Better Capital, Dart Group, FL Partners, Irish Continental, Jon Moulton, Marketspreads, Paddy Power, Pageant Holdings, Petroneft Resources, Ryanair, Siteserv, Smurfit Kappa, TGISVP, Total Produce, Tullow Oil, TVC Holdings, United Drug, UTV Media, Worldspreads, Zamano
Continued from here:
Before tackling the next batch of stocks, some readers may want to revisit my first TGISVP post. This project’s not about doing a detailed writeup/valuation on each stock. Sure, I spend ample time on each stock (on a best efforts basis)**, but less than if I were making an investment and/or doing a detailed writeup. That’s why I label these rough and ready valuations! On average, yes I’d expect detailed and rough & ready valuations to be similar, but ‘average‘ is key here..! Take a closer look at any company, and my new valuation could be (possibly significantly) higher, lower or unchanged vs. my original valuation.
What this project is designed to do: i) Illustrate the wide variety of valuation assumptions/approaches that can be applied depending on each individual company/situation, and ii) provide a cheatsheet to highlight the potentially best (and worst!) Irish stocks, on an absolute (or relative) basis, that may merit further research and potential purchase/sale.
I’m not writing specific stock recommendations here, and I prefer readers to DYOR and examine the exact valuation/math for themselves (and prices/upsides can change quickly), so I limit the figures/info. I include in any stock commentary. I hope this encourages people to download/utilize the latest Excel file – feel free to refresh prices, and/or revise any valuation formulae to fit your own perspective(s). OK, let’s finish off the ISEQ listed stocks:
The Great Irish Share Valuation Project V (xlsx file)
The Great Irish Share Valuation Project V (xls file)
Ryanair (RYA:ID or LN): I’m a shareholder (I tweeted I’ve sold down to a 0.9% stake as the price appreciated), but hadn’t done a detailed blog writeup as I’ve been more interested in selling than buying since the end of last year.
This holding now matches up with my Petroneft (PTR:ID) shareholding. I’m looking for others (chemical stocks?), but I like transport stock(s) as a natural hedge for oil stock(s). Before we argue correlations, yeah it’s a little rough & ready but there’s an obvious negative correlation there, and it’s worked well for me in the past. Of course, I’m still looking for alpha – ideally each pick appreciates over time but with some of the underlying commodity price volatility/impact eliminated. So if you can’t find a stock you want to own anyway, don’t try this!
Ryanair made compelling sense even as a stand-alone investment at my average entry price. If I end up adding to my oil stocks, I’d like to also increase my transport holdings. Ryanair and Irish Continental (IR5A:ID) don’t offer enough upside, tanker stocks are an absolute disaster, and coach/rail/cruise-line stocks don’t seem so compelling – it’s a riskier stock, but Dart Group (DTG:LN) has potential, and has been on my Potential Buy list for a long time… And it’s caught plenty of blogger’s eyes recently: kelpiecapital, Expecting Value, Richard Beddard, valuestockinquisition, Valuhunteruk. Hmm, maybe a good stand-alone investment anyway?!
I’ve a 15 P/E on Ryanair – might seem a touch low, considering current earnings growth, but bear in mind historical earnings volatility and the headwinds RYA faces with oil next year. I similarly arrive at a 1.33 P/S ratio (vs. a 15.3% Operating Profit margin). It also reflects the fact operating free cashflow has historically been severely lower than operating profit. No longer the case, with capex on hold (yes, I’m sure another special dividend’s coming…), but who knows when that might change? When O’Leary feels like he’s beaten Boeing into submission..?!
Smurfit Kappa (SKG:ID or LN): So, definitely not a widows and orphans stock! But its valuation is intriguing… Latest pre-exc. EPS stands at EUR 1.00, and I’m reminded of the rule: With cyclical stocks, never pay more than 5-6 times peak earnings! But it’s not clear where Smurfit stands in this regard – there are certainly fresh threats to global growth, and debt overhang will restrain the developed markets for years to come – on the other hand, Smurfit’s now a dominant player, emerging markets continue to perform well, and Western central banks continue to pump out a tsunami of liquidity to combat debt deflation. All in all, I think the risks are finely balanced, and certainly do not imply we’re definitely seeing peak earnings now – you should certainly factor in your own growth outlook into this valuation.
What’s much more relevant is that Smurfit’s still pretty much a distressed situation. Debt’s far too high, and debt reduction needs to be the primary focus for such a cyclical stock (I’m actually disappointed at the recent dividend announcement). As I’ve mentioned too many times, the only safe way to value a distressed stock is through the balance sheet and cashflow statement, simply ignore the P&L! Of course, risk control goes hand in hand with this – even if a distressed stock’s v under-valued, it may be wise to limit your stake in light of the continuing risk its excessive debt presents.
Looking at Smurfit in the past 3 years, I’m impressed at their capex. spending control, which has only risen from a net EUR 235 to EUR 262 mio. This hopefully suggests that if end-market prices start to reverse, similar discipline will be applied to reduce/cancel spending plans. Average operating free cashflow margins have been 8.0%, which deserves a 0.67 P/S ratio. However, debt/derivatives are far too high at EUR 3.7 bio (resulting in a net EUR 245 interest bill) – vs. the latest operating free cashflow of EUR 697 mio, a 57% reduction in debt would bring interest coverage back to reasonable levels.
There’s also a EUR 655 mio pension deficit, but this is more than offset by ample cash of EUR 845 mio. Putting all this together, we’ve a substantial (debt) haircut to the implied P/S valuation of EUR 4.9 bio, but Smurfit still presents a v attractive upside if you’re prepared to bet on an economically sensitive stock still in the midst of a debt reduction programme.
Total Produce (TOT:ID or LN): This one should be v familiar to regular readers! Please read here, and here. My Fair Value Price Target is much unchanged at EUR 0.941, offering a low risk, but hefty, upside. Price action in the past week has been intriguing – we broke EUR 0.41, which quickly led to EUR 0.44. A break above that level would signal a significant move higher. I currently have a 5.1% stake, my 3rd largest portfolio holding now.
Tullow Oil (TLW:LN or ID): Uhoh, I’m really going to put my f***ing foot in it this time… Tullow’s valuation makes no sense to me! I tie myself up in knots, but I still can’t reach it – like that old joke…if I damn well could, I’d never leave the bloody house!! In the end, I tried 3 different approaches – to show I’d spent enough time poring (not ‘pouring‘ as so many idiot publications spell it!) over the figures, and to see if any individual valuation wildly contradicted the others.
‘Fraid not! My preferred approach is balance sheet/reserves based: Tullow has $403 mio of cash, plus $72 mio from its Ghana offering, less $89 mio for EO purchase, an expected $2.9 bio from its Uganda farmout, less $405 mio net 1 year cash burn, less $3.1 bio of debt/derivatives. It has 152.7 mio boe of Proved Reserves (assuming a 50:50 Proved/Probable split) I value at $10 per boe, another 152.7 mio boe at $5 per Probable boe, and 684.6 mio (post Uganda farmout) boe at $2.50 per Contingent Resource boe. This amounts to about a $3.8 bio Fair Value.
Now let’s try a P/S approach: With the prior volatility and recent ramp-up in revenues, and the variability of operating profit margins, I think I’m being pretty generous working off the latest revenues of $1,666.3 mio and an operating profit margin of 41.9% (10% to be allocated to minorities). Current debt’s manageable, in theory, based on these metrics so no adjustment needed there. I’ll put Fair Value at a 4.25 P/S ratio, which equates to about $7.1 bio.
Finally, we’ll look at EPS: For the same reasons as above, I’m not prepared to place Fair Value any higher than a 12.5 P/E, which corresponds to $3.95 per share based on latest LTM EPS of $0.316.
I therefore come up with an average Fair Value of GBP 338p per share, which threatens a substantial downside for the share price. Despite the misleading headline, this is reflected in a Bloomberg article today that highlights ‘They’re paying about 33 times expected profit for Tullow shares, the highest price to earnings ratio on the 19-member FTSE All-Share Oil & Gas Producers Index.‘
Let’s crush it in a couple more ways: Tullow’s currently worth about $25.1 bio (inc. net debt). It has 1,509 mio boe (pre Uganda Farmout). This implies each boe’s worth almost $17 (incorporating no discount for Probable Reserves or Contingent Resources). Far too rich for me! Alternatively, if we derive a valuation based on Tullow’s own deal-making skills, the 519 mio boe Uganda farmout is worth $2.9 bio, which implies a value of $8.4 bio on its total reserves/resources, and that’s before net debt! ‘Nuff said…
TVC Holdings (TVCH:ID or LN): I wrote some brief commentary about TVC here. TVC’s come a long way from its roots as an Irish technology VC fund… It hasn’t made a new investment in almost 4 years, a fresh tech investment since it listed, and most recent non-cash portfolio value/gains derive from 2 listed companies. Norkom‘s been taken over since, while their 18.0% stake in UTV Media (see below) is by far their largest investment. Idle cash (at 66%) is the largest portion of their overall portfolio.
The market’s been disappointed at the lack of transactions here, the loss of its tech focus, and the drift into listed companies. The significant discount to NAV is understandable, as a result, but still v much unwarranted. The only discount arguably to be applied is on the unlisted portfolio. Even if we apply a 30% discount, the unlisted allocation at 11% is so small Fair Value‘s still close to the published NAV, so we still have some decent upside.
Jon Moulton‘s the obvious solution..! What? Moulton’s well-known in the PE industry, and likes distressed/turn-around situations. He has a listed fund, Better Capital (2009) (BCAP:LN), and has raised GBP 170 mio for a second Cell of the company, Better Capital (2012) (BC12:LN). He’s also shown a predilection for Irish companies, so now is the perfect time for him to swoop in and scoop up some bargains. What better way to achieve that…than to buy TVC!
For once, I think a Share Offer would be more attractive than a Cash Offer. Considering Moulton’s record, exchanging TVC shares at a nil premium would still be an attractive proposition. With a takeover complete (and cash preserved on both sides for acquisitions), Moulton could just fire most of the TVC dead-weight. Once that’s done he just has to check the remaining TVC team still remember how to actually buy (into) a company, and then send them out as his Irish investing vanguard. (Almost) everybody’s a winner!
United Drug (UDG:ID or LN): Poor old United Drug… Long gone are the days when they proudly included compound growth tables in their annual reports! Tables that illustrated 14 to 20% pa revenue/earnings growth over the past 10-20 years. Considering the ridiculous closed-shop feather-bed Irish pharmacies were over the years (to the Irish consumer’s cost), I’m sure there was plenty of cream to go ’round, so United clearly benefited for years from this situation. It also had the reputation of being a rock-solid business.
But that was then…this is now! It’s a much harsher world these days, and people now see how much governments, and large pharma, can squeeze the entire healthcare supply chain. In the last 4-5 years, revenues, adjusted operating profits and diluted adjusted EPS have gone absolutely nowhere (although debt has almost doubled..!), accompanied by a comprehensive (and expensive) diversification out of Ireland and into related business lines. There’s probably some empire-building here from Liam FitzGerald, CEO, but I suspect this acquisition/diversification spree was mostly necessary just to offset declining revenues/margins. What’s that sound? Yes, it’s a business sucking wind..!
Unfortunately, even if headwinds slacken, they’re still going to be faced with continual pressure and regulatory/governmental uncertainty. This is not the bluest of blue chips anymore. I would therefore only award a P/E of 10, and its 4.4% adjusted operating margins only gets me to a 0.375 P/S ratio – both of which confirm United Drug’s only a little undervalued. Interested investors may still see another chance to pick up the shares between EUR 1.80-90.
UTV Media (UTV:LN or ID): I criticized TVC Holdings above for their UTV Media investment. You might conclude it was a bad investment, but I was really making a very different point! One, TVC Holdings shareholders didn’t sign up for investment in public companies, and two, style drift generally signals other/underlying problems and often seems to end in tears…
UTV Media actually presents an interesting investment opportunity. I was always fond of the niche they were in, and it also struck me as a pretty well run company, at least on an operational basis. Of course, nowadays, this type of media company doesn’t get much respect, but I still think the immediacy of TV & radio is far more attractive and relevant than newspapers. I do think however that many stand-alone media companies would probably now be better off in private equity hands, or swallowed up by a larger media conglomerate. It’s interesting therefore to see UTV’s largest shareholders are both PE houses, with Organo Investments‘ 14.1% shareholding not much smaller than TVC’s. Organo is a Peter Crowley & Neill Hughes vehicle – they’re founding partners of FL Partners, owner of the Racing Post.
If we look at UTV’s recent history, they went on an acquisition spree about 5-6 years ago, and are still paying the price… EPS declined from GBP 23.08p in 2006 to the most recent FY of 16.7p – reflecting an increased interest bill plus a painfully dilutive rights issue, rather than significantly poorer performance. This is evidenced by the fact Revenues and Operating Profits have grown marginally in the period. Then again, one has to wonder what these would have looked like if the acquisitions did not occur..? Perhaps much worse?!
This may prove v relevant, as UTV’s finally got debt back under control due to strong cashflows, the rights issue and a steady/aggressive paydown of debt. They’re now at a point where they can run the business for maximum cash returns (the PE approach), or contemplate bolt-on acquisitions to shore up/grow revenues. On balance, a valuation based simply on current metrics seems neither too harsh nor too optimistic – there are still plenty of higher TV/radio M&A multiples to reference, but I think a 12 P/E and a 2.0 P/S ratio (based on a 21.8% operating profit margin) are pretty neutral values to apply. With net interest expense now standing at about 15% of operating profit, there’s no need for any debt adjustment to my valuation, positive or negative. Plenty of upside present if you can bear to buy an ‘old media‘ stock..?!
Worldspreads (WSPR:LN or ID): You know, this was my favourite Irish wish-list share some years back. I was just figuring out how to buy it (volume is crap), when I got some incomprehensible news… How do I explain? Well, let’s set a little challenge: If you looked at a stand-alone/fast-growing company with EUR 8.0 mio Revenue, EUR 4.4 mio EBITDA and EUR 4.3 mio PBT, what kind of price would you buy (or sell) it for? Think about it for a minute…
A hell of a lot more than EUR 11.2 mio (with EUR 3.2 mio of that deferred), I would venture?! I was flabbergasted! The fact the buyer was Brian O’Neill, COO, didn’t help either. Knowing both parties, but not the circumstances, I concluded – rightly, or wrongly – there was a colossal falling out with Conor Foley, the CEO. This somehow mutated into the announcement, in Aug-2009, of a sale of the Irish spread-betting division to O’Neill (now called Marketspreads, with O’Neill no longer at the helm). The primary reason cited was a rationalization of costs – running two separate staffs and trading desks (out of Dublin and London) was expensive and inefficient. How this absurd situation arose in the first place was never discussed…
Obviously, the fact that Worldspreads was losing its crown jewel, and at a price that royally f***ed its shareholders, wasn’t discussed either…
This is a little bizarre, considering Foley’s own 18.0% stake in Worldspreads. Somehow, he appears to have decided that ditching O’Neill and the original Irish division, and pursuing a hell-bent chase for international growth, was more important than shareholder value at the time. This has proved costly, with the business now running at cashflow neutral/negative (note: you need to exclude customer deposit inflows when analyzing the cashflow statement) to fund its growth strategy. This obscures the fact, however, that Worldspreads used to earn 30%+ operating profit margins (similar to those of Paddy Power (PWL:ID)) before the Irish division was sold. In fact, the Irish division had 50%+ margins, which gloriously illustrates what’s possible!
So, clearly, margins could significantly improve if there was a move to consolidate their current business. On the other hand, Worldspreads might just continue to be stretched a little too thin, and it feels like a bit of an also-ran vs. some of the other actual/potential players out there. A sale, or takeover bid, looks somewhat inevitable in the end. In light of all these factors, a 1.33 P/S ratio could prove conservative ultimately, together with its Net Cash (again, exclude customer deposits), Net Derivatives position (which could be quickly liquidated) plus the Deferred Consideration (with a 50% haircut) that was due to be collected in Dec-11 (no news on this). Not as compelling as it was pre-disposal, but now the share price is lower and the upside’s looking pretty good again!
Zamano (ZMNO:ID or LN): I remember bastard stocks like Monstermob – they do the same type of ring-tone/smart phone content/advertising as Zamano provides. Similarly, margins can be heaven or hell, with the usual direction being subterranean… It seems like low barriers to entry, and the eternal quest for the next new/big thing, create a pretty toxic business environment.
Zamano’s revenues have collapsed over 65%, and it’s not yet clear they’ve stabilized. This is another distressed company, so focus should again be on operating free cashflows, which are currently negative. And there’s no guarantee Zamano will ever regain its average (peak) margins of 14.6%.
The presence of Pageant Holdings with a 24.0% stake, however, likely ensures the survival of the company. We may see more (slightly) dubious related party transactions, like this, and I wouldn’t be surprised if we hear of some kind of hook-up with Digital Reach (previously funded by Pageant). However, it doesn’t necessarily imply other shareholders will retain much value. Balancing current risks, I’d only put a 0.3 P/S ratio (or EUR 4.0 mio) on the business right now, and this is unfortunately exceeded by Zamano’s current debt of EUR 4.7 million…
** Except stocks I tag as (significantly) over-valued…I just throw them in for a bit of variety and, of course, to simply offend as many stock holders as possible…