bid discussions had actually been terminated (no further details were provided). I’m sure plenty of shareholders have been experiencing the five stages of grief since, and who can blame ’em really…it must feel a lot like getting jilted at the altar!

So, What Now..?!

Well, less than a fortnight later, the company released news of the Chairman’s upcoming resignation, plus a 9 month trading update which (while excellent) consisted of a single sentence… This appears to draw a line under the failed bid, and signals it’s business as usual, which I really don’t find acceptable. Shareholders deserve better. Whatever the merits/likelihood of the bid, it’s a frustrating reminder of the obvious value gap between ZMNO’s share price & its intrinsic value. I’m quite sure a majority of the company’s shareholders (i.e. its bloody owners!) now feel like they’re owed at least a strategic review, laying out in detail how the board intends to close the current value gap & grow shareholder value. Let’s map out the available strategies (and forgive a more jaundiced view):

Organic Growth

My last post relied on FY-2013 figures – since then, the company’s enjoyed consistent revenue momentum of +24% in FY-2014, +19% yoy in H1-2015 & an accelerated +37% yoy in Q3-2015, while net cash increased over 150% to 5.4 million. The recent trading update now pegs the revenue run-rate at 23.3 million, a 45% increase in less than two years! Maybe ZMNO finally deserves a growth stock re-rating?! Let’s hope so… Here’s updated financials to end-June 2015, focusing (again) on cash flow:

Zamano - Decade of Financials

It’s encouraging to note recent (& historical) growth clearly doesn’t require increased cash investment. But let’s not fool ourselves, management’s enjoyed some attractive tail winds here. With 80% of the business now coming from the UK, sterling strength is a significant top-line contributor. The EUR/GBP rate averaged 0.8491 in 2013, and now it’s 0.7046 – that probably accounts for 25-30% of the post FY-2013 revenue increase. And with the UK & Ireland being two of the best economies in Europe (in terms of GDP growth/recovery & declining unemployment), increased consumer spending is another substantial tailwind. Plus, there’s a renewed emphasis on B2B – and while that delivers a more stable/durable revenue stream, it also means lower margins & a lagging EBITDA (which increased 19%, to €3.1 million) over the same period.

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The Saga Continues…

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‘Bout time I revisited Saga Furs (SAGCV:FH). Loyal readers will hopefully recall my original investment write-up, two years ago now:

‘Quite A Saga…’

And boy, that’s what it’s proved to be ever since… Wisely, I wrapped up my last post with a potential health warning for readers (& included a scary looking chart). At first, it seemed unnecessary, as Saga managed to rally 20%+ in the following two months (hitting almost EUR 50.00 a share, which was gratifying). I must admit, I certainly didn’t expect what came next…

Now, I should encourage you, please go back & read my original post – it provides useful background on the fur industry & Saga Furs, which I don’t plan on revisiting here. [And I’m ignoring an anti-fur movement that’s become increasingly irrelevant…but I should clearly highlight Saga isn’t a stock for everyone, though obviously it’s not a fur producer itself]. Let’s recap my positive investment thesis at the time:

  • Triple Threat:  Saga Furs offers attractive exposure to three of my favourite things: Emerging Markets, Luxury Goods & Auction Houses.
  • Supply:  European/N American fur production is highly regulated (& superior to Chinese fur), with supply constrained despite generally increasing prices.
  • Demand:  High-growth/secular fur market trend in the past decade or so, driven by Western fashion/luxury revival & new emerging market demand.
  • Resilience:  Despite a 39% post-crisis collapse in sales, Saga’s P&L stayed close to break-even. [Aided by inversely-correlated commission rates, which increase as sales decline]. Auction sales rebounded 78% the following year.
  • Investment:  Significant percentage of Saga’s annual turnover is ploughed into expanding capacity, European/global fur lobbying, and the promotion of Saga Furs as a luxury brand.
  • Market Share/Network Effect:  Now permanent agreement with American Legend & Fur Harvesters Auction to sell via Saga auction, thereby creating some of the largest fur auctions in the world & significantly improving Saga’s effective market share.
  • Valuation:  Stock cheap in absolute terms, vs. long term earnings growth & an average adjusted operating FCF margin of 28.0%. Also cheap in relative terms, vs. auction house & luxury goods sectors.

Unfortunately, the perfect storm was ready to hit: Dec-2013 auction sales collapsed 76%, as prices & the number of pelts sold dropped precipitously. Despite the about-face, initially this seemed like a bit of a buyers’ strike really…brought on by a mild winter, sticker shock (after pelt prices doubled in 3 years), higher retail inventories, and signs of slowing Russian & Chinese growth. Looking back, we know better now. It did prove to be a temporary buyers’ strike (as I’ll highlight below), but clearly the December auction heralded a more serious & sustained market disruption – the Chinese crackdown on luxury gifts was just gathering momentum at the time, and Putin was on the verge of sending the Russian economy (& ruble) over a cliff by backing military intervention in Ukraine.

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$DCEL: Denis’s Cash Extraction Lifeline

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NB: I should immediately note Denis O’Brien is not selling any of his shares in the upcoming Digicel IPO. And why should he…when the company’s already after paying him $1.1 billion in dividends over the last 3 years. Surely that will keep the home fires burning for quite some time to come!?

NB: And ‘Lifeline’ is simply a reference to ‘Who Wants to Be a Millionaire’ (or Billionaire?!) – nothing at all to do with lifeboats, or sinking, or drowning, or debt, or anything else even remotely like that…

So, ever since Denis O’Brien started popping up at regular intervals on CNBC & Bloomberg, maybe eighteen months ago now, I just knew in my gut he had a whopping great IPO in the works… Fast-forward, and Digicel’s now billed as the largest ‘Irish’ IPO ever, a revised F-1/A was just filed with an indicative $13-$16 per share price range, and its NYSE IPO is just about ready to drop. With everybody & their mother talking about it (well, except for Johnny Ronan’s fat mouth), how can I resist chipping in my two cents..?!

Let’s kick off with an introduction: Digicel Group is a leading provider of mobile communication services in the Caribbean & South Pacific regions. Its mobile subscriber base has grown from just 0.4 million in 2002 to a total of 13.6 million subscribers as of Jun-2015 (an impressive 31.7% CAGR). It now enjoys a number one position in 21 of the 31 markets in which it operates.

Digicel Glance

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