Conroy Gold & Natural Resources, DCC, FBD Holdings, Irish shares, Irish value investing, Kingspan, New Ireland Fund, Paddy Power, Pageant Holdings, Papua Mining, TGISVP, The Great Irish Share Valuation Project, Zamano
Continued from here. If you’re only joining the series now, I recommend you first read my first TGISVP post this year. And so, without further ado, let’s dive straight into my next (random) bunch of Irish stocks:
Company: New Ireland Fund
Prior Post: Here
Price: USD 9.919
The New Ireland Fund is the only closed-end fund now investing in Irish shares. [Hopefully, when general Irish sentiment is sufficiently improved, Gervais Williams might see fit to launch a new Irish investment trust]. The share’s made decent progress in the past year, slightly exceeding my price target. This was really due to NAV appreciation, however, as the NAV discount remained steady around 12%. With Phillip Goldstein, of Bulldog Investors, selling much of his 13% stake in the past year, that’s a pretty creditable performance.
As I mentioned last month, I usually prefer a closed-end fund to an ETF – especially one on a nice discount like IRL! This is doubly true for the Irish market, where I believe (of course..!) some active stock picking can perhaps add value (vs. indexing). I’ve previously suggested FBD Holdings (FBD:ID) as perhaps the best single stock exposure to Ireland, but if you prefer a more diversified bet, IRL appears the obvious choice… Note there’s only a handful of stand-outs locally in terms of market cap, so it’s worth taking a look at Kerry Group (KYG:ID), Ryanair Holdings (RYA:ID), Aryzta (YZA:ID) & CRH (CRH:ID) (NB: 2012 comment/valuation) before buying – as they account for 41% of the fund. A 1.0 P/B remains a reasonable price target – that implies an elimination of the discount, but doesn’t anticipate any growth in the Irish market, so this may prove conservative.
Price Target: USD 11.23
Company: Conroy Gold & Natural Resources
Prior Post: Here
Price: GBP 1.525p
You’d be forgiven for thinking this was another Teeling venture, but no, this is Richard Conroy‘s baby. And what a labour of love – a GBP 4 mio market cap, but he’s populated his board with a grand total of nine directors! The share price has managed to decline 62% in the past year – pretty much the collapse I projected.
But I guess I’m meant to take them seriously now!? Since they continue to charge ahead with plans for an Irish gold mine, most recently appointing Tetra Tech for the metallurgical section of their Feasibility Studies. On the other hand, the idea Conroy could actually fund a $78 mio capital cost, and end up with a gold mine producing at $350 per oz, is really far too much to swallow..!
But let’s be kind, and assign a value to the 260 K oz of JORC-compliant indicated resources (say, at a $175 per oz in-the-ground value, haircut by 75% to reflect indicated status). Combine that with Conroy’s last cash & debt figures, factor in a year’s worth of cash-burn, and I actually arrive at a little upside for CGNR. [Note, of course, this valuation cannot hope to capture the challenges (& dilution!) posed by the funding required to advance this mine off the drawing board].
Price Target: GBP 1.9p
Company: Paddy Power
Prior Post: Here
Price: EUR 62.50
Paddy Power continues to suffer an embarrassment of riches, while value investors continue to just suffer embarrassment…. The company’s failed to remotely qualify as a value stock for years now, but has been perfectly content to rub our noses in it with superlative operating & share price performance. Ouch! My summation last year continues to ring true – Paddy Power is definitely the Ryanair of the gambling world! OK, let me struggle again to adequately value it…
Unfortunately, I may prove to be just as wide of the mark again. Last year, I tagged it as being slightly over-valued – in response, it’s bloody well rallied over 40%! Revenue & profit growth continues to run well in excess of 20%, while the balance sheet’s still rock-solid & primed for acquisitions with EUR 186 mio of cash & zero debt. PWL currently trades on a 26.4 P/E. Despite the consistent growth, I’m always conscious how highly-rated shares can get crucified if results fail to deliver – the best I can manage to award is a 20 P/E. Operating free cashflow margins continue to outpace operating profit – at 28.2%, a 3.25 Price/Sales ratio still looks fair, while a substantial positive debt adjustment is clearly appropriate in light of the balance sheet strength & the ringing success to date of their Australian acquisition.
My price target is 25% higher than last year’s – which makes perfect sense – but with PWL’s usual outpacing, it now looks quite over-valued at this point. I may just end up with egg on my face again, but then again…let me remind you, PWL trades on a 26 P/E & a 5.3 P/S right now. Living up to those ratios could prove pretty bloody tough!?
Price Target: EUR 45.70
Company: Kingspan Group
Prior Post: Here (valuation, no commentary)
Price: EUR 8.698
Kingspan’s insulation & related businesses are in a marvelous niche, attracting both green customers & green investors. However, there’s no escape from the economic & construction cycle – while it continues to increase revenues, based on acquisitions & market share wins, operating profit margins remain under pressure.
I tagged Kingspan as marginally over-valued last year. Fortunately, its balance sheet remains in good shape, so the share price has responded pretty positively to two new acquisitions. The purchase of ThyssenKrupp‘s insulated panel business, with EUR 315 mio in Mainland Europe sales, and Rigidal, another panels & roofing business operating in the Gulf region (with $39 mio in sales), adds significantly to future sales.
However, the price rally may be based more on hope at this point, rather than any immediate earnings enhancement – as ThyssenKrupp currently operates at a loss, which likely matches/exceeds Rigidal’s current profit. But we can expect to see extensive restructuring here, and I’m confident margins will eventually converge to group levels. Meanwhile, the operating profit margin is likely to fall from 6.6% to 5.4%, albeit on higher revenues.
However, Kingspan’s long-term growth story remains intact. With a rather absurd EUR 141 mio of cash on hand (vs. EUR 338 mio of debt), the total acquisition consideration presents no financial drag. The company may even have some scope for further acquisitions. With a genuine improvement in the economy, and/or the bombed-out construction sector (who knows when?!), it’s obvious Kingspan’s margins could rocket higher. Meanwhile, it’s reasonable to price KSP somewhere between its prospective 5.4% & its historic 13.3% peak operating margin, which would equate to something like a 0.75 Price/Sales ratio. This confirms the company is fairly priced.
Price Target: EUR 8.51
Prior Post: Here (valuation, no commentary)
Price: EUR 27.04
DCC’s another Irish company that isn’t actually so Irish anymore. In fact, as they recently pointed out, over 75% of their profits & shares are earned/held outside Ireland now, prompting them to consider seeking admission to the FTSE UK Index Series (& cancellation of their Irish listing). Judging by previous/similar announcements by other Irish companies, this probably signals a fait accompli…
Hand in hand with this migration out of Ireland, over the years, its Energy division has become increasingly important. The desire (it seems) of all the European energy majors to divest themselves of low margin oil & LPG distribution businesses has presented a unique opportunity for DCC to bulk up. Energy now makes up about 75% of revenues, but low margins (somewhere between 1 & 2%) means it only contributes about half of DCC’s operating profits. It also introduces significant year-on-year earnings volatility, depending on weather conditions.
Overall, this evolution will probably force a break-up/restructuring of the group eventually, something that’s been periodically hoped & called for by investors. While the spread of more stable/higher-margin businesses has doubtless contributed to DCC’s operating performance, now investors generally view this conglomerate structure as an undesirable legacy of DCC’s origins. A pure play on energy distribution, perhaps coupled with its environmental division, is obviously DCC’s core business now – a spin-out/sale of the other divisions would accelerate its ongoing energy roll-up strategy.
Meanwhile, (up to) 20% EPS growth this year demands a bump-up in DCC’s P/E ratio. On the other hand, earnings will remain volatile & recent GBP weakness presents a substantial headwind for 2013 (eliminated, of course, if DCC abandons the EUR & the ISEQ ;-)). I’ll increase their P/E to 14, but the continued Energy-led decline in their operating margin (to a likely 1.8%) now deserves a 0.175 Price/Sales ratio (plus a small/positive debt adjustment to reflect further acquisition capacity). DCC now also looks fairly valued.
Price Target: EUR 27.50
Company: Papua Mining
Prior Post: Here
Price: GBP 92p
Gold & copper exploration in Papua New Guinea – I mean really, who came up with that?! Did they just sit down with a map, and simply decide to find the most distant place on earth? I wonder how much business class costs all the way to PNG? Is there even a business class? Do you get your choice of arm, leg or head for your meal?
This company raised $11.2 mio of cash in its IPO, and is already down to $8.9 mio – which we’ll likely see exhausted in the next 18-24 months. And there’s nothing at all to show for it, except for a geophysical survey or two (& the like). Deducting a year’s worth of cash-burn, PML is severely over-valued. But who am I to say that? I had the same opinion last year, and the muppets rallied the shares by over 50%!
And somewhere, right now, there’s some dipshit shareholder who’s persuaded himself my analysis is totally superficial… Before I kick him in the testicles, I might ask what exactly should I be digging for here? The secret which allows PML & its ilk to spend a few million on exploration work, to have it automatically & magically transformed into tens of millions?! Whereas a listed investment fund can invest in a high quality/diverse portfolio of companies for a mere 1-2% expense ratio…but trades on a 20% discount to its fair value? Yeah right, ultimately that kind of bizarre investment discrepancy doesn’t actually exist – otherwise all those fund managers would be jumping on planes to far distant lands instead, their pockets stuffed with exploration licences!
Oh, and I still love this video – seriously, make time to watch it. So thanks, PML. 😉
Price Target: GBP 7.3p
Prior Post: Here
Price: EUR 0.065
What a difference a year makes… Pageant Holdings is now a 29.9% shareholder here. Their board representation & investment/technology experience has helped get things back on track here, with annual sales stabilized at over EUR 18 mio pa. Operating free cashflow margin turned positive again in the last 12 months, at 2.7% – and actually jumped to 15.3% (similar to average peak margins) in their most recent interims. Zamano’s EUR 4.1 mio debt burden has also been turned around – Pageant acquired all the bank debt from BoS, and in so doing the debt was reduced by 50%, and then half the remaining balance was paid off from existing cash resources. This leaves just over a EUR 1 mio of debt to be serviced & repaid.
However, as investors have learned elsewhere in the sector, competition & regulation changes can literally destroy business overnight. This can be clearly observed in the changing nature of Zamano’s business – Spain & Australia proved a bust, their US business is now in wind-down as Verizon and AT&T tightened up their policies, and even their Irish business is under serious threat due to Comreg’s new Code of Practice (& the failure of legal challenge(s) against it). The UK’s been the saviour here, with revenues tripling in the past year – and appears to be the reason for the company’s confident outlook, despite gloomier prospects for their Irish business.
The threat of bankruptcy has now been essentially eliminated, but Pageant’s control in terms of its shareholding, board-room presence, related party deals, and ownership of the outstanding debt, may still be a cause for concern. The situation bears careful monitoring, but a valuation based on an average of the most recent operating free cashflow margins (i.e. 9%) appears sensible. This conservatively deserves a 0.75 Price/Sales ratio, with no need for a debt haircut or adjustment at this point. This is radically different from my valuation last year, which now looks plain silly, but distressed companies tend to enjoy (or suffer) such binary outcomes. I’m glad to see Zamano now offers substantial upside.
Price Target: EUR 0.14
2013 The Great Irish Share Valuation Project IV (xlsx file)