Atlantic Resources, Austevoll, Continental Farmers Group, Hoarders, Independent News & Media, Limited Brands, Merrion Pharm, Origin Enterprises, Ormonde Mining, Ovoca Gold, Paddy Power, Petroceltic, Petroneft Resources, Polymetal, Prime Active Capital, Providence Resources, Readymix, Ryanair, TGISVP
Continued from here:
OK, time to tackle another batch of 10 Irish stocks. First, let me insert the Excel files. Again, all market prices (and FX rates) are updated, so this is a live snapshot of all stocks covered to date (with each stock’s upside/downside potential also recalculated vs. its valuation).
As I’ve mentioned before, please feel free to provide your own Price Targets on the Template sheet – it would be greatly appreciated by me, and many of my readers. If you disagree with some of my valuations, this is a great way to express yourself! I think we can all learn a lot more from divergent rather than convergent views on stocks..! Here are full notes/instructions if you wish to submit any Price Targets.
The Great Irish Share Valuation Project IV (xlsx file)
The Great Irish Share Valuation Project IV (xls file)
Merrion Pharm (MERR:ID): Merrion’s been offered a reprieve, with $5 million of debt being bought out by Irelandia Investments, a vehicle of Declan Ryan (son of the late Tony Ryan, the founder of Ryanair (RYA:ID)). Ryan is also Merrion’s largest shareholder, with a 14% stake.
Debt already exceeds cash, and even if we temporarily ignore the debt (Irelandia offered greater flexibility and a cheaper rate), cash will be exhausted within 15 months. Merrion continues to talk to interested parties about possible sales/licensing of their intellectual property, but there’s no way to discern what upside this process might offer. No matter how I spin it, I can’t find any value in Merrion. On occasion, I notice biotech stocks that pop up with a market cap lower than their net cash on hand. If you want to bet on biotech upside, this type of stock offers a free bet – Merrion isn’t one of them.
Origin Enterprises (OGN:ID): Origin went through a recent period of slow growth, as they restructured to focus on Agronomy Services & Agri-Inputs. This aspect of the process is now largely complete, as evidenced by their most recent 16% boost in earnings. The focus on agricultural yields and efficiencies, and related cross-selling opportunities, presents a marvelous investment opportunity. This is particularly true of the agronomy services, Origin’s the only listed stock I know of that offers this type of exposure. Additionally, the business is far less capital intensive than most other agri-businesses I’ve surveyed/written about to date (causing cash flow/burn issues).
On the other hand, Origin’s divestment process hasn’t made much sense. Management appears incapable of letting go of any business! Now they’re stuck with anything from a 24% stake in Continental Farmers Group (CFGP:LN) (which I’ve written about here), a 32% stake in Valeo Foods, to a 50% stake in Welcon (a JV with Austevoll (AUSS:NO)), Europe’s largest manufacturer of marine oils and protein.
Yes, you can argue they’ve smartly cashed out on a portion of their investment and/or traded a large stake in a small business for a smaller stake in a larger business. But I’d argue a complete divestment of all non-core businesses would be the far more obvious strategy, with proceeds paying down debt and funding a more aggressive core business ramp-up. Instead, investors have been left to worry what happens next with all these playthings, while interest coverage gets worse as direct control is lost over their cashflows.
I’m sending management some popcorn, and a season of Hoarders to watch – maybe after watching, they’ll finish what they’ve started..!
Ormonde Mining (ORM:LN): Ormonde seems reasonably valued right now. Unfortunately, this makes no allowance for how they’ll actually fund their Barruecopardo tungsten project. While further progress might offer the prospect of an improved reserves/resources statement, I’m not sure this will offset the necessary dilution hit for shareholders when Ormonde tries to come up with a decent level of funding.
Ovoca Gold (OVG:LN): Ovoca’s an interesting stock. It’s now more of an investment company – makes sense when you consider Tim McCutcheon, the CEO, is an ex-investment banker. It has significant cash on hand, 0.8 million shares of Polymetal (PMTL:LI), and a $10 mio gold equities portfolio (managed by GLG). These assets resulted from a sale of the Goltsovoye silver deposit to Polymetal in 2009, at a 194% premium to the company’s market cap at the time!
To date, McCutcheon’s been an excellent steward of shareholder value, conserving the Goltsovoye proceeds, focusing exploration efforts on just 3 gold projects, and launching a share buyback (which could be a little more aggressive!). I’m not much of a gold (wing) nut at this point (there are plenty of better real assets & opportunities out there to buy into), but I wouldn’t be surprised to see a $2,000 price spike. Ovoca could be a cheap entry into this exposure. But what’s really fascinating is that Ovoca’s current gold resources could potentially be proved up within a limited period of time at a relatively limited cost. Success in this regard would likely prompt another step-change in valuation for Ovoca.
Paddy Power (PWL:ID): To me, Paddy Power’s the Ryanair (RYA:ID) of the betting world! Like Ryanair, years ago they appeared to be just another also-ran – they had a chain of bookies in Ireland, an expensive build-out in the UK, and it seemed like they were firmly in the sights of the big boys. Then they launched themselves online, and progressively adopted a Ryanair publicity approach featuring plenty of wackiness, and lots of pretty girls and partial nudity.
Well, I’m not sure who came first! When you think about, the approach seems a lot more suited to a betting company, rather than a bloody airline…how on earth do we trust an airline like that?! A similar approach with their annual reports makes for a fun read (personally, I was always dying to buy Limited Brands (LTD:US) myself…take a look here. I challenge you to send me a better AR link!).
Now Paddy Power makes three quarters of its profit online, and earns two thirds of its profits outside Ireland. Earnings growth has been amazingly consistent over 5 and 10 years, at a 26% cagr in both cases. Unfortunately, I cannot bring myself to put a P/E higher than 20 on any stock. I’ve become far too wrapped up in the past in stocks with high growth rates, and low PEG ratios, and then suffered an earnings slowdown…and a P/E multiple de-rating. This (agonizing) combo. can easily deliver a 70% collapse in your favourite growth stock, so anything above a 20 P/E (regardless of the growth rate) offers too little of a Margin of Safety.
On the other hand, operating free cashflows have consistently exceeded operating profit in the past few years, so I was happy to utilize a higher 3.25 P/S ratio (plus an upwards debt adjustment to reflect inherent debt capacity – perhaps to pursue other acquisitions like Sportsbet in Australia). Despite this, my valuation fell quite a bit short of the market price – Paddy Power looks like it’s priced for perfection…
Petroceltic (PCI:LN): Petroceltic’s a big spender, with annual cash outflows of around $100 million, but unfortunately has not yet achieved any proving up of reserves. This is the key to value creation here, as PCI has a little less than 1 year’s cash on hand. However, the underlying value of one of its prospects is highlighted by the farm-out deal on its Algerian Isarene permit to Enel (ENEL:IM).
Enel is Italy’s largest energy provider, and payment(s) for its 18.375% stake in Isarene point to an implied value of $1 billion on the project. This is a major endorsement, but then again big companies take bets too..! At this stage, I’ll incorporate only 50% of this valuation, reflecting the lack of any proved and probable reserves. Taking into account PCI’s 56.625% stake, this suggests Petroceltic is close to Fair Value right now.
Petroneft (PTR:LN): I own a 1.0% stake in PTR, and have recently written about it here. Petroneft’s in an enviable situation compared to most other resource stocks, with plenty of proved and probable reserves. This is the underlying basis for my valuation, but the market price illustrates how critical cashflow is with an asset based investment. Any value investor likes to pounce on a stock which trades at a large discount to asset value. This can be sometimes be a big mistake. Why?
Well, if the company involved is suffering from significant cash outflows, and has insufficient cash/debt to reach its expected cashflow positive inflection point, you’re probably going to see that share price hammered. There’s nothing the market hates worse than this kind of funding uncertainty, or the risk of actual company failure. And this is the problem – Petroneft has plenty of asset value, but is running out of cash/debt capacity. Problems with initial production have compounded this – these will be solved with time, brains and money, but the funding issue is unlikely to be solved without dilution for the shareholders.
Purely on an asset basis, I calculate Fair Value of about GBP 75p per share. If I assume a share placing large enough to fund 1 year of cash burn (302.6 mio shares @ say GBP 10.25p, a 35% discount, to bring in $49.1 mio), I come up with a diluted value of GBP 48p per share. Which is correct? Well, I’ve already pointed out the best solution (now that PTR’s missed the boat on a decent share price) – a sale/farm-out of reserves, or preferably resources. In fact, I don’t include resources in my valuation, so any resources sale (and they have 100s of million of boe) would improve my (higher) valuation due to cash received and retention of their reserves. It would also eliminate any near term funding issues, hopefully granting the room for a ramp-up in production. Therefore, I think an average of the two approaches is justified, which is a GBP 61p per share Fair Value, and a Potential Upside of 293%.
Prime Active Capital (PACC:ID): PAC is a private equity vehicle, launched by Peter Lynch (formerly Fin. Director with Eircom), focused on company restructuring, and/or operational improvement. It’s now focused solely on a chain of cell phone stores in Georgia/Alabama and Pittsburgh/Ohio regions – not exactly inspiring stuff! However, this business has now reached a scale where it’s earning a 2-4% EBIT margin, which is offset by almost a EUR 1 million HQ cost (outrageous for such a small company). I don’t like the sector, I don’t like the geography, but a 0.2 P/S ratio seems achievable on a sale, especially to a competitor. The best course of action would be a sale of the US business, collect deferred consideration PAC is owed (from a previous sale), pay off debt and liquidate/distribute net proceeds to shareholders asap! This stock has an unattractive story, but presents an intriguing valuation and upside.
Providence Resources (PVR:LN): Say O’Reilly and some people will shudder, say Atlantic Resources and even more people will shudder..! Providence Resources is the bastard child of both. See my prior Independent News (INM:ID) comment for some useful Irish investing advice… But to be fair, let’s go ahead and value it: Debt exceeds available cash. Cash burn’s relatively low, but will accelerate as Providence moves forward with a more aggressive drilling programme. Non-Irish/UK assets have now been divested ($16 mio realized from Nigeria). Despite the 100s of millions of barrels Providence casually throws around, the level of P50 reserves is much more limited. It still adds up though, with over 40 mio boe identified. Presuming a 50:50 Proved:Probable split, these are worth over $300 million, so there’s actually some valuation upside at Providence’s current share price!
Readymix (RYX:ID): I owned this share at one point, and sold at a loss when I realized I was in far too early. The end-game now appears to be here with a possible EUR 0.25 bid per share (up from EUR 0.22) from controlling shareholder, Cemex (CX:US). I suspect v few shareholders have a profit even at this level, considering the stock’s price history. The destruction of shareholder value here has been a terrible shame. People may forget there is actually enduring value in quarries, aggregates, cement factories etc. – the trick is to preserve this value during a downturn…
The wrong way (let’s call this the Readymix strategy!) is to continue operating as if nothing much has changed (in the Irish construction industry?!?), attempt some cost savings, and still lose money hand over fist… The right way is to shut everything down asap – literally lock the gates if you can – and wait it out. I call this the timber strategy: When you can’t sell trees for a good price, don’t panic, just shut the forest gate and forget about them for a few years! It’s not as simple as all this, but I think you get my point!
This wanton value destruction has finally reached a point where Cemex can saunter in with an offer (actually, absurdly generous…vs. the prior market price, that is) to buy out the remainder. Presuming this takeover goes ahead, expect to see a savage rationalisation pushed through, and then pretty much a watch and wait attitude until eventual signs of growth encourage them to throw the gates open for new/more business. It’s a shame that we likely will never see the level of profit Cemex will squeeze out of this puppy in the next boom.
On the face of this, valuation’s binary: Either the EUR 0.25 per share Potential Offer is realized, or the Offer fails and Fair Value equates to the current estimated Equity (after over EUR 50 mio of losses and writedowns in 2011!) less another year of operating losses. I’m opting for an average, which is a little shy of the current market price. Incidentally, I think RYA presents a dreadful Risk Arb opportunity – even if the underlying value is there, the reality is you can make a v small return against the Offer Price, while risking a likely immediate 50%+ price decline if the Offer doesn’t work out.
Any feedback, or questions, please don’t hesitate to comment or email me. Cheers!