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I finished the valuation phase of The Great Irish Share Valuation Project in May, but we’ve actually seen a grand total of three Irish companies IPO since then. Seriously, that’s a bit of a bloody record – one of them even listed on the ISE! I’ll be taking a closer look at each company in this post, and including them in TGISVP for the rest of the year.

[btw I can’t help but remember it was about this time last year I first sat down, took a look at US Oil & Gas (USOP:G4), and promptly fell off my chair. It was a bit like meeting Paul Calf for the first time – I laughed, I cried, I was horrified… I ended up predicting an ultimate TGISVP price target of 3.5p (a 99% price decline). Not surprisingly, this was greeted with outrage  – with multiple muppets going out of their way to explain, in great detail, why I didn’t have a f***ing clue! Oh, how right they were, and how wrong I was – USOP’s now trading at 32p, a share price decline of only 95%..! Clearly an apology is warranted – perhaps I should suck up my pride & make it?! ;-)]

Well, maybe I can’t promise you anything as exciting as USOP, but let’s see if we have any bargains or disasters on our hands:

Company:   Green REIT

Ticker:   GRN:ID

Mkt Cap:  EUR 372.0 mio

Price:   EUR 1.20

As you may have noticed, my Green REIT write-up kinda got away from me! I ended up publishing it as a completely separate post – see here.

Price Target:   EUR 0.965

Upside:   (20)%

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Company:   Keywords Studios

Ticker:   KWS:LN

Mkt Cap:  GBP 61.4 mio

Price:   GBP 153.5p

Keywords Studios was founded in 1998 by Teresa Luppino & Giorgio Guastalla. The company is a leading provider of integrated localisation, testing & audio services (across 30 languages & 12 game platforms) to a blue chip client base in the global video game industry. ‘Video game’ means consoles to me, but here it’s meant in the generic sense to include mobile & social/casual gaming – Keywords also works on hand-held, Facebook, Apple & Android platforms, with more recent clients including Zynga (ZNGA:US) & King.com.

The industry has seen increasing consolidation into a number of major players – which is reflected in the fact that Keyword’s Top 4 customers account for 50% of its revenues. This may naturally limit expansion via existing clients, so the focus will be on: i) geographic expansion – for example, by opening facilities in China & S Korea, which have some of the most rabid online & MMO gamers, and ii) lateral expansion, most likely via acquisitions – into upstream (like art outsourcing, original audio & motion capture) and downstream services (like multi-lingual customer support, (micro)-payment services & analytics).

The video game industry’s far larger than many realize (not far behind the movie industry), with $63 billion in global revenue last year, and growth (at 6.5% pa) expected to remain well in excess of GDP (growth) for the next few years. This offers service providers huge scope for increased outsourcing & market share wins. On the other hand, the long delay in the console cycle (now coming to an end with upcoming PlayStation 4 & Xbox One launches) & the increasing migration to mobile, online & social/casual gaming has proved somewhat problematic. This explains Keyword’s declining but still v healthy growth rates in revenue, operating profit & net income.

2011 & 2012 revenue grew 83% & 39% (respectively) to EUR 14.3 million – plus 18% yoy growth in revenues for the first 5 months of 2013. Operating profit margin has declined from 23.8% to a more sustainable 19.6% in 2012, which was broadly reflected in the cash flow statement (little capex. is required). This has left the company in a relatively cash-rich position (EUR 4.4 mio of cash & zero debt). And a further GBP 8.6 m net will come from the IPO (which was at a GBP 123p share price). [NB: The majority of the GBP 28 m IPO Placing was a sale of founders’ shares. But they’ll continue to hold 29.9% of the company, with Andrew Day (CEO since 2009) holding another 13.2%].

In terms of valuation, I’d take a P/E & a Price/Sales valuation approach, and add cash as a separate but significant component. [Presumably they’ve got an acquisition pipeline lined up – I have to admit I’m somewhat fearful the (immediate) intrinsic value of these acquisitions will prove to be less than the cash expended]. I’d estimate the current revenue run-rate to be EUR 15.4 m, and an operating margin of around 20% deserves a 2.0 P/S multiple here, in my opinion. On the earnings front, the reversal in the 2012 operating profit margin left earnings up only 10%. But considering the general trend in financials, and 18% revenue growth YTD, an 18 P/E multiple is appropriate (and perhaps even conservative).

Averaging out these valuation approaches, plus EUR 14.6 m of cash, leaves Keywords looking significantly over-valued. A re-acceleration of revenue growth (new console launches should help), plus a game-changing acquisition or two, will definitely be required for the company’s valuation to grow into the current share price.

Price Target:   GBP 107p

Upside:   (30)%

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Company:   Ardmore Shipping

Ticker:   ASC:US

Mkt Cap:  $243.7 mio

Price:   $13.50

Ardmore Shipping was set up in 2010 by Greenbriar Equity Group (a transportation-focused PE firm) to take advantage of a historical low point in the shipping industry (in terms of charter rates & asset values). Reginald Jones (Chairman), Tony Gurnee (CEO) & Mark Cameron (COO) each have 20-30 years of maritime operating/financial experience – notably, each has worked for/with Teekay Corp. (TK:US). The company’s incorporated in the Marshall Islands, with its principal office located in Cork.

The luke-warm success of their IPO reflects continued investor aversion to the shipping sector, which is now into the 6th year of its current downturn (but showing signs of recovery). The original indicative IPO price was set at $15-17, but ended up at $14 & the shares haven’t traded higher since – 10 million shares were sold for net proceeds of $128.7 mio. This will reduce Greenbriar’s (plus directors & officers) stake to 44.6%, which is subject to the usual 180 day lock-up period. A fairly minimal $0.40 annual dividend is promised for the moment.

Ardmore now operates a fleet of 8 mid-range (MR) product & chemical tankers, with another 12 tankers on order (for 2014/15). The focus is on fuel-efficient product tankers (80%+), with an average 40 K dwt & an avg. age that will drop from 5 to less than 4 years. [By comparison, the current industry avg. is over 9 yrs]. In terms of capacity vs. flexibility, this category of tanker is considered the work-horse of the industry. The company also believes their overhead & operating expenses (per vessel) are among the lowest of their industry peers. The current strategy is to focus on the spot market & short-term charters, with higher day rates expected in due course.

Let’s put that into context: In 2009, the spot market averaged $8,190/day – while YTD 2013, Ardmore’s fleet time charter equivalent (TCE) per day was at $12,932. Longer-term, the market has (violently) fluctuated between a $3 K low & a $49 K high/day in the past 10 years, with the 10 yr avg. a little over $21 K/day & the 20 yr avg. just under $17 K/day. [By comparison, the company’s current fleet operating costs per day are at $6,471]. A similar story can be seen with asset values – new-builds are currently averaging $33.5 m, with 5 yr vessels trading ’round $25 m. This compares to 2007/08 peak values of over $50 m (for both new & 5 yrs). These charts are useful:

Product Tanker Development

Product Tanker Supply Demand

Product Tanker Charters

Product Tanker Assets

Now, I should add some additional perspective: The product & (particularly) the chemical tanker markets are more specialized than the dry bulk carrier market, and tend to attract less speculative capital. Which means charter rates have also been that much less volatile, vs. the rather insane volatility we see here in the Baltic Dry Index:

BDI

[NB: Take a look at the medium-term chart – looks like we’re now seeing a decisive break higher from key resistance ’round 1,250. But the chart above may temper your overall bullishness – the collapse of the past few years may simply have returned the BDI to its pre-2003 range…].

This can also be seen within their respective order books. The chemical tanker order book stands at just 4.5% of the current fleet – a level which hasn’t been seen since the ’80s! Orders for product tankers still stand at a much higher level of 12.2%. However, considering the duration of the order book & scrappage levels, product tanker supply’s only growing a net 1-2% pa at the moment – vs. estimated demand growth of 3-4% in 2013. By comparison, here’s the dry bulk order book…ugghh:

Dry Bulk Order Book

That all looks potentially promising for Ardmore, but how do things currently stack up for the company? Well, since inception the P&L run-rate’s around a $3-4 m loss pa, which is pretty marginal. That actually translated into $4 m of positive operating free cash flow (exc. vessel purchases) in 2012. We’re now seeing a steady improvement in 2013, with FY revenues likely to be up at least 30% – while H1 losses were reduced to $(1.2) m, accompanied by $5.6 m of operating free cash flow (albeit with some positive working capital assistance).

The end-June balance sheet has $201.6 m of vessels (for 8 tankers, this carrying value looks about right, perhaps even conservative) & $16.5 m of vessels under construction. This is funded with $107.2 m of equity (pre-IPO) & $125.1 m of debt/capital leases (company also has $9.9 m of cash) – that’s a vessel leverage ratio of about 57%, which is not unusual. Of course, post-IPO, Ardmore’s now in a net cash position. But it ultimately will return to a fairly similar leverage ratio – its order book (costing about $350-400 m) will be funded by the IPO proceeds & a new $235 m credit facility (hopefully, to be confirmed shortly).

Now, the company’s current P&L and cash flows clearly don’t deserve a premium valuation. On the other hand, most of the shipping industry’s in much worse shape (and likely to see further write-downs) – so cheap(er) peer valuations may not represent such a bargain. A 1.0 Price/Book valuation makes the most sense here, which leaves the shares trading just over fair value. But if you’re a (slightly nervous) shipping bull, Ardmore may still prove attractive – its product & chemical tanker fleet offers more conservative exposure, it’s cash flow positive, and it’s currently in a net cash position (albeit with a substantial 2014/15 order book & a credit facility to be confirmed). This gives you the luxury of time if you’re unsure of the timing & scale of a shipping market recovery – there are v few shipping companies out there which offer a similar proposition.

Price Target:   $13.07

Upside:   (3)%

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OK, here’s my usual pair of Excel files:

2013 The Great Irish Share Valuation Project (IPO Update – Sep 13)     (xlsx file)

2013 The Great Irish Share Valuation Project (IPO Update – Sep 13)     (xls file)

For your convenience & curiosity, they now include my exact fair value calculations for all 3 companies above (I’ve highlighted each of them). Also included are all other companies covered to date (with updated share prices, FX rates, etc. as of Sep 10th) – and, of course, I’ve ranked all 75 companies according to their current Upside Potential.

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