First Derivatives, Fyffes, Irish Continental Group, Irish shares, Irish value investing, Ormonde Mining, Petroneft Resources, Rathdowney Resources, TGISVP, The Great Irish Share Valuation Project, Total Produce
Continued from here. Why don’t we just jump into the next (er, smaller!) batch of TGISVP stocks:
Company: Ormonde Mining
Prior Post: Here
Price: GBP 7.25p
ORM message boarders really took exception to my comments last year – clearly, they’re nuttier than the average Snickers bar… For God’s sake, I posted a marginally bullish valuation! Suggesting dilution might prove an issue seems to have caused most offence & was emphatically rejected. Er, what about the two subsequent placings in 2012 (one arrived a mere 5 weeks after my post)?! Muppet magic… Jesus, they probably won’t even like this year’s valuation!
There’s little tangible result from their Spanish copper & gold exploration work (& Antofagasta dropped their La Zarza interest). The main focus remains on the Barruecopardo tungsten project, with progress made on feasibility, permitting & proving reserves. Latest cash will fund about a year of cash-burn, but the upgrade of 2.6 million tonnes to 2P status offers significant upside (based on an unchanged $40 in-the-ground tungsten valuation). Unfortunately, my new valuation may not adequately capture those same risk(s) I highlighted last year – the proposed project cost of EUR 48.5 mio is a huge funding cliff for Ormonde to climb.
Price Target: GBP 13.7p
Company: Irish Continental Group
Prior Post: Here (valuation, no commentary)
Price: EUR 19.85
I was mildly bullish last year on ICG last year, and wasn’t too surprised to see my target surpassed on the back of an announced share repurchase & tender offer. Which makes perfect sense – the Irish ferry/freight business is a pretty mature/competitive business with fairly limited growth prospects. I also suspect the focus on shareholder value might also be due to possibly stretched finances for the CEO, Eamonn Rothwell (a 16.4% shareholder), and Moonduster/One Fifty One plc (they finally exited their 12.3% holding in 2012), plus the increased presence of international value shops (like Franklin Templeton, with 15.0%).
The tender offer was priced at EUR 18.50, a reasonable premium, and returned EUR 111.5 mio to shareholders. Considering ICG only had EUR 21 mio of net debt at the time, and has since sold its container shipping sub. Feederlink for EUR 29 mio, the new level of debt (& interest coverage) appears sustainable. However, their pension obligation has jumped to EUR 66 mio – this bears watching.
Fuel costs also continue to be a challenge, so operating free cashflow (FCF) margins are now running ’round 11.5%. With prospects fairly mixed (an improving Irish economy & volumes might perversely end up being offset by increased competition), this margin now deserves a 1.0 Price/Sales ratio. This puts my new price target some way below last year’s share price – which generally makes sense to me. What doesn’t really make sense is the continued post-tender buying – quite honestly, I suspected shareholders would begin bailing out after – leaving Irish Continental looking pretty over-valued now.
Price Target: EUR 13.75
Company: Petroneft Resources
Prior Post: Here
Price: GBP 5.875p
Petroneft is a 0.7% portfolio holding of mine. It’s also a (thankfully small) reminder of how bloody fruitless investing in the (junior) resource sector can often be, even if you apply value investing principles. I mean, if the share price of a company with substantial proved & probable oil reserves falls almost two thirds in a year (not to mention the collapse from its highs), what hope is there for the punter who falls for the real no-hopers?!
As always, I vacillate between continuing with my search for the occasional gem, or simply abandoning the sector entirely. The second option could mean giving up on the possible bargain of a lifetime at some point… But so what? Missing a winner here & there may simply confirm you’re successfully avoiding the disasters. I often joke: If you find yourself enjoying a multi-bagger stock or two within a year, you might want to start worrying, not celebrating…you’re definitely not a value investor, and probably not even a real investor! And I can pretty much guarantee any decent investor will crush your performance in the medium/long term, while you suffer appalling highs & lows instead.
Right, I’ve commented plenty about Petroneft before – let’s get up-to-date quickly. 2P reserves have since been upgraded to 131.7 mio boe – using a $10 per boe valuation, and a 50% hair-cut for probable reserves, I reckon this represents at least a $750 million asset. Disagree with this valuation for Russian oil? Fair enough, but don’t forget: i) oil price differentials tend to be inevitably eliminated over time, and ii) I’m totally ignoring 100s of millions boe of prospective resources!
Against this (unrealized) asset, I estimate there’s $14.3 mio of cash (as of the last balance sheet, and adjusting for the subsequent placing), and debt of $36.5 mio. I’ll also haircut my valuation by the current $23.0 mio annual cash-burn rate. Of course, that implies cash would actually run out, say…about now! So, let’s also factor in another placing to raise a year’s worth of additional cash-burn – at the current share price, and assuming a 35% placing discount, that could dilute the share count to well over a billion shares. Despite this, there continues to be huge upside potential for PTR.
This is all completely dependent, of course, on increasing production aggressively, eliminating all other exploration expenditure (for the moment), and raising sufficient bridging cash to satisfy debt obligations & cash-burn ’til production (possibly) becomes self-sustaining on a cashflow basis. Negotiating an off-take agreement, and/or a farm-out/outright sale of prospective resources, would probably be the least dilutive way of raising additional cash. If a cashflow neutral position can be reached, I suspect it would ignite a major rally which would then likely feed upon itself…
Price Target: GBP 44.3p
Company: First Derivatives
Prior Post: Here (valuation, no commentary)
Price: GBP 567.5p
First Derivatives pitches itself as a software house – no surprise there, investors respond better to the prospect of much higher gross & operating margins, and the lure of recurring revenues. However, despite its best efforts on the software front, in reality FDP’s in the consulting game – check the latest annual report, consulting comprises nearly 75% of revenues.
This might actually have proved a blessing in disguise: I’ve been puzzled how FDP maintained its revenue growth since 2008. Even now, in early 2013, we’re still hearing about large banking/trading job cuts – and reduced head-count means less revenues for service providers, right?! I’d conclude, rightly or wrongly, that since the crisis an increased emphasis on risk management, Dodd-Frank & the Volcker rule (etc.), continued cost-cutting plus consolidation of trading exposures & systems, has actually proved a boon for FDP’s consulting services. If that’s true, this may prove a v finite revenue stream – one has to wonder if there’s a death valley for the company to cross at some point, before we see a genuine return to growth in the finance industry? Revenue growth’s also been delivered at the cost of lower margins.
On the other hand, their long-term performance record is exemplary, management owns over 50% of the company, and there’s always the possibility of a much larger firm snapping them up. With the current operating profit margin at 16.5%, last year’s 1.75 Price/Sales ratio still looks valid. I’ll add a tweak – a positive debt adjustment to reflect the company’s ample capacity to fund acquisitions, expansions and/or share buybacks. [The company has about GBP 16 mio of residential property (for employees on location work) on the books, which they’re slowly selling – this would eliminate the majority of FDP’s current debt]. There’s less clarity around underlying earnings growth, but an assumption of EPS growth in the teens seems reasonable – so a 15 P/E still works, based on a current GBP 34.6p normalized/diluted EPS run-rate. First Derivatives continues to look fairly priced.
Price Target: GBP 549p
Prior Post: Here (valuation, no commentary)
Price: EUR 0.60
Why look at Fyffes when one can buy Total Produce (TOT:ID) instead?! But seriously, I may learn to love FFY eventually: Despite Fyffes’ higher earnings volatility, a re-merger of the two companies would make perfect sense in terms of cost-cutting, revenue synergies, and improved investor sentiment. With Balkan Investment Company (McCann brothers/family), Fidelity, Farringdon & Sparinvest all holding meaningful stakes in each company (see here & here), this clearly would be an easy deal to sponsor. The fact their share prices & market caps move in tandem cries out for a merger also. Then again, there’s always the chance that (the much larger) Dole (DOLE:US) or Fresh Del Monte (FDP:US) could finally swoop in & force a deal on them…
2012 is shaping up to be a really great year for Fyffes – earnings may actually jump by up to 52% yoy. However, historical growth has tended to be slow & erratic, and operating free cashflow continues to disappoint. EBITA has been steadily upgraded to a range of EUR 30-33 mio, and EPS to EUR 8.3-9.2 cts. With the last trading statement in December, we can be confident FFY will deliver at the v top end of the range. Considering the unchanged (yoy) EPS forecast for 2013, I’m upgrading my P/E ratio from 8.5 to 10.0. EBITA margin’s running at 3.4%, but poor cashflow only prompts me to raise my Price/Sales ratio from 0.125 to 0.15. Fyffes’ strong financial position suggests a positive debt adjustment is also appropriate. This all contributes to a significant step-up in valuation this year – so despite Fyffes reaching last year’s price target, it still offers some nice upside.
Price Target: EUR 0.75
NB: I’ve eliminated Rathdowney Resources (RTH:CN) from this year’s TGISVP, as they’ve optioned out their Irish interests, and are now focusing on zinc & lead exploration in Poland.
OK, let’s leave it at that for this post – time’s pretty tight for me right now, ouch… I’m attaching a fresh Excel file – it includes all figures/valuations for the 5 stocks above.
I’ve also refreshed share prices (plus FX rates, and a couple of other minor variables) for the previous batch of TGISVP shares. Note: I expect I’ll only rarely change the underlying valuation of any stocks during 2013, and if I do, I’ll be sure to post/comment accordingly. Therefore, the real purpose of continually updating share prices with each post/file is to basically allow me to rank all shares together (pretty much apples to apples) by current Upside Potential – this will offer an expanding real-time menu of Irish stocks to consider as we progress.
[Of course, I’m not trying to change the goalposts here as we go along! I’ll be sure to keep a hard-coded file & populate it with all the original share prices & valuations (at the time of posting), so we can properly measure TGISVP performance later in the year].
2013 The Great Irish Share Valuation Project II (xlsx file)