OK, folks, let me throw another dozen stocks into the mix!
The Great Irish Share Valuation Project II (xlsx file)
The Great Irish Share Valuation Project II (xls file)
A couple of housekeeping items, if you’ll take a look at the first (Wexboy) sheet: I’ve added a Blog Link column to the right – if I’ve written about a stock already, you’ll find the link there. I’ll bold any stock (see FBD, for example) where I’ve disclosed an ownership stake. I’ve also added some averages at the bottom of the sheet. I’ll discuss these in more detail when there are valuations for a majority/all of the shares listed, but they’re pretty self-explanatory and already look interesting.
You’ll note I’ve refreshed the market price of ALL stocks. Most importantly, this will update each stock’s Upside, so best to always focus on my most recent file. I’m keeping a record, though, of the original market prices at the time I published each batch of share valuations/price targets, and I’ll do the same for all contributions. Might be handy for some fun performance analysis at a later date! Finally, I’ve sorted all stocks by their Upside potential. Now, what did I find this time ’round?:
Datalex (DLE:ID): Datalex’s finally near the inflection point of being cashflow positive, and there appears to be a great pipeline of Revenue signed up. I’ve focused on the EBITDA Margin to come up with a P/S Ratio (plus Cash), as it corresponds well with Operating Margins for many (but more mature) tech companies, and in reality it’s the key M&A metric in the sector. This may be relevant, as it has some sharp/activist shareholders on the register, including IIU.
Elan (ELN:US): Elan’s a tough company to get your hands around. My valuation may seem harsh, but then again it’s alarming to see how dependent it is on Tysabri, a drug with its own fair share of problems and competition. However, my valuation would probably have included an aggressive debt haircut only for the recent spin-out/merger of Elan’s EDT business into Alkermes (ALKS:US) (incidentally, they’re (or claim to be..!) HQed in Ireland, and obviously have lots of Irish-based manufacturing and R&D, so I’ve included them as a TGISVP candidate). In return, Elan received $0.5 billion of cash, and a 25% stake in ALKS.
Take a look at my valuation methodology: R&D has to be fully expensed, not capitalized. I like this as a ‘default‘ – and it’s v appropriate in many situations. But if you’re dealing with a company which has a diverse, successful, long-standing R&D programme, it makes perfect sense to addback the majority of a company’s annual R&D expense to arrive at underlying operating profitability. Think of it another way, if you bought out a Pharmco in the morning and terminated its R&D programme, you’d have an amazingly profitable business for many years to come.
FBD Holdings (FBD:ID): I included a previous (short) write-up on FBD. I own it, and included it in my Baker’s Dozen for 2012. With risk now removed from the B/S, and an underlying RoE of 19.5%, a valuation of at least 2.0 NAV is very obvious. It should either grow into this valuation within a reasonable timescale, or note that foreign insurers have always been fascinated with the Irish market (despite its size)… With Liberty Mutual snapping up Quinn Insurance, others may soon stop trembling in their boots and think about how they can grab a slice of the pie too.
Great Western Mining (GWMO:LN): Oh God, what do you want me to say about this little f**king cripple? Whoohoo, it has slightly more than a year’s cash on hand..?! Hmm, maybe it’s on AIM Soiree‘s Top 100, haha. Plse ignore this PoS! Shareholders are investing in nothing – even if they ever find anything tangible, existing shareholders would obviously be diluted to hell if they were ever to move forward…
Grafton Group (GN5:ID): This is a high quality stock in a v cyclical sector, which unfortunately accounts for its hammering in the past few years. Recent saving grace has been the UK business, which has bottomed out/improved slightly even as the Irish market continues to tank – like DCC (DCC:ID), it’s become an increasingly UK focused company, with an over 70% share of its revenues in the UK now.
Not surprisingly, I’ve used the same valuation approach as with CPL (CPL:ID) and CRH (CRH:ID), but with one interesting twist: Operating Free Cash Flow (FCF) leads and lags operating profitability in a bust and boom, respectively. Duh, elementary, dear Watson (btw I’m really warming up to Sherlock now)! Yes, I know this is not so unusual, but it’s quite pronounced with Grafton particularly on the downside, I believe. This is an excellent defensive characteristic (perhaps not in terms of price – does the market ever pay attention to cashflow?! – but in terms of continuing financial stability). Also, if you evaluate based on FCF, current/historical margins are in a much tighter/more predictable range – another sign of quality.
I think Grafton will be slow to take off in the current environment, but when it does it can expect to enjoy a multi-year momentum cycle. This is no great/aggressive macro call. It’s more a reflection of the fact that in a more normal (even low growth) economy Grafton will re-acquire the confidence and capacity to renew its bolt-on/roll-up acquisition strategy (in a still v fragmented market). This has proved v successful in the past.
Donegal Creameries (DCP:ID): The real daisy in the cowshit (though they need a name-change). This was (is) a bit of a hotch-potch – they own retail stores, a dairy business, an organic/yoghurt business, other assorted agri-businesses, a stake in a mushroom producer, farmland and investment properties! I was tempted to value based on RoE (and attracted by the large discount to NAV), but with the recent disposal of the dairy/co-op/retail business, a drill-down into the individual investments and businesses seemed worthwhile. This was also prompted by the fact that the dairy business was the most volatile and poorly performing (on occasion) business, perhaps freeing up its more stable/higher value businesses? And its sale will eliminate a significant portion of DCP’s debt.
Unfortunately, their agri-inputs business is not so hot either (with volatile/distribution type margins) – it would be worth a lot more sold, than retained. That would leave it with property (mostly farmland, which you can still actually shift in Ireland), and its Monaghan Mushrooms stake, both of which could be divested in due course. In fact, the Monaghan stake is ultimately responsible for my valuation premium to Book: A 15 P/E multiple for this stake may seem aggressive, but it’s on what looks like a temporary profit dip, and the implied valuation is undemanding considering their recent EUR 100 mio capex programme. An eventual IPO here wouldn’t surprise me. If this path was followed, Donegal would be pretty much left with cash and its produce (seed potato) business. The obvious end-game there would be an M&A transaction with Produce Investments (PIL:LN), which is also in the potato business, with a similar market cap.