Allied Irish Banks, Bank of Ireland, Biogen Idec, Dalradian Resources, Datalex, Elan Corp, ELG Scheme, Fastnet Oil & Gas, FBD Holdings, IIU, Irish shares, Irish value investing, Pageant Holdings, Permanent TSB Group Holdings, Prime Active Capital, Royalty Pharma, TGISVP, The Great Irish Share Valuation Project, US Oil & Gas
Company: Elan Corp
Prior Post: Here
Last year, I had Elan pegged for a significant fall – which definitely appeared to be on the cards with the share price falling 25%+ to sub-$10 levels in Dec & Feb. In the past 2 months, however, they’ve certainly pulled a rabbit from the hat with their recent Biogen Idec (BIIB:US) deal. This hands full control of Tysabri back to Biogen, but in return Elan receives $3.25 billion of cash, and a 12-25% royalty on future global net sales. Post-restructuring, Elan was almost entirely dependent on Tysabri – so this deal transforms the company into a highly attractive pot of cash, and a low cost/high margin royalty stream.
Unfortunately, management didn’t quite grasp this was shareholder’s money – they acted like all their bloody Xmases had come at once! They’ve promised a share buyback, but their main plan is to use the majority of the proceeds & royalties to acquire a brand new portfolio & pipeline. This is coupled with a projected reduction in annual operating expenses to (only?) $180 million per year! This has lured Royalty Pharma out of shadows, to offer shareholders an interesting alternative: An $11.00 per share bid.
Let’s take a quick stab at what Elan’s net cash & Tysabri royalty stream might be worth: Currently, Elan has $844 mio of cash & securities, plus $600 mio of debt – the Biogen payment would transform this into a $3.5 bio net cash position. 2013 Tysabri sales are estimated at just over $1.8 bio, which would produce a $221 mio royalty – let’s presume that’s fully eaten up by 2013 operating expenses as they transition to a lower expense base. After that, let’s just assume 10 years of sales, increasing by 5% a yr – conservative perhaps, but somewhat offset by the assumption there’s zero expense associated with administering it. That puts average sales at an annual $2.4 bio, which is worth an average $460 mio per year to Elan. If I discount back the mid-point (6 yrs out) of $4.6 bio in total royalties at (say) 12%, that’s a back of the envelope $2.33 bio NPV. Which all equates to $9.74 per share – but I’m surely conservative in my assumptions, so stretching my valuation to the $11 bid appears fairly reasonable.
This is a difficult one to call: Royalty Pharma offers a clean cash exit. Biogen seems like the only realistic Pharma bidder – but after living with Elan for years, having a financial investor as a new partner may present no cause for alarm. The situation might be tempting for a private equity bidder, but it’s outside the normal competency for most PE houses. Finally, Elan management is dangling a share buyback & dividends to entice shareholders to stick with them. Of course, with this alternative, you also have to NPV back that projected $180 mio of annual operating expenses…but in return, I guess, you get all the upside of that potential pipeline/portfolio. Except you know precious little about it, and it mostly hasn’t even been acquired yet!? The slight premium the share price is trading at clearly discounts the (relatively low) probability this all leads to another/improved bid.
Price Target: $11.00
Company: Allied Irish Banks
Prior Post: Here
Price: EUR 0.073
AIB’s ludicrous market cap continues to defy gravity (it’s trading on a 2.8 P/B!), but the widening gap between it & Bank of Ireland’s (BKIR:ID) share price is pretty telling… I’m not quite sure why I’m bothering with a write-up at all – AIB is 99.8% owned by the state, but I guess its penny stock status keeps the muppets interested (they can’t spell P/B anyway). It’s a bit of a shame really, the Dept. of Finance was probably just starting to dream of possibly disposing of a portion of its stake – I guess now we’ll have to see how Cyprus treats the markets…
Having covered B/I & Permanent TSB Group Holdings (IPM:ID) already, we can run a little quicker with AIB. It actually has some good points – equity’s currently at a nice 10.2% of total assets, and the loan-to-deposit ratio‘s now at 120% (just creeping into acceptable territory) & falling. However, it’s currently operating at an underlying loss, and even with aggressive cost-cutting plans there’s no sign of a decent return on equity on the horizon. This can be blamed, as usual, on a lousy 0.90% net interest margin. With the upcoming elimination of ELG (at end-March), this margin will (notionally) expand to 1.24% – but the jury might be out on what happens with AIB’s level & cost of deposits after, particularly as we ponder the implications of Cyprus.
It also has a colossal EUR 27 bio of impaired loans, plus another EUR 6.8 bio of vulnerable loans thrown in for fun. Fortunately (!?), AIB’s been earnestly ploughing the Irish taxpayer’s money into beefing up its provisions, which now amount to a grand total of EUR 15.6 bio. But is this enough? Well, by my reckoning, no… I consider AIB’s underwriting quality to be just as bad as Permanent TSB’s (i.e. poorer than B/I), so I’m assuming an eventual 60% & 30% haircut on impaired & vulnerable loans, respectively. This will further eat into equity, and the best valuation I can award on the remaining equity is a (bloody generous) 0.67 P/B. AIB remains wildly over-valued.
Price Target: EUR 0.014
Company: Prime Active Capital
Prior Post: Here
Price: EUR 0.043
PACC was actually my highest upside potential stock last year! Needless to say, that didn’t bloody well work out… Oh dear, somewhere/someplace an upset muppet or two is now cherry-picking PACC as an example of my awful stock-picking skills. In response, I could highlight the out-performance of my 2012 TGISVP Portfolios, but that would require they understand what an actual portfolio looks like…sigh, let’s not bother!
In reality, a valuation’s only one (albeit, an essential) component of the analysis you perform before buying a stock. Sometimes, it’s nigh impossible for a valuation to adequately capture the risks, and/or the binary outcomes, a particular stock might present. And it can’t hope to capture if a stock might increase/decrease risk in your portfolio (depending on the exposure/correlation it offers). Finally (& inescapably) your qualitative assessment of a company & its management adds a whole other dimension to your analysis: We all know of companies with tremendous upside and/or intrinsic value…which will never be realized because of God-awful management!
Anyway, it’s pretty revealing I considered PACC to have the highest upside potential, but never indicated any interest in actually buying it! [I hope I’ve highlighted this adequately along the way: This whole TGISVP series is in no way a shopping list of high potential stocks to go out & buy, it simply ranks & highlights the stocks which might prove most worthy of your own further research]. This year, we’re looking at a business which continues to limp along, with a ridiculous & disproportionate level of US & Irish corporate overhead. However, the latest results were pre-iPhone 5, so hopefully that’s generated some hoopla (& moola) for them since.
The only realistic value to be extracted here is selling the stores on a stand-alone basis (to another/larger chain), and immediately liquidating the company to avoid further corporate expense. In that scenario, I could still argue the stores might sell for a 0.2 Price/Sales multiple. But equally, we may just see the same sorry story drag on, so I’m going to haircut my valuation of the cell phone store business again to a 0.1 P/S fair value, and deduct a year’s worth of HQ expense. This tears strips off PACC’s valuation, but due to the low share price, the company may still offer significant upside.
Price Target: EUR 0.132
Company: Dalradian Resources
Prior Post: None
Price: CAD 1.10
Dalradian is a new arrival for TGISVP – a reader actually highlighted it to me (thanks!) some months back. Although they’re Canadian, they’re actually focused on European gold (& silver) exploration. They do have the mineral rights to 1.7 mio hectares in Norway, but for the moment, the company’s resource value & development efforts are focused on Northern Ireland (go on, pay a visit!).
Their NI gold resources have been somewhat proved up, with 10 K & 460 K oz of measured & indicated resources. They’ve also advanced their potential mine project planning, with a Preliminary Economic Assessment (PEA) completed which identifies an NPV of about CAD 300-500 mio! However, this comes at a daunting capex cost of CAD 192 mio, and places great reliance on the additional exploitation of a 2.23 mio oz inferred resource. I’m happy to place a $175 per oz in-the-ground valuation on measured/indicated resources (albeit with a 50% & 75% haircut for M & I status, respectively), but at this point the inferred resources may turn out to be completely uneconomic. Frankly, a focus on further proving up of resources would offer the most value-add at this point.
Dalradian currently has CAD 28.9 mio of cash on hand, and an annual cash burn of around CAD 17.1 mio. Put all this together, as things stand, Dalradian looks substantially over-valued. However, if we see an eventual proving up of their inferred resources, that would obviously be a game-changer in terms of DNA’s potential valuation.
Price Target: CAD 0.37
Company: FBD Holdings
Prior Post: Here
Price: EUR 12.20
FBD has v nicely breached my EUR 11.82 target from last year, rising 74% in the process. I did a full FBD write-up in November, which I recommend you read, anticipating their year-end results. With hindsight, I’m v pleased with my NAV estimate – 2012 results were released earlier this month & actual NAV came in at EUR 7.21. I was only a cent off – pretty tight, eh?! Quite honestly, the outstanding results were much as I expected – but it’s worth noting this kind of consistent delivery from Langford & team puts many other Irish companies to shame.
I’ve really nothing further to add to my write-up, at this point. Considering the reported return on equity, my 2.25 Price/Book fair value multiple continues to make perfect sense. FBD continues to offer attractive upside & a perfect exposure to the domestic Irish economy.
Price Target: EUR 16.22
Company: Fastnet Oil & Gas
Prior Post: None (originally)
Price: GBP 26.125p
Somehow, I ended up doing a Fastnet write-up last September..!? They were the second late addition to TGISVP last year, US Oil & Gas (USOP:G4) being the first. After my (somewhat!) infamous USOP write-up two weeks earlier, I felt somewhat obligated to do one for Fastnet also – I guess I didn’t want the poor USOPians to feel singled out as the special kids…
My price call on Fastnet certainly looks wildly wrong…at least for the moment. But in my defence, you have to admit I recognized its stupendous relative value, at least from a numpty chump perspective: If only you could have executed my recommended Long FAST:Short USOP trade, it was an absolute bloody winner!
Since then, it’s been a stunning blur of farm-ins & farm-outs. I can hear the music now: You put your right leg in, you put your right leg out. In out, in out, you farm it all about..! Of course, there’s nothing to show for all this to date (tangible resources are definitely a long way off still), and the exploration & drilling commitments are piling up. However, this is just the kind of news flow junior oil investors love, so the share price has continued making steady progress. So much so, they managed to get a GBP 15.0 mio placing out the door at 22p per share last November!
I continue to apply a cash on hand less 1 year cash burn valuation (and my cash burn estimate is far too kind – actual expenditure is likely to ramp up to a multiple of the LTM cash outflow). Fastnet still looks substantially over-valued.
Price Target: GBP 7.5p
Prior Post: Here
Price: EUR 0.90
I was pretty positive on Datalex’ prospects last year, but really didn’t envisage the share price soaring far beyond my price target, jumping a full 150%! The company continues to make steady progress, signing up an impressive number of airlines & inking a major partnership with SITA last year. Also, their continued success at the World Travel Awards attests to the quality of the technology & the compelling proposition it presents to the industry.
Revenues have increased to $32.4 mio, while EBITDA has expanded to $5.8 mio (a 17.9% margin). The company’s now profitable & cash generative (with $14.6 mio of cash now on hand), despite continued heavy investment in its software platform. This investment, however, has always proved problematic when it comes to valuation: While DLE’s EBITDA margin is growing nicely, the heavy investment in intangibles (or amortization, the figures are similar) means operating free cashflow has now only reached $1.3 mio. With the rather abrupt departure of Cormac Whelan last June, and the appointment of Aidan Brogan (the ex-SVP of Sales) as CEO, you’ve also got to wonder if margins/cashflow will be sacrificed for increased revenue growth (not necessarily a bad thing, ultimately)?
On the other hand, their client/revenue pipeline & prospects are excellent, and as revenues grow, an increasing portion of new revenues will drop directly to the bottom line. And if Datalex reaches a point where investment can be more focused on upgrade cycles, underlying margins will then expand rapidly. On balance, a similar valuation methodology makes sense (this year, I’ll bump up my Price/Sales multiple to 1.75) – this appears to be an acceptable compromise between lower current operating profit margins & much higher eventual margins (as flagged up by the current EBITDA margin).
This leaves Datalex looking marginally over-valued at this point. However, noting 50% of the company’s in the hands of IIU (28.6%), Pageant Holdings (see Zamano’s (ZMNO:ID) recent results!), Farringdon Capital & Pascal Taggart, I’m highly confident there will be continued & rapid value creation here (and a value realization event at an opportune time).
Price Target: EUR 0.78
Here’s the usual pair of Excel files, which includes all companies covered to date, plus updated share prices (as of cob 25-Mar-13):
2013 The Great Irish Share Valuation Project IX (xlsx file)