Abbey plc, Better Capital, Big Pharma, CPL Resources, Gallaghers, Glanbia, ICON, Irish shares, Irish value investing, Jon Moulton, milk quotas, STV Group, TGISVP, The Great Irish Share Valuation Project, TVC Holdings, UTV Media
Continued from here. Let’s take the next batch:
Prior Post: Here
Price: USD 28.43
ICON’s starting to fire on all cylinders again, as I correctly anticipated. Well, except for the share price…but I’m sure investors aren’t complaining! 😉 Last year, the company was squeezed between (virtually) zero growth in its existing contract revenues & the challenges/expenses of ramping up to meet some v large contract wins. Operating margins, even on a pre-exceptional basis, had fallen to near-zero – but valuing ICLR on that basis would clearly have been incorrect. It seemed reasonable to presume margins would return to 10%+ as new contract revenues/margins matured.
On the other hand, bidding on & winning these contracts was clearly vital, so the prudence of their contract pricing & assumptions remains unclear. [Big Pharma has huge negotiating leverage with ICON & its peers. The fact ICLR’s margins max out far below 20% (perfectly achievable for this type of business), attests to the power of Pfizer, BMS, etc.] My approach was a valuation based on averaging current & historic margins, plus a significant debt adjustment to reflect its financial strength. ICLR ended up looking fairly over-valued to me, absent an actual bounce-back in margins.
Hmm… Shareholders clearly didn’t need this reassurance, they bought the shares regardless! The company recently provided $1.40-55 EPS guidance for 2013, a substantial step-up from 2012. This puts ICLR on a prospective 19.3 P/E – uh, that looks a little rich to me! However, considering the steady ramp in revenues, margins & earnings this year, I’m happy to gross up from their latest results. Quarterly revenues are running at $285.5 mio, for an operating margin of 7.3% & an EPS of $0.29. My valuation’s based on a similar Price/Sales methodology as last year, but now incorporates a 20 P/E (using a $1.16 EPS run-rate). To me, ICON appears about as over-valued as it was last year.
Price Target: USD 20.84
Company: TVC Holdings
Prior Post: Here
Price: EUR 0.87
Want to hear a can’t lose proposition? We’re offering a once-in-a-lifetime chance – the chance to become an investment management client. We won’t accept anything less than quarter of a billion in assets. What? You’ve only got EUR 118 mio to spare? OK, go on – we’ll take it, just this once… For that kind of dough, to make it worth our while, just keep in mind it’s gonna cost you almost EUR 2.5 mio a year in fees. Sorry, what do you mean? It most certainly is a bloody can’t lose proposition! For us, you silly man, not for you..!?
Hell, we’ll even provide an occasional investment update. To begin with, we plan to buy an 18% stake in UTV Media (UTV:LN). We’ve an online account open with a discount broker, so no big deal – it’s simply a click of a mouse, and a 20 pound commission! Then we’ll need to check the price (and see if there’s any news released) every single day. But we just discovered our receptionist surfs the bloody web all day long, so we might as well make her the UTV point-person.
We’ll invest the majority of the portfolio into deposits & government bonds – that only takes a few phone calls every six months, or so. Yes, rates are pretty low, but safety comes first! Anyway, our fees are far greater than the interest earned, so does it really matter what rate we get? Finally, just to remind you where all our time, brainpower & (your) fees are going, we’ll invest a whole 7% of the portfolio into unquoted investments. Granted, that’s a little nerve-racking – don’t worry, we know our shit…
OK, I’ll keep my TVC valuation simple: Cash & bonds, plus current value of UTV stake, plus unquoted investments (haircut by 30%). This offers some fairly low risk upside for shareholders. However, some kind of value realization event is really needed here:
– The UTV stake is sold: Relations with UTV now appear frosty, so TVC may seek a predator for their stake, or even the company. But UTV’s considered old-media now (perhaps incorrectly?), so that may be a tough proposition.
– An actual unquoted portfolio is created: Hmm, we’ll all be dead by then… And judging by UK PE fund discounts, the share price (on a 24% discount) could fall in that scenario!
– Let’s be creative: How about a 3-way merger between UTV Media, STV Group (STVG:LN) & TVC? UTV & STV are small(er) regional TV & radio broadcasters – sister companies at heart. With a far larger market cap, UTV might have gone for this already, except for STV’s litigation & liabilities... TVC’s cash/bonds solves that problem. They could also lend a private equity perspective to running the newly merged company – if you accept they’re in a mature/old media business, that type of approach would likely capture the best long-term return for shareholders.
– Perhaps simplest & quickest: A takeover by another PE investor/manager. Even paying a premium (?), an acquirer gets TVC’s infrastructure, contacts & personnel for free – perhaps a cheap & convenient entree to Ireland? Unfortunately, most external investors are now focused on Irish distressed debt & property – not TVC’s usual area of expertise. I would have suggested Jon Moulton of Better Capital (BCAP:LN), as a suitable predator – but that chance may may now be gone.
OK, all good fun, but TVC will probably just stagger on as per usual for the foreseeable future… The share price will likely continue to trail NAV, though UTV will hopefully prove a positive influence. If you forced me to bet on a new unquoted investment being (finally) made, I’d guess hotels.
Price Target: EUR 1.14
Company: CPL Resources
Prior Post: Here
Price: EUR 4.449
I must say, I was bloody spot on with last year’s valuation – it suggested a 76% gain & shareholders actually enjoyed a whopping 82% gain! Of course, there is the small fact I didn’t own the bloody shares. Ouch! But in my defence, I was profitably occupied elsewhere on the ISE. Anyway, you have to wonder what kind of upside CPL now presents after that kind of performance? I was pleasantly surprised…
Revenues have continued to surge, and CPL also acquired European Human Resources AB (EHRAB), which opens up the Scandinavian markets for them. [Rather hilariously, CPL insisted on calling them ERHAB – check the bloody initials, people!] Cash continues to build again – it’s now at EUR 26.6 mio (vs. zero debt). This offers plenty of scope to expand in core market(s), and to diversify into new geographies. Overall, CPL’s a miraculous story of survival while the Celtic Tiger was being slaughtered… Of course, management owns a substantial stake – this really makes all the difference when things go wrong, as protecting & growing the ultimate value of the business is far more important to them than the value of their pay packages.The company did suffer two years of decline (2009-10), but revenues have come surging back ever since, and in 2012 they surpassed prior (2008) peak revenues.
I think CPL’s secret sauce is their temporary staffing business. In the economic climate of the last few years, in Ireland & elsewhere, companies have obviously avoided permanent hires. This doesn’t mean they don’t need staff – they just need more flexibility (and suffer from far more uncertainty). Ireland’s continued success as a higher value outsourcing alternative to emerging markets has provided an ongoing/large source of demand also. This was always an important business segment for CPL, but with the downturn they chose (v smartly) to avoid scaling back their cost base – instead they focused it more & more on winning share & scale in the temporary staffing market. Margins are lower in this segment, but that’s been more than made up for on the revenue front.
I’d expect the current 3.7% operating margin to exceed their long-term average of 6.1% in due course (aided by an increasing level of higher margin permanent placements). I continue to value CPL on that basis, plus a positive debt adjustment to reflect their capacity for further acquisitions (and/or another share tender offer) – it still offers some decent upside.
Price Target: EUR 6.07
Prior Post: Here (valuation, no commentary)
Price: EUR 8.25
I pegged Glanbia as mildly over-valued last year. The surge in the share price ever since has been pretty bloody mystifying to me. What the hell am I missing? That everybody else seems to get..?! Even my father’s into share tips now – he advised me to buy Glanbia. Jesus – now I definitely know GLB shares are waayyy over-valued (sorry, Dad!).
OK, let’s take a closer look & think about what’s changed in the last year. Earnings last year were up 20%+, but this year’s proving a lot tougher with a likely 10% EPS gain at best. This earnings volatility suggests a fair value 13 P/E still looks about right, particularly in light of longer-term earnings growth. The only big news all year is really the spin-out of Dairy Ingredients Ireland (DII, a unit of Glanbia’s Dairy Ireland division) into a JV, to be owned 40% by Glanbia & 60% by Glanbia Co-operative Society Ltd. (their majority shareholder). The impact on earnings appears insignificant, at least initially, but it now focuses management exclusively on the higher margin cheese & nutritional businesses.
Perhaps all this explains the mad enthusiasm for GLB shares? If so, it might be a little too much excitement – after all, the strategic direction of Glanbia has long been obvious. And, in my opinion, the impetus for the deal is simply to avoid a negative, rather than generate a positive… With the looming abolition of milk quotas in 2015, the Irish dairy sector needs to aggressively scale up processing capacity. In DII’s case, this would require a proposed EUR 180 mio investment over the next 7 years. And the likely reward? Maybe just more bitching about prices from Irish dairy farmers. But if they plan to increase milk production dramatically, what on earth do they expect to happen with prices?! Then again, you should never assume a European (or US?) farmer will necessarily grasp simple market economics…
That kind of investment (in a low margin/volatile business) is the last thing Glanbia needs, when it can deploy the cash more profitably elsewhere. Far better to leave it to the Society – they can just go off & bloody argue with themselves, to their hearts’ content, about the milk price… Anyway, it’s debatable if Glanbia could afford it anyway – debt’s already far higher than is prudent, particularly when one notes operating free cashflow consistently falls 50% or more behind EBITA. [Operating FCF only provides a rather alarming 3 times interest coverage]. And considering the global competition Glanbia faces, that situation isn’t likely to change anytime soon. Total net proceeds from the spin-out will go towards reducing debt, but a further negative debt adjustment is clearly required. If we average the current 7.0% EBITA margin & the underlying 3.3% Op FCF margin, a 0.4 Price/Sales ratio is the best I can reach.
This implies Glanbia is now substantially over-valued – it’s trading on a 17.1 P/E, for God’s sake! Shareholders have gotten way ahead of themselves in pricing up their gradual disengagement from low margin Irish dairy processing.
Price Target: EUR 4.80
Prior Post: Here
Price: EUR 7.50
Sometimes, watching Abbey is like watching paint dry… Hmm, that’s not necessarily a bad attribute in these still shaky post-crisis times – especially when we’re talking about a property company! The share price put on a nice spurt coming into 2013 & has now caught up with last year’s price target. It currently trades on a 0.9 Price/Book. An eventual 1.0 P/B fair value looks about right – while Return on Equity’s low (around 5%), credit should be awarded for a strong balance sheet: Assets appear reasonably valued, there’s zero debt outstanding, and Abbey’s got EUR 65.7 mio of cash & gilts on hand for land-bank purchases.
Obviously, the Gallaghers are firmly in the driving seat here, so we can expect Abbey to continue being run in a conservative fashion. More share buybacks are less likely now, as the share price approaches NAV. Anyway, past buybacks were probably more about increasing management’s control, rather than enhancing shareholder value. However, I don’t believe the Gallaghers necessarily want to buy out minority shareholders (unless they’re presented with a real bargain), or delist. But what about their offer for Abbey last year, you ask? Well, it’s important to note this was a mandatory offer, albeit one triggered by their purchase of shares, so I wouldn’t read too much into it. I think they were simply testing the waters…
With the majority of Abbey’s business now in the UK, the recent weakening of GBP (vs. the EUR) may hurt NAV. However, another year of (steady) earnings will likely offset that, so Abbey still presents a little further upside at this point.
Price Target: EUR 8.30
2013 The Great Irish Share Valuation Project V (xlsx file)
Wow – mid-February, and I’ve definitely worked my way through about half the Irish stocks out there now. That’s right on schedule, so hopefully I’ll keep up the pace & have this review stage of the 2013 TGISVP finished by end-March (like last year). Cheers!