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Continued from here:

[NB: Worth revisiting Part I if you’re a new reader, or you’d like a refresher on TGISVP & my approach to the whole project.]

Company:   Trinity Biotech

Prior Post(s):   2012 & 2013

Ticker:   TRIB:US

Price:   USD 26.55

First up, I should remind readers TRIB used to be a large holding for me. And I bloody well hung on for as long as I could – bailing out of my final tranche of shares last August, with a near 700% gain on my average net entry price & almost an 1,100% gain on my initial purchase price. Of course, I ended up leaving money on the table – it’s rallied another 30% since then! But I’m not sure I understand the investor who’s buying at today’s price… I much prefer being the investor who bought TRIB at a tenth of the price, when it was truly despised & neglected! But let’s keep an open mind – what’s a sensible valuation for the company today?

In reality, Trinity’s transformed itself (& its investor base) from value to growth in the past couple of years. Most of its cash pile has now been spent on acquisitions. [But it remains in rude financial health – generating healthy cash flow, with $22.3 million of cash & zero debt]. The Fiomi Diagnostics acquisition is coming to fruition – the company’s now ramping up sales & marketing for the actual/expected European & US approvals (in 2014/15) of its Troponin I & BNP cardiac tests. In 2013, they added a UK-based blood bank screening business & Immco Diagnostics, a US (autoimmune) diagnostics company. These are complementary businesses, they add another $16.5 M of revenue, and Immco’s business/pipeline can be quickly leveraged up (using TRIB’s existing resources) to a 20% pa growth trajectory.

TRIB’s already trading on a 30+ Price/Earnings ratio, so applying a P/E valuation multiple would be a fairly pointless exercise. And the company’s operating profit margin’s holding pretty steady just under 22% (exc. share-based payments) – perhaps justifying a 2.5 Price/Sales multiple, but again this falls well short of current market value. But as I’ve previously discussed, and judging by sector M&A multiples, I’m confident Trinity would command at least a 3.5 P/S multiple in a takeover situation (plus an adjustment for net cash). [Yes, considering current operating margins, this valuation may seem a stretch – but an acquirer could very quickly eliminate duplicate costs, leverage up product sales, and accelerate pipeline development]. Based on the recent acquisitions, and management’s 114 M revenue forecast for 2014, annualizing Q4-2013 revenue is appropriate:

(USD 25.5 M Qtrly Revenue * 4 * 3.5 P/S + 22.3 M Cash) / 22.5 M Shares = USD 16.87

Since last year, my price target’s actually fallen marginally! Oddly enough, the decline in cash isn’t really to blame, as it’s been replaced by a higher P/S valuation – the main factor’s actually dilution, with the outstanding share count increasing by 6.5% yoy. TRIB now looks pretty over-valued to me – it clearly belongs in growth stock territory, with investors deriving an increasing portion of its value from future revenue & pipeline prospects.

Price Target:   USD 16.87

Upside/(Downside):   (36)%

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Company:   Great Western Mining Corp

Prior Post(s):   2012 & 2013

Ticker:   GWMO:LN

Price:   GBP 1.215p

Great Western’s done the honourable thing, collapsing 63% in the past year – and I’m not at all sure that changes my view here… [Though I note Nial Ring has finally resigned as a director – so that’s one tiny positive!] The company’s actually been in existence for 10 years now, wandering the Nevada desert. Christ, they really could have saved shareholders a lot of bloody time & money, if they’d just spent a night in Vegas & bet it all on black instead!

But management bounced right back in January this year, touting the potential for millions & billions of pounds of copper – this was exciting enough to garner a gross GBP 2.3 million, from two separate placings. [The quadrupling of the share count in a single year isn’t so exciting…though it is quite astonishing!] This has replenished their coffers, and allowed them to launch a Phase 2 (exploratory) drilling programme – doubtless, this will produce some promising news flow. But with nothing tangible to show for the last decade (US Oil & Gas (USOP:G4) managed at least a jar of oil!), my usual junior resource stock valuation formula applies:

(EUR 278 K Cash – 217 K Net Payables + GBP 2.3 M * 93% / 0.8346 EUR/GBP – EUR 647 K Annual Cash Burn) * 0.8346 EUR/GBP / 265 M = GBP 0.6p

Lo & behold, GWMO’s no longer worthless (but it’s still way over-valued)! Of course, this is entirely due to the recent influx of cash, which will dissipate in due course. And only a muppet would believe they’ll (ever) have anything to show for that…

Price Target:   GBP 0.6p

Upside/(Downside):   (49)%

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Company:   Falcon Oil & Gas

Prior Post(s):   2013

Ticker:   FOG:LN

Price:   GBP 10.375p

Falcon also has projects in Hungary & South Africa, but the main focus is on the shale oil & gas prospects in the Beetaloo Basin, Australia. Last July, FOG’s partner Hess made the astonishing decision to walk away from the project – after spending $80 million on exploration! Just as astonishing was Falcon’s subsequent decision to consolidate control of the project, by buying out other minority partners & signing contracts to purchase overriding royalty interests (ORRI). The rationale is to presumably facilitate a farm-out, with Falcon now in discussion with a number of companies. Hmmm, it hardly bears pointing out, but one would think it’s far easier for a potential new partner to say ‘No’ to this project than a company who already had an $80 M sunk cost…but let’s wait & see!?

Meanwhile, raising new cash will become a pressing issue in due course. While FOG has $11.2 M of cash on hand, it also has a 2.8 M derivative liability (warrant MTM) & 1.1 M of net payables. It also made a 1.0 M ORRI payment in November, plus it sports a 6.4 M annual cash burn. [At this point, we’ll ignore the other 6.0 M of agreed ORRI payments, since they’re contingent on a farm-out deal]. Of course, there’s nothing in the way of proved-up reserves or resources here – which puts us at:

(USD 11.2 M Cash – 2.8 M Derivative Liability – 1.1 M Net Payables – 1.0 M ORRI Payment – 6.4 M Annual Cash Burn) / 1.6516 GBP/USD / 922 M Shares = Zero

As things stand, Falcon’s basically worthless…

Price Target:   Zero

Upside/(Downside):   (100)%

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Company:   Datalex

Prior Post(s):   2012 & 2013

Ticker:   DLE:ID

Price:   EUR 1.22

I considered Datalex to be mildly over-valued last year, and for much of 2013 that was borne out, with the share price reaching my EUR 0.78 price target a couple of times. Then in August, ’round the time of DLE’s interims, the share price took off – climbing steadily to reach a EUR 1.33 high early this year. Since then it’s been treading water, digesting its gains, while the rest of the market marches higher.

This price rally reflects the continued success of the company in adding more of the largest airlines/travel retailers to its client roster: Latest operating milestones include Virgin Australia going live in August, Virgin Atlantic to go live in Q1-2014, and the recently announced JetBlue Airways deal. The company also now has agreements in place with three leading industry players – SITA, HPES & PROS. New management’s bedded down nicely too – in November, DLE was confident of reporting 25-30% growth in adjusted 2013 EBITDA (and 15% growth in cash balances). We also have a well-respected & reassuring shareholder base – with IIU & Pageant Holdings holding about 40%, in aggregate. Plus another 10% odd is held by Farringdon Capital & Paschal Taggart (albeit Farringdon’s been trimming their stake recently).

Noting the cash forecast, we can reasonably presume year-end cash to be $16.8 million – a significant step-up from the interim results, as DLE’s H1-2013 working capital investment is expected to unwind. In similar fashion, the EBITDA forecast suggests the 13% increase in H1 revenue will be easily maintained – which equates to $36.4 M of revenue on a FY-2013 basis. Unfortunately, we still see negative operating free cash flow as the company continues to invest heavily in its platform (though it should turn positive on a FY basis)…

However, in this instance, I still believe it would be inappropriate to handicap DLE’s valuation due to its currently poor cash flow. Considering DLE’s potential underlying profitability (exc. software development costs), and the far higher margins it can expect to enjoy on future incremental revenue, (adjusted) EBITDA’s a better metric to use when determining fair value. Presuming a 25% increase (to $7.2 M) in 2013, that’s equivalent to a 19.8% margin – which deserves a 2.0 P/S multiple. Since Datalex enjoys long-term contracts, and recurring transaction revenue now represents 45% of total revenue, I also think a (positive) debt adjustment’s appropriate at this point. I calculate 19.7 M of debt could be drawn down, and interest expense would still be limited to 15% of EBITDA – let’s include 50% of that incremental debt, just to be conservative. That gives us:

(USD 36.4 M Revenue * 2.0 P/S + 16.8 M Cash + 19.7 M Debt Adjustment * 50%) / 1.3784 EUR/USD / 70.7 M Shares = EUR 1.02

My price target’s improved significantly yoy, but Datalex continues to look mildly over-valued. Which may be a little unfair – this is a rather unique world-class business, so I suspect an eventual takeover multiple might far exceed my own valuation multiple. At this point, however, I believe key shareholders will wring more value from the company…by waiting, rather than by agitating for a quick sale.

Price Target:   EUR 1.02

Upside/(Downside):   (16)%

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Company:   Galantas Gold Corp

Prior Post(s):   2012 & 2013

Ticker:   GAL:LN

Price:   GBP 1.325p

Galantas soldiers on… I suspect it’s still years before the first underground oz of gold is extracted here. The company will continue to face numerous & interminable objections from the usual assortment of local wing-nuts, and there’s little clarity about the actual funding requirements for an underground mine. Meanwhile, GAL continues to burn cash (CAD 2.3 million pa), and related party liabilities (of CAD 3.2 M) continue to mount – not a reassuring situation for minority shareholders.

But we can focus on two encouraging news items: First, a new resource estimate was released, confirming 21 K measured oz (of gold) & 122 K indicated oz (plus nearly 300 K oz of inferred resources). Let’s value these resources using my standard $150 per in-the-ground oz, but haircut by 50% for measured & 75% for indicated. I was also surprised to see a strategic review announced last August (but no word since) – which cited the possibility of a sale or JV of its Northern Irish properties. It’s rare to see junior resource stock management voluntarily sell a project – I suspect the real objective here is a JV, or some other type of farm-out, to raise cash and/or fund the proposed mine. Per our usual methodology, GAL’s worth:

(CAD 0.7 M Cash – 3.2 M Related Party Liab. – 2.3 M Annual Cash Burn + (0.021 M Measured * 50% + 0.122 M Indicated * 25%) * $150 per oz * 1.1241 USD/CAD) / 1.8566 GBP/CAD / 256 M Shares = GBP 0.4p

Galantas remains wildly over-valued. Shareholders might do better switching their money into some nice pieces of Galantas gold jewellery. 😉

Price Target:   GBP 0.4p

Upside/(Downside):   (68)%

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Company:   Petrel Resources

Prior Post(s):   2012 & 2013

Ticker:   PET:LN

Price:   GBP 12.75p

I’m almost fond of Petrel really. When I look at the company, it gives me hope… Hope that muppets everywhere will take a closer look & see the embodiment of junior resource stock hell! This company’s survived for an incredible 30+ years now, draining shareholders pockets on a regular basis, as it serially abandons failed projects & moves on to the next sexy project/country. Forgive me – I just have to repeat my comment from two years ago:

‘I think most small investors would do better if they thought of junior resource company execs. as bratty little infants (with shareholders for parents). They have short attention spans, constantly crave shiny new toys, completely ignore their parent’s wishes, need to be constantly fed (at the most inconvenient of times) and then, of course, they shit all over you…’

I also have to name-check last year’s piece: Petrel is a tiny local reminder there’s no compelling reason to assume Herbalife (HLF:US) must ultimately collapse. Maybe Ackman gets lucky, and the FTC finds a smoking gun – but is it possible for a company to survive for decades, stripping suckers of their money & their dreams? Yes, absolutely..! [btw What’s the global market cap of the gambling industry anyway?!] Because, as PT Barnum David Hannum said: ‘There’s a sucker born every minute!’

But hats off…Petrel actually managed to farm-out 85% of its Atlantic Porcupine Basin holding to Woodside Petroleum (WPL:AU) – for which it will receive $1.3 million of back costs. [Irate Providence Resources (PVR:LN) shareholders, take note – and give Tony a call & ask him to get the finger out…] Given how sexy Irish offshore has become (at least ’til recently), it’s surprising Petrel has since chosen to re-up in Iraq – taking a 20% stake in Amira Hydrocarbons Wasit, for a $0.5 M cash payment plus a number of actual/potential share issuances. Since the company will likely avoid any increased Ireland/Iraq expenditure in the near/medium-term, we can expect little change from the current EUR 1.4 M cash burn. This all equates to:

(EUR 2.3 M Cash + ($1.3 M – $0.5 M) / 1.3784 EUR/USD Woodside & Amira Receivable/Payment – EUR 1.4 M Annual Cash Burn) * 0.8346 EUR/GBP / 100 M Shares = GBP 1.2p

Petrel is certainly instructive & entertaining, but it’s also a ridiculously over-valued share…

Price Target:   GBP 1.2p

Upside/(Downside):   (90)%

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Company:   Bank of Ireland

Prior Post(s):   2012 & 2013

Ticker:   BKIR:ID

Price:   EUR 0.304

I think maybe a few readers have been waiting for this valuation..!? I have to admit, I watch B/I pretty carefully myself – as far as I’m concerned, it clearly sets the direction & momentum for the entire Irish financial sector. Which explains the sector wobble this month, when the Ross/Watsa stake sale was announced. B/I shares are now down 22% from their end-Feb high (of EUR 0.389). This seems a little silly really: Ross & Watsa have only sold about a third of their aggregate stake, after the stock price had more than tripled! They still retain two-thirds of their original stake (identified as a long-term holding) – in fact, in monetary terms (post-sale), they actually have far more invested in B/I now than they did originally. That being said, it’s obviously sensible for investors to use news like this to disengage from the market’s price momentum & re-focus on intrinsic values…

But what a difference a year makes… The balance sheet continues to improve, with the loan-to-deposit ratio (at 114%) finally back within a normal banking range (of 80-120%). The bank’s tier 1 ratio (pro-forma Basel III transitional) now stands at 12.3%. However, I prefer to simply focus on total equity/total assets – at 6.0%, this falls well short of the 8% comfort level I’d like to see. Hopefully, we’ll see this addressed in the next 2-3 years via equity accrual & a stable balance sheet. Last year, I highlighted 2.00% as a decent target for net interest margin (NIM). The bank’s actually made huge progress in the past year – 2012 NIM (before ELG fees) was at 1.25%, whereas 2013 NIM reached 1.84%. The run-rate is even better, with H2-2013 NIM of 2.03% actually surpassing my target.

Not surprisingly, the bottom line’s still negative, with loan impairments of almost EUR 1.7 billion swamping operating profit. This masks a dramatic improvement in underlying profitability, driven by improving NIM & other income, plus the impact of expense (i.e. employee) reductions. Underlying (pre-impairment) operating profit was 1,065 million for 2013, with H2-2013 hitting 1,370 M on an annualized basis. This is an astonishing improvement on the 224 M of operating profit reported in 2012. [And a reminder of the sad reality of Ireland’s banking duopoly – on the way down, the taxpayer’s screwed by the state, and on the way back up, he’s screwed all over again by the banks!]

Now, before we discuss return on equity (RoE), we first need to consider equity itself. And that means we need to ponder loans & loan impairments… Here too, we may finally have reached an inflection point – impaired & past due (but not impaired) loans now total 19.8 B, vs. 21.0 B at end-2012. Despite the positive noises emanating from the Dublin property market, it’s still too premature to consider altering my loan provision methodology. I’ll continue to apply a 50% haircut to 15.8 B of impaired loans, and a 25% haircut to 4.1 B of past due but not impaired loans (reference last year’s piece for supporting comments). This equates to an 8.9 B total provision, which compares unfavourably to the bank’s actual provision of 8.2 B – we’ll adjust equity accordingly.

Now for RoE: Noting the current P&L momentum, it’s quite reasonable to expect the H2-2013 run-rate will be maintained/improved upon. That’s a 1.4 B profit on 6.6 B of equity (7.9 B of total equity, less 1.3 B of preference equity). Even allowing for the 10.25% preference dividend, that’s an incredible improvement – to an 18.8% RoE! Of course, that excludes any kind of tax charge, or underlying (i.e. normalised) level of loan impairment. But a tax charge is a fairly theoretical prospect at this point (hey, another screwing for the taxpayer!), and I suspect continued P&L improvement will prove a reasonable offset to any underlying loan impairment. Sticking to the conservative end of my usual RoE metric (8-12% RoE equates to a 1.0 Price/Book ratio), I’m now applying a 1.67 P/B multiple. This gives us:

(EUR 7.9 B Total Equity – 1.3 B Pref Equity – (15.8 B Impaired * 50% + 4.1 B Past Due * 25% – 8.2 B Actual Provision)) * 1.67 P/B / 32.4 B Shares = EUR 0.305

Well, whatta you know?! Bank of Ireland is perfectly valued in the market today. Optimists will discount further P&L improvement, a reducing loan impairment problem, and an expanding market multiple – while pessimists will focus on B/I’s total equity/total assets ratio of 6.0%, and also worry about potential economic reversal in Ireland and/or Europe. I think ‘Don’t Bank on the Banks!’  is definitely worth another read myself… 😉

Price Target:   EUR 0.305

Upside/(Downside):   0%

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Company:   Ormonde Mining

Prior Post(s):   2012 & 2013

Ticker:   ORM:LN

Price:   GBP 5.625p

Ormonde continues to make steady progress with the permitting process for its Barruecopardo tungsten project – in fact, it awarded the engineering design contract to Fairport Engineering earlier this month. The only real drama in the past year was an unsolicited approach from Almonty Industries (AII:CN) last August. Since Almonty’s paper offer valued Ormonde at just GBP 5.7p per share (and lower, as AII’s share price fell), the board quite rightly rejected it – and Almonty finally conceded defeat at the end of January.

[But this serves as a useful reminder to shareholders – junior resource stocks are often most vulnerable as they reach/progress through the capex phase of a project. The value of the project & its reserves/resources are usually obvious at this point, but time & cost over-runs plus stretched finances are almost inevitable…and the share price may suffer accordingly. This is where potential bidders are often tempted to step in].

There was also a potential divestment of La Zarza for EUR 6.3 million (5.0 M cash & a 1.3 M liability extinguishment), but it fell through at the last minute. However, this seemed like a genuine deal, so I think it’s reasonable to include La Zarza in our valuation (at a 50% discount). It’s a shame they didn’t receive the cash last year, as Ormonde was down to 0.9 M of cash & has a fairly heavy 4.3 M annual cash burn. Since then, though, it’s raised 1.3 M from a placing – but obviously more funds will be needed shortly. However, these figures are mere chicken-feed vs. the value of its reserves/resources & the (increased) overall 70 M cost of the Barruecopardo project…

Encouragingly, the company has now appointed Swedbank as bond advisor for a likely 50 M bond issue. This would have seemed like a totally unfeasible option ’til recently – but now, I frankly wouldn’t be surprised to see them pull off a successful junk bond placing. However, this will also require a significant equity raise, and/or a JV partner. [To be conservative, we should perhaps anticipate this dilution – unfortunately, we really need more details, and obviously nothing goes ahead ’til final permits are approved. So we’ll ignore the issue for the moment – ideally, further proving up of reserves will be an integral part of the entire project plan, which would help to offset potential share dilution].

And speaking of reserves, Ormonde previously reported 1.64 M mtus of proved tungsten reserves & 0.98 M mtus of probable reserves. I’ll continue to apply my valuation rule of thumb of $40 per in-the-ground mtu, with a 50% haircut for probable reserves. At this point, I think it’s appropriate to also include ORM’s incremental 2.44 M mtus of measured & indicated resources – at a 75% discount. [Be aware, though, most of these incremental resources would only be accessed via a new underground mining project]. This all equates to:

((EUR 0.9 M Cash + 1.3 M * 93% Placing Proceeds – 4.3 M Annual Cash Burn + 6.3 M * 50% La Zarza) * 1.3784 EUR/USD + (1.64 M + 0.98 M * 50% + 2.44 M * 25%) * $40 per mtu) / 1.6516 GBP/USD / 421 M Shares = GBP 15.9p

Ormonde looks totally under-valued, but clearly it still faces some major project & financing hurdles. As the company gets ready to enter a new phase, the ability of management to sell (and deliver on) this project will become really crucial – and it’s the likely key to avoiding another opportunistic takeover bid at some point…

Price Target:   GBP 15.9p

Upside/(Downside):   184%

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OK, that’s it for the moment. And if I say so myself, not doing too badly here – I’m now half-way through my complete roster of Irish shares! 🙂 Here’s my usual (updated & re-ranked) TGISVP file:

2014 – The Great Irish Share Valuation Project – Part V

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