Aryzta, Austevoll, Bank of Ireland, Bill Ackman, Continental Farmers Group, Galantas Gold, Gillian Bowler, gold, Herbalife, IMC Exploration Group, Irish shares, Irish value investing, John Teeling, Liam McGrattan, Nial Ring, Origin Enterprises, Permanent TSB Group Holdings, Petrel Resources, TGISVP, The Great Irish Share Valuation Project, Trinity Biotech, US Oil & Gas
Continued from here.
Company: Petrel Resources
Prior Post: Here
Price: GBP 16.75p
We should include at least one John Teeling company in every TGISVP post, eh?! Believe it or not, Petrel’s been around (in one form, or another) for 30+ yrs now! This long-term chart covers less than half that period, but I think it neatly summarizes the company’s progress – or rather, lack of fucking progress, over its lifetime:
[Rather bizarrely, I’m reminded of Ackman vs. Herbalife (HLF:US). Unless the government targets them for being illegal (which I don’t think they are, and what agency would bother), he’s dead wrong with his investment thesis: Herbalife will never die, or go to zero.
Because they’re selling a pipe-dream, and there’s no need to bother with anything illegal when you’re exploiting stupid people (read my recent Distressed post). Petrel’s longevity & chart is just another reminder: There’s always more suckers to go ’round... And they’re all horribly co-dependent: The companies need suckers, but suckers need the companies too].
Petrel also neatly illustrates two key/overlapping aspects of junior resource stocks. First, management have v short attention spans – they get bored & frustrated pretty easily. After all, why stick to your original project, when you could be off striking exciting new deals in Africa? Why keep choking on the drilling problems you’re having, when you could just move on to something newer & shinier? Don’t worry about your shareholders, they probably won’t even notice – they’ve got even shorter attention spans… And memories – I mean, they keep giving you fresh funding, don’t they?!
Second, fronting a junior resource stock is all about spinning a good story – that’s what the suckers want, some colour in their drab little lives. But over time, you’ll be forced to change that story – to accommodate, or avoid, inconvenient truths… Far better if you can just switch stories altogether – it distracts attention from previous failures, hopefully sucks in a new set of shareholders, and ideally it even captures the current zeitgeist (graphene, anybody?!).
I’m bemused how well Petrel has surfed the waves over the years. In 2010/11, they were riding the Iraqi reconstruction wave & looking forward to being awarded billion barrel licences left, right & centre. More recently, Iraq’s been forgotten (with nothing to show for the time/effort/money expended). Why? Simple – things have come full-circle (as they tend to, every couple of decades) – offshore Ireland’s now red-hot! So that’s exactly what Petrel’s talking up now. Just stand up at a conference, identify a billion barrel potential in your offshore Ireland licence, and the suckers will ensure an immediate quintupling of your share price! [Except fresh buyers are sitting on about a 50% loss since then, ouch…]
Once again, I value Petrel based on its verifiable assets (i.e. cash), less its estimated annual cash burn. This may be considered a rather stupid approach (I’ve been reliably informed…) – but perhaps I put a lot more faith in PET’s price chart (or the large odds/money stacked against such a tiny company ever getting to a commercial reserves position). Petrel continues to look hugely over-valued.
Price Target: GBP 3.4p
Company: Galantas Gold
Prior Post: Here
Price: GBP 2.125p
Galantas is trading right in line with my previous price target, down 45% yoy. I guess GAL shareholders can just suck it! If I recall, they were particularly aggrieved with my valuation last year. But perhaps I tell a lie, there’s so many muppets it’s hard to tell them apart sometimes…
And time’s on my side also – there’s been no increase in measured & indicated resources (95 K oz) in the past year. [However, I’ve upped my gold in-the-ground valuation to $175 per oz, which helps a little – unfortunately that’s for a proved oz, so I continue to apply a 75% haircut to reflect measured/indicated status]. Despite the lack of progress, their cash position’s still deteriorated significantly. The company’s now in a (small) net debt position, and burning CAD 3 mio of cash per year (despite their current gold production!). Galantas is virtually worthless.
[Disagree with me? Sure go ahead, throw a higher ozs/valuation assumption into the pot. But try not to fool yourself – measured/indicated resources are obviously worth less than probable reserves, which in turn are worth less than proved reserves. And it’s not difficult to ascertain, say, a $175 per oz proved reserves M&A multiple is perfectly reasonable. btw A good rule of thumb is to assume in-the-ground valuations are about 10% of the above-ground medium-term spot price. Don’t forget to factor in future cash burn, the capex costs of the new mine, and (of course) oodles of share dilution to come. Now, are you still coming up with a much higher price target than mine? Really?!]
Price Target: GBP 0.2p
Company: Origin Enterprises
Prior Post: Here
Price: EUR 4.97
I tagged Origin as having some reasonably attractive upside last year. The share spent most of the interim drifting at lower levels, but a fresh price surge in the past month has allowed it to surpass my price target. The past year’s been mostly about consolidation. Revenues rose 6.6%, and diluted adjusted earnings of 45.16 cts were up 4% (or 11% on an underlying basis). No changes were made to its JVs/associates: If you recall, Origin has a 24% stake in Continental Farmers Group (CFGP:LN) and a 32% stake in Valeo Foods. It’s also got an interesting 50% stake in Welcon – Europe’s largest manufacturer of marine oils & protein – a JV with Austevoll Seafood (AUSS:NO), another aquaculture stock I monitor.
Origin has been caught, to some extent, between a rock & a hard place. They’ve admirably re-focused on their core competency, agri-services, in the past few years. This logically would have demanded disposing of the legacy businesses in their entirety (JVs & associates are the worst of all worlds, in my opinion). Why they traveled down this particular path – when the final destination seems obvious – is perplexing. Ideally, they’d line up legacy sales & a simultaneous agri-services acquisition to utilize the proceeds. But the real world isn’t usually that convenient: If they sold the legacy businesses & there was a delay in finding/closing an (accretive) acquisition, there’s an earnings valley to cross. If they pounced on a great acquisition, and then sought out buyers for the legacy businesses, there’s a debt mountain to conquer…
However, with steady cash generation & falling interest rates, that may all be yesterday’s problem. Their interest coverage ratio has actually surged over 60% in the past year to 12.6 times. If they’re confident on sales/margins, this may be the perfect time to take on a decent-sized acquisition (with the luxury of selling the legacy businesses at their leisure). Considering the current cost of debt, this could also produce a v nice earnings step-up.
Plus, ramping up the company’s market-cap is perhaps doubly important here: Aryzta (YZA:ID) still owns a 68.8% stake in Origin & its market cap is about 6 times larger. The smaller Origin’s relative market cap, the easier for Aryzta to just scare up a buyer for its stake (& Origin). The larger Origin’s relative market cap, the more likely Aryzta is persuaded to dividend OGN shares out to its own shareholders. Of course, you could argue either outcome might be good for Origin’s minority shareholders – perhaps, but this lingering Aryzta overhang/uncertainty has been generally perceived as more hindrance than help in recent years.
I reckon an 11 P/E, together with a 0.5625 P/S ratio (reflecting a 6.2% operating margin), look about right now for OGN – and we can supplement that with a flip to a positive debt adjustment. Origin looks slightly under-valued.
Price Target: EUR 5.50
Company: IMC Exploration Group
Prior Post: None (not included last year)
Price: GBP 7p
The presence of Liam McGrattan & Nial Ring as directors, amongst other clues, confirms IMC’s from the same pub as US Oil & Gas (USOP:G4). Exploration progress to date here has been equally fantastic. Judge for yourself which is more amazing:
– US Oil & Gas’ 67 mio barrel discovery in the v dry state of Nevada (which contributes just 0.02% of total US production, and USOP’s find would last 157 yrs at the current annual production rate for the entire state!), or
– IMC’s recent news from its ongoing gold exploration drilling programme in Wexford & Wicklow – specific assay data confirming a core interval yielding 354g/tonne (over 16 times the grade of some of the highest grade gold mines in the world!).
Tough choice, eh? It’s like being forced to decide which kathoey to take home long time…
You have to feel a little sorry for Messers Ring & McGrattan. Despite their best efforts – take a look at these gushing media headlines – USOP’s market cap (despite its collapse) is still nearly 10 times larger than IMC’s. They really should have announced an exploration venture somewhere far more exotic than Wexford (as lovely as it is).
Oh wait, they did…Afghanistan, no less!?! Surely that’s foolhardy enough to deserve a 50 mio market cap? Come to think of it, the boys haven’t been on the USOP board since 2010 – perhaps they should resign (again), might do wonders for IMC’s share price! Meanwhile, I’m really not expecting a resumption of Wicklow’s late 18th century gold rush any time soon… A valuation of IMC based on its latest cash, less estimated annual cash burn (and I’m being generous – the prior run-rate didn’t include any drilling expenditure), is more than fair. IMC’s worth far less than a gold sovereign – more like two brass farthings…
Price Target: GBP 0.5p
Company: Trinity Biotech
Prior Post: Here
Price: USD 16.91
TRIB’s a long-standing holding of mine – here’s my v first write-up, and my most recent post. I’m not going to do a fresh write-up here – there’s no fundamental change in my investment thesis, but as the share price has risen I’ve obviously trimmed my stake to a current 4.5% portfolio holding. With steady progress on revenues & earnings, my price targets have also edged up accordingly. At this point, we’re long past my original (earnings & cash based) Intrinsic Fair Value target, so it’s only logical to opt for my Relative Fair Value target (3.5 Price/Sales & Cash, based on comparable M&A multiples – which, frankly, I’ve never really understood – again, see my original TRIB post). This pegs TRIB as fairly-valued, but I ain’t selling out yet…
You may/may not agree with that conclusion, depending on how much of a value purist you are… In my defence, I’ve been steadily reducing my stake, but I’m also cognizant value investors often sell far too early. TRIB’s story, sector, M&A potential & technicals all suggest more upside to come – in fact, it looks like many growth investors have only begun to join the band-wagon recently. As long as TRIB continues to deliver, I expect better exit-prices to come – if things change (abruptly), I’ll probably become a lot more value-conscious & exit in haste (missing out on a few dollars, I expect). Sure, I’m being a little greedy here, but hopefully it proves to be smart-greedy!
Price Target: USD 17.38
Company: Permanent TSB Group Holdings
Prior Post: Here
Price: EUR 0.033
IPM continues to trade like it’s dead in the water. And I still find it annoying… I blame Gillian Bowler. Trying to imagine her sitting at the head of their boardroom table, sunglasses atop her head, wittering on about loan-to-deposit ratios (& worse) still makes my blood boil! At least she’s long gone now, but what are we left with?
Another zombie bank….
I’m sorry, is this…thing meant to be the much vaunted Third Force (OK, er, not so much anymore) in Irish banking? Even if you ignore all impairments, it still can’t manage an underlying operating profit. Which is easily traced back to a pathetic Net Interest Margin of 0.76% – reflecting their high funding costs, and the lowering of their standard variable mortgage rate. Even if they managed (hope against hope) to double their NIM, a mid-single digit RoE would be a bloody stretch. Mind you, that totally ignores the fact the ELG finishes up at the end of March – a fucking scary prospect for a bank that’s still got an 190% loan-to-deposit ratio. [US community banks have a simple rule about this: ‘80% or lower, kick the loan department’s ass – 120% or higher, kick the deposit department’s ass!‘].
I guess Jeremy Masding, the CEO, is actually playing the best hand possible from the cards he’s been dealt. The bank is being split up into a new Irish bank (Permanent tsb bank – EUR 14.2 bio loan book), a stand-alone UK operation (CHL – EUR 7.1 bio loan book), and a non-core distressed assets unit (AMU – EUR 12.5 bio loan book). This should allow the UK operation to be sold off as soon as possible. As for the AMU, we shall have to await the details, but I think it’s v reasonable to presume it end ups with another right royal fucking for the Irish taxpayer.
Total impairment provision now stands at EUR 2.7 bio. The Irish residential mortgage book has EUR 4.1 bio of impaired loans & EUR 1.0 bio of past due but not impaired loans (> 90 days, that is – total past due is nearly three times as large!). Disclosure isn’t so clear re the commercial book & UK residential mortgages, but it’s obvious impaired loans total at least EUR 1.1 bio. The notion that IPM’s loan underwriting record equals Bank of Ireland’s (BKIR:ID) is laughable – so I’m going to assume an eventual 60% write-down on impaired loans, and 30% on past due loans.
Despite all that, IPM’s adjusted equity still offers plenty of upside!? However, it’s quite obvious a decent return on equity isn’t something on the cards/high on Masding’s list right now. I wouldn’t value the equity at anything better than a 0.67 Price/Book ratio for the moment – but this still offers some nice upside from the current share price.
Price Target: EUR 0.044
As usual, I’m attaching my latest/detailed Excel file here. For all previously reviewed companies (year-to-date), share prices have been updated (plus FX rates & certain other inputs), so the attached file is actually a real-time ranking (by potential upside) of all companies covered:
2013 The Great Irish Share Valuation Project VII (xlsx file)