Barryroe, CRH, DGO, Dragon Oil, Fiordland, IFG Group, IFP, Irish shares, Irish value investing, Melrose Resources, PCI, Petroceltic International, Providence Resources, PVR, TGISVP, The Great Irish Share Valuation Project
Continued from here.
Company: Petroceltic International
Prior Post: Here
Price: GBP 6.3p
Last year, I correctly tagged Petroceltic as slightly over-valued. Despite that, I’ve been surprised to see the share price continue its decline in the past few months…because 2012 was a game-changing year! There were two key events:
First, Petroceltic closed on a GBP 170 mio merger with Melrose Resources in October. This was essentially a merger of equals (with PCI shareholders getting 54% of the enlarged company), and both companies possessed nicely overlapping portfolios in the MENA, Mediterranean & Black Sea regions. The key attraction of the deal, however, was the fact it was the merger of a producer & an explorer. This is an incredibly powerful combination in the hands of the right management team: Production can actually fund a company’s exploration plans on a self-sustaining basis. In this instance, pre-merger cashflows suggest operating cash generation (after interest & taxes) is now running around $155 mio pa post-merger, which nicely funds Petroceltic’s forecasted 2013 exploration & development programme.
In reality, another Algerian farm-out deal could dramatically revise the company’s capital expenditure requirements (but note the value of the company’s reserves would decline accordingly). More rapid collection of $119 mio in outstanding trade receivables (a Melrose legacy) would also assist cashflow, but will probably be offset by a significant portion of new production revenues dropping into receivables. At this point, reflecting that ongoing cycle, I’ll only include 50% of those receivables in my valuation.
The second key event was the declaration of commerciality & regulatory approval for the Ain Tsila gas-condensate field in Algeria. This allowed Petroceltic to book a dramatic increase in its year-end reserves. On an entitlement basis, the company now has 114 mio boe of proved reserves (which I value at my usual $10 per boe) & 60 mio boe of probable reserves (valued at a 50% discount to proved). Combine that with yr-end cash of $67 mio & $277 mio of debt, and we have a major step-change in the valuation of the company.
However, right now, there’s clearly an Algerian discount being applied here, reflecting the events of the Arab Spring & the recent hostage crisis. Unless we see a further escalation, this concern should fade over time – and the Algerian government & the oil companies (and the US government) are obviously motivated to suppress any further terrorist threats & potential. Presuming that, Petroceltic’s severe under-valuation will be addressed.
Price Target: GBP 19.3p
Company: IFG Group
Prior Post: Here
Price: EUR 1.411
2012 was also a significant year for IFG – in July, they completed the sale of their International division (trustee & corporate services) for GBP 70 mio. In my opinion, in terms of margins & stability, this division was actually the company’s crown jewel! But what’s done is done – a pay-down of accumulated debt was prudent, and it allows IFG to focus on bulking up its more mundane pensions & IFA business. It also facilitated the return of GBP 30 mio to shareholders via a tender – in the Irish market, this is a relatively rare example of returning capital to shareholders!
Looking at their recent results (on a continuing ops. basis), I note the continuing shortfall in actual operating free cashflow (Op FCF) vs. the adjusted operating profit (Adj OP) that’s being reported. For example, in the past two years, Adj OP margin was 16.8% while Op FCF margin only came in at 12.0%. However, we may have actually witnessed a sea-change in 2012 – Op FCF (at 16.5%) actually exceeded Adj OP! Hmmm…let’s split the difference & assume the business is currently capable of producing a 14.25% Op FCF margin. I think this deserves the same 1.25 Price/Sales multiple as last year.
The company’s much improved financial situation also permits a positive GBP 25 mio debt adjustment (slightly greater than IFG’s GBP 21 mio of net cash) to my valuation, reflecting the capacity for acquisition/consolidation opportunities. [It’s worth noting the Irish business has continued to deteriorate – clearly a decision is required here: IFG should i) pursue an Irish acquisition/consolidation strategy that offers substantial cost savings & synergies, or ii) attempt a quick sale of the business, which might add an immediate 5-10% to IFG’s current valuation].
I calculate IFG’s currently trading near its fair valuation. However, it should be noted Fiordland (a major 23.6% shareholder & a previous bidder for the company) is tightening its grip: John Gallagher recently joined Peter Priestley on the board & announced his own 6.3% shareholding (partly through his ownership of Fiordland, in partnership with Edmund Truell). Gallagher’s one of the v few people who called the top of the Irish property market perfectly (and actually acted on it) – so it’s definitely encouraging to see him installed as IFG’s new Chairman. It’s also interesting to see MSDC Management pop up in the last few days with a 4.0% holding – they’re the folks who manage Michael Dell’s portfolio (although I think we can safely assume he’s otherwise occupied!).
Price Target: EUR 1.35
Company: Providence Resources
Prior Post: Here
Price: GBP 615p
Last year, Providence was one of the few resource shares I tagged as having some reasonable upside…despite my aversion to any kind of bloody O’Reilly vehicle! Of course, a lot has changed since then, with continued/rapid progress being made with their Barryroe discovery – not surprisingly, the share price has positively soared vs. last year’s share price (and my target price). And Barryroe’s not their only exploration target with big potential – Tony O’Reilly’s been keeping the punters happy every time he speaks, throwing out a 100 mio boe here & a billion boe there – it really starts adding up..!
In fact, if we count up all the barrels every other tin pot explorer’s now claiming in offshore Ireland – well Jaysus, soon Ireland can forget all about austerity & start rolling in
clover oil instead! [In fact, maybe the government should seek atonement by seizing the whole kit & kaboodle for the Irish taxpayer? Illegal, you say… Yeah, about as illegal as them handing over 10s of billions of taxpayers’ money to bondholders during the banking crisis, I’d say?!]
The trouble is, much as I highlighted last year, the resource estimates keep getting larger but there’s been precious little progress (so far) in actually proving up those resources. Now, I’m certainly not suggesting they can’t ultimately prove to be transformational, but at this point Providence has a $500 mio exploration programme planned. That requires a v significant amount of fund-raising, and/or farm-out(s), and there’s bound to be some drilling/operating hiccups along the way. [And it’s worth remembering, even for a minute, how two such dominant brands as Independent News & Media (INM:ID) & Waterford Wedgwood both ended up in the shitter]. I suspect the share price may now have gotten a little ahead of itself..?
Let’s tot things up: As of their last report, Providence has EUR 45 mio of cash on hand, offset by EUR 44 mio of debt. We also need to factor in the current annual cash-burn rate of about EUR 64 mio (which may well accelerate). Near-term, this can be funded with the recent sale of the company’s UK interests (Singleton & Baxter’s Copse) for $66 mio. For the moment, I’ll just include their P50 reserves in my valuation – these are up on last year, despite the UK sale, as I’ve now incorporated Providence’s increased ownership of Barryroe (to 80%). [NB: San Leon’s (SLE:LN) 30% stake was acquired in exchange for a 4.5% NPI]. That amounts to 48 mio boe, plus another 1.875 mio boe from Helvick, and I’ll assume my usual $10 per proved boe valuation & a 50:50 proved:probable split.
Which all confirms Providence looks, at this point, quite significantly over-valued – a much improved CPR, and/or a significant farm-out deal, is clearly required here to justify/build on the current market valuation.
Price Target: GBP 364p
Company: Dragon Oil
Prior Post: Here (valuation, no commentary)
Price: GBP 612p
Dragon Oil’s one of the most dependable oil stocks around – rather amazing when you consider it primarily operates in Turkmenistan. Last year, I predicted about 12% upside for the share price – it’s actually managed a 19% increase. It’s also one of the few stocks which is actually committed to returning a decent amount of cash to shareholders – it pays a 30 ct annual dividend (a 3.2% yield) & the company completed a $200 mio share buyback programme in 2012. They’ve also (finally) made some tangible progress with their long-vaunted diversification strategy: They concluded a 55% farm-in for an offshore Tunisia project, and have been awarded (as a consortium member) exploration blocks in Iraq & Afghanistan. They also tentatively considered an offer for Bowleven (BLVN:LN), but this was quickly abandoned.
On the production front (in Turkmenistan), they’ve now reached 76 K bopd & are targeting over 100 K for 2015. They also continue to replace reserves on almost a 2:1 ratio. This leaves their working interest reserves at 920 mio 2P as of year-end, which equates to 401 mio 2P on an entitlement basis. I value these at $10 & $5 respectively for proved & probable, presuming a 50:50 split. In addition, the company has almost $2 billion of cash on hand (end-March) & zero debt. Once again, Dragon looks mildly under-valued.
Price Target: GBP 669p
Prior Post: Here (valuation, no commentary)
Price: EUR 16.215
Early last year, I put a EUR 12 odd price target on CRH – about 20% below the share price at the time. For the rest of the year, CRH’s business was left treading water (vs. steady progress in 2011), and the stock looked like it would hit my target on a number of occasions. However, 2013 has ushered in a powerful rally – CRH is now 7% higher than last year, leaving my target price dead wrong…
In the Americas, CRH enjoyed 15% & 12% increase in revenues & (adj) EBITDA, respectively. However, this was pretty much wiped out by a 7% & 12% decline in revenues & (adj) EBITDA in Europe, leaving total company results mostly unchanged. Portfolio management was left treading water also, with divestment proceeds actually exceeding the cost of their bolt-on acquisitions. Myles Lee, the CEO, is now planning to cap off a difficult few years by retiring at the end of 2013 – a successor is still to be announced.
The underlying (adj) operating profit margin has increased somewhat, to about 5.2%. This is still well shy of CRH’s long-term average of 9.9% – and considering how Europe continues to lag the US, we’re obviously some distance away from reaching/exceeding that kind of margin again. On the other hand, CRH is clearly the bluest of blue chips listed on the ISE – in fact, it’s the largest stock listed on the exchange (well, ignoring Allied Irish Banks’ (ALBK:ID) market cap, which is just a joke!). Despite its international exposure, CRH is probably always going to be the first stock investors & fund managers consider buying if they’re looking for some Irish exposure. Noting that & operating on the assumption margins will eventually converge, a 7.6% average of current/long-term margins might deserve a 0.7 Price/Sales multiple at this point.
Unfortunately, CRH’s EUR 4.9 bio of debt remains a worry – with underlying interest coverage coming out at a low 3.7 times. This demands a fairly stiff negative debt adjustment to reflect a more sustainable level of debt (based on current operating profit) – I’d estimate just over EUR 2 billion is appropriate. Considering CRH’s EUR 1.8 bio of cash (which earns sod all) & its (similar) level of un-drawn loan facilities, this adjustment might seem a tad excessive. Possibly, but I’d prefer to err on the side of caution – I think it’s far more likely they’ll be tempted to buy some growth with the cash, rather than apply it to debt pay-down. Unfortunately, there’s a whopping great EUR 0.7 bio pension deficit to factor in also.
Putting all this together, despite the debt haircut, we still have a v decent jump in my target price – which leaves CRH looking only slightly over-valued.
Price Target: EUR 14.24
OK, here’s my usual pair of Excel files, which includes (for your reference) my exact valuation figures & calculation for each of the companies above. Also included are all other companies covered to date (with updated share prices, FX rates, etc. as of April 23rd), and all companies are ranked according to their current Upside Potential.
2013 The Great Irish Share Valuation Project XI (xlsx file)
Now, just to remind you, I only have 5 more Irish companies left to cover. They are:
If there’s any Irish companies I appear to have forgotten, this is your last chance to alert me (comment, or email me at email@example.com) & I’ll be happy to take a look/include them. Cheers!