Aryzta, GameAccount Network, Green REIT, Irish shares, Irish Stock Exchange, Irish value investing, ISEQ, iShares MSCI Ireland Capped ETF, Kentz Corp, New Ireland Fund, Origin Enterprises, Permanent TSB Group Holdings, TGISVP, The Great Irish Share Valuation Project
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: Green REIT
Prior Post(s): 2013
Price: EUR 1.20
Since I first wrote about Green in August, not a lot’s changed fundamentally. But boy, it’s been a fun ride! The share price actually traded up to a EUR 1.479 high since then, an astonishing 53% premium to NAV. In fact, I’m bemused to see GRN’s all-time closing high (of EUR 1.442) was set on December 31st. [And has suffered a steady decline since. Same for Hibernia REIT (HBRN:ID)]. It’s so obvious, it’s laughable… Hmmm, if you already owned a decent slug of shares, wouldn’t it be sooo tempting to spend just a little more driving the price higher? Sure, it would raise your average entry price marginally, but also do wonders for your year-end mark-to-market! 😉 Unfortunately (or fortunately!), the Irish market’s a good venue for this type of fun & games – prices can sometimes be pushed around with surprising ease. It’s not like anybody expects the Irish exchange will ever bother doing anything about it…
Then there’s the problem of over-enthusiastic & naive investors. God forbid I compare property & junior resource stock investors, but sometimes I wonder… When it comes to real assets, too many investors seem to think something magical happens when they’re acquired by listed companies. A resource CEO throws together a rag-bag of exploration licences (acquired for a few million), IPOs the company, and minutes later the same assets are worth 50 million plus! As for property, there’s the old joke: ‘Yeah, they just bought it for X million. Wow, that’s an amazing property, you won’t see another like it…I wonder how much it’s worth?!’ Yes, I actually get emails like this: ‘The Green REIT portfolio’s on a tasty 8.7% yield – what do you think it’s worth?’ Er, pretty much what they fucking paid for it three months ago, I would think!
[I’m really not trying to mock Irish/UK investors here. The real lunatics are in the US, of course – where investors are willingly sucked into that other great blood funnel, the REIT/MLP machine. All too often, valuations bear little relationship to actual asset values, but nobody cares… Kennedy-Wilson Holdings (KW:US) is a great example – now a much-vaunted name on the European side of the pond, but how many investors have actually checked out the parent company listing? It trades on an astonishing 2.3 times book!]
Also, far too many investors mistake interesting for cheap. Or maybe they’re just confusing their price target with valuation. Or maybe both. So they pay up… Pointing this out to them can be upsetting: ‘Why must you be so bearish?’ Except I’m not, I may actually be bullish too! But if you hear of a property bought at an 8.7% yield, you should realize that’s a fair price 95% of the time. [Don’t forget, virtually all property sales are conducted as public/private auctions]. I may even agree the yield will compress to 6%…but what the hell’s that got to do with today’s valuation? Very bloody little, because that’s a future price target, which comes replete with all the usual risks & opportunities. If an investor insists on paying over the odds for every (interesting) stock they believe offers great upside, at best he’ll under-perform the market – at worst, he’s going to be a perennial loser.
So, back to Green: It’s now assembled a EUR 214 million portfolio focused on Dublin (84%), mostly office (53%) & retail (28%). Noting available debt capacity, the company has another quarter of a billion to spend – a substantial portion of which will be invested in the recently announced Central Park acquisition (with Pimco). [Deal has now closed]. The (initial) portfolio yield is 8.7%, but expect this to be diluted by a lower Central Park yield. Valuation’s a simple affair here:
EUR 300 M Equity * 1.0 P/B / 310 M Shares = EUR 0.97
Green REIT’s still fairly over-valued. And yes, I think a 1.0 Price/Book multiple’s perfectly adequate here! The Irish market’s clearly past its nadir (for God’s sake, prime yields are already down to 5.5-5.75%), but as I’ve detailed it still faces plenty of risk as well as opportunity. And a continuing property rally is obviously dependent on a far broader Irish & European recovery – so there’s oodles of Irish/European equities to buy as a decent alternative! Plus, of course, there’s plenty of UK/European listed property companies still available on nice discounts. It requires huge confidence in the Irish market (& Green REIT) for an investor to assume 40-50% cheaper stocks (in terms of P/B) will prove less attractive investments.
Price Target: EUR 0.97
Company: Origin Enterprises
Price: EUR 7.55
I was only mildly bullish on Origin in 2013, but the shares actually surged over 50% in the past year! While the company continues to make steady progress, it’s not immediately obvious intrinsic value’s kept pace with the share price. Quite honestly, I consider their associate & JV disposals the most encouraging news in the past year. I’ve long questioned the logic behind hanging onto these stakes, when a more focused strategy offers better upside. The dam broke, though, when the Saudis showed up & lifted Origin’s 24% stake in Continental Farmers Group. This was quickly followed by the sale of the company’s stake in the Welcon Invest JV to Austevoll Seafoods (AUSS:NO) in July, for EUR 93 million. Now there are growing whispers of a possible Valeo Foods IPO. [Though I suspect a trade sale could be more attractive, despite investors’ new-found IPO enthusiasm]. That would pretty much clear the cupboard & present a great opportunity for a step-change in Origin’s corporate strategy:
i) Finish the job: Management appears to have an ambiguous attitude towards the animal feed business, which clearly lacks sufficient scale. Understandable, perhaps – it’s another low margin/high volume business. On the other hand, I think it’s a pretty complementary fit with fertilizers & agronomy. Management needs to cut loose, or go big here – sell animal-feed asap, or else map out a consolidation strategy within the sector.
ii) Get the monkey off its back: Aryzta (YZA:ID) still owns 68% of Origin – this stake will continue to be an overhang for the stock (not that shareholders seem to care right now!). More importantly, it’s a potential conflict of interest – case in point, Origin originally stated the Welcon proceeds would be ‘used ultimately for investment in our core Agri-Services business.’ But a few months later, the company actually executed a 100 M tender offer instead, at EUR 7.50, with most of the cash going straight into the majority shareholder’s pocket! Clearly a great deal for Aryzta, but for minority shareholders maybe not so much…they might have preferred to see the money reinvested in their company (or funding an acquisition), rather than being spent on an over-priced tender.
iii) Uncover the jewel in the crown: Agronomy’s a high value/high margin knowledge business. With the dramatic improvements in satellite & sensor technology, and in (big) data collection, analysis & prediction, there’s obviously broader scope to be a tech business also. Noting the average Western farmer’s now close to retirement age, plus the insatiable global demand for food, we’re on the cusp of a new wave of farmers & intensive farming techniques. This is a high growth opportunity for any agronomy business, whether it’s maximizing yields in (N America), or simply lifting yields (in Russia/Ukraine – this acquisition is a small but promising start). Unfortunately, Origin’s agronomy division appears to be just another sales channel at the moment. Now, this obviously isn’t going to change tomorrow, but breaking it out as a separate segment (internally, and externally) would be a great start – when divisional management is (visibly) responsible for & incentivized by their own P&L, good things tend to happen in terms of operating strategy & revenue/profit growth!
iv) Bulk up: Origin’s agri-business is a blessing & a curse… It’s reassuringly stable, which allows for fairly aggressive leverage. But it’s also low margin/high volume – it’s not clear how much scope’s left for consolidation and/or margin expansion in the UK/Ireland. If the company wants to maintain/accelerate its growth rate, now’s the time to step up & take a few risks. An aggressive new markets & acquisitions strategy is the answer – Origin now has significant debt capacity to fund such a strategy, and if investors keep loving the stock it’s a perfect opportunity to raise a hefty chunk of fresh equity. The reputation & calibre of Origin’s new CFO (to be announced shortly) is crucial to this new strategy.
Meanwhile, adjusted operating margin’s stable around 6.4%, which still deserves a 0.5625 Price/Sales multiple. I’ll also make a (positive) debt adjustment here – I calculate another 155 M of debt would still limit net interest expense to 15% (or less) of operating profit. As I mentioned, I’m quite comfortable with a higher level of leverage here, so I’ll break my usual habit of hair-cutting this debt adjustment by 50%. On the earnings front, we’ve seen an 11-12% growth rate for a number of years now, but the Welcon disposal knocks this back to low single digits for 2014 (and a Valeo IPO/disposal could hurt also) – so I’ll scale back a smidge to a 10.5 Price/Earnings multiple. Averaging the two approaches, we get:
(EUR 0.505 EPS * 10.5 P/E + (1,368 M Revenue * 0.5625 P/S + 155 M Debt Adjustment) / 125 M Shares) / 2 = EUR 6.34
Origin’s mildly over-valued, but still an interesting/high potential stock. I’ve come close to buying it on a number of occasions…but it was never quite cheap enough! One to watch though – we may possibly see a bit of a bumpy period to come (in terms of results, or investor sentiment, or both), as the company (hopefully) transitions from the old Origin to a new higher growth Origin. Which might offer a better buying opportunity for the enterprising investor…
Price Target: EUR 6.34
Company: New Ireland Fund
Price: USD 14.31
IRL’s the only Irish closed-end fund available globally to investors. [Yes, it’s NY-listed, but so what – its portfolio is mostly denominated in EUR & it isn’t hedged]. Judging by the likes of Green REIT, one might presume this trades on a 20-30% premium to NAV..?! Er no, not quite – you can buy this little gem on a somewhat astonishing (for such a hot market) 12.3% discount! But decent discounts for (decent) funds are exceedingly rare in the US. And surely we should have faith in the average US retail investor? If they’re prepared to pay a ridiculous 52% premium for Bill Gross’ thoroughly average Pimco High Income Fund (PHK:US), for example, surely they’ll drive IRL to a tasty premium at some point? Well, when word finally trickles down to them (too late, of course) how red-hot the Irish market is…
There’s obviously no getting away from the market cap giants here, but at 38% the fund’s aggregate allocation to Ryanair Holdings (RYA:ID), CRH (CRH:ID) & Kerry Group (KYG:ID) is much lower than you’ll see in the ETF alternatives. I also have faith active stock-picking can still add a little edge in the Irish market, even it boils down to avoiding/under-weighting a potential disaster or two, and/or cherry-picking a few small(er) caps which would be a negligible component of an ETF. I’m not going to speculate on an underlying NAV return here, but I definitely think the fund deserves a 1.0 P/B multiple:
USD 82 M Equity * 1.0 P/B / 5.0 M Shares = USD 16.32
For a fund, IRL’s decently under-valued. And if you like it, there’s not much need to keep reading TGISVP – just buy a nice allocation for your portfolio, and sit back & relax! But hey, remember to come back…only a minority of my portfolio & attention’s actually focused on Irish stocks. 😉
Price Target: USD 16.32
Company: iShares MSCI Ireland Capped ETF
Price: USD 38.94
When it comes to listed Irish funds, this is the biggie of the bunch – with a market cap that’s well over double/quadruple the other two funds on offer. When I’m picking a suitable ETF, I generally think it’s a good idea to choose the largest fund available. That leaves the ISEQ 20 UCITS ETF (IETF:ID) out in the cold, and makes it a straight choice for investors between CEF (New Ireland Fund, see above) & ETF (EIRL). Then again, there’s a wrinkle: Here, the Top 3 holdings amount to 44% of the portfolio, but rather oddly Ryanair Holdings (RYA:ID) doesn’t even make an appearance – Bank of Ireland (BKIR:ID) is actually the third largest holding. Make of it what you will..! Again, I’ll value this at a 1.0 P/B multiple:
USD 38.94 NAV * 1.0 P/B = USD 38.94 (well, duh..!?)
EIRL’s fairly valued. [OK, full disclosure: I fudged NAV a little. The share price actually trades marginally higher than NAV, but I’m not making this a short call on EIRL for the sake of a 1.1% premium! So I tweaked NAV higher… But the vast majority of any return will come from NAV appreciation/depreciation anyway.]
Price Target: USD 38.94
Price: EUR 63.15
Oh dear, the yeast’s no longer working…
I was growing suspicious of Aryzta’s growth potential last year – particularly as their roll-up strategy seemed to be curtailed by the company’s debt & interest coverage levels. Results confirm this – FY-13 underlying EPS growth came in at only 6.8%, while earnings growth’s fallen again (to 4.1%) in the latest interims. What’s alarming though is the underlying decline in interim revenues (when you exclude the impact of the Klemme acquisition). But what’s even more alarming is the relentless decline in operating free cash flow (Op FCF = cash generated from operations less net capex/intangible spending) in the past couple of years. For example, the LTM headline EBITA margin’s 10.7%, while the Op FCF margin’s fallen steadily to a new low of 4.9%. I’m sure the company would argue much of this differential was necessary & valuable restructuring & investment spending. Maybe, but when you start seeing it year-in year-out…well, maybe not. It’s also problematic when you consider Aryzta operates in what is, at its core, a very mature/low growth sector. Plus the company’s high interest bill adds additional stress – net interest (inc. hybrid coupons) now stands at a whopping 37% of operating free cash flow.
But don’t worry – er, the company’s going to buy its way back to growth!? I was rather astonished to see the recently announced acquisition. And even more astonished at the price: Ayzta paid EUR 730 million for Cloverhill & Pineridge Bakeries’ 400 M of revenue – a 1.8 P/S multiple looks damn steep for businesses with (implied) 13% EBITA margins!? There’s a wee whiff of desperation here – whatever it takes to maintain revenue & earnings growth, it seems… Let’s price it up:
LTM revenue’s now at EUR 4.5 billion, and the new acquisition will push this over 4.9 B. Headline EBITA’s 488 M vs. Op FCF of 223 M – let’s average the two, and presume an adjusted 355 M margin. The new acquisition should bump this up to 408 M (I’m kindly assuming no cash shortfall here). That’s an 8.3% margin, to which I’ll assign a 0.7 P/S multiple. But Aryzta’s way over-leveraged now, we need to apply an appropriate (negative) debt adjustment. Again, I’ll be (very) kind here & assume Aryzta utilizes its entire cash pile (of 589 M) for the new acquisition (which probably won’t happen). That implies another 141 M of debt issuance is required – which would cost another 7 M (say), so total net interest (inc. hybrid coupons) will reach 90 M. That’s 22% of our adjusted margin – to get this ratio back down to an acceptable 15%, we’d need to haircut debt by 32%. Since total debt’s now 2.4 B (1.6 B loans + 0.65 B hybrid debt + 141 M new debt), we’re talking about a 754 M debt adjustment. I’ll be (extraordinarily) kind here, again – recognizing the (equity-like) advantages of hybrid debt, let’s back out 50% of this debt, which reduces my debt adjustment to just (!) 429 M.
Now, let’s turn our attention to earnings. LTM underlying diluted EPS (which bears no resemblance to actual IFRS EPS!) is currently running at 366 cents per share. I know far too many investors will focus on this (management) metric, to the exclusion of all else, so let’s not even argue the point…because it’s really not going to help the cause anyway! Earnings growth has steadily declined from 14.5% a couple of years back, to just 4.1% in the latest interims. [And this is (somehow) expected to revert to double digit growth by mid-2014!?] Considering the quality of current earnings growth – i.e. over-leveraged acquisition-led growth – I think a 10 P/E multiple’s more than adequate at this point. Put all this together & we have:
(EUR 3.66 EPS * 10 P/E + (4,939 M Revenue * 0.7 P/S – 429 M Debt Adjustment) / 92 M Shares) / 2 = EUR 34.80
My price target’s actually fallen significantly yoy, a function of poor cash flows & too much leverage – Aryzta’s way over-valued. And yes, we’re back to our now familiar food stock valuation debate… Aryzta investors are on a completely different fucking planet than me, happily paying a 17.2 P/E – looks pretty bloody expensive to me in light of Aryzta’s recent earnings history, not to mention the EPS (on which it’s based) appears almost entirely notional!? But investors are still fighting yesterday’s battle – surely food stocks will save them from economic disaster, so they’re worth any price…right?! And we know most investors will happily ignore poor cash flows & too much leverage pretty much forever – well, ’til something goes horribly wrong.
We shall see who’s right in the end. 😉 I obviously believe my valuation’s fair, but getting the timing right (as always) is nigh impossible. Maybe the shares will simply go nowhere for years instead, as intrinsic value slowly catches up with the share price – an all too familiar situation with over-valued shares ($KO & $WMT are famous examples). In that scenario, I’m sure shareholders will claim they’ve won our little battle…but they’ll definitely have lost the bloody war!
Price Target: EUR 34.80
Company: Permanent TSB Group Holdings
Price: EUR 0.112
Q1: Why on earth is Permanent TSB still a listed company? Q2: And why on earth does it still exist as a stand-alone bank?! Like Allied Irish Banks (ALBK:ID), the Irish government owns over 99% of the outstanding shares – so we have a tiny tail wagging this dog… And after everything the Irish tax-payer’s endured to date, this continuing state fantasy of a third force in Irish banking is a mockery. [Maybe I should say third & fourth force – with all & sundry pretending the credit unions remain in good health. The bailout of Newbridge Credit Union (absorbed by Permanent TSB!) is simply the tip of the iceberg]. Of course, this has been desperately seized upon by Permanent TSB management, with their (Good) Bank plus Two strategy designed to create the illusion of a (core) healthy bank…which is on the verge of rising like a phoenix, from the toxic dross which has been neatly carved out into Non-Core & AMU divisions. All that’s needed now is some fancy sleight of hand to try jam them down the taxpayer’s throat without anybody noticing.
Meanwhile, I’m astonished to how little progress has been made in the past year. Total operating income only increased due to a decline in ELG fees, while net interest margin (exc. ELG) is a puny 0.82%. Against this, management’s actually delivered an increase in (pre-impairment) operating expenses!? So it’s no surprise the bank can’t even make a pre-impairment profit… On top of this, we have further impairments of nearly a billion. The balance sheet’s no better – Core Tier 1 capital looks healthy enough at 13.1%, but equity/total assets is just 6.3% & the loan-to-deposit ratio’s a ludicrous 150%.
Equity now stands at EUR 2.4 billion, but we need to cross-check the current impairment provision (of 4.0 B). As before, I’ll apply a 60% haircut to the bank’s 7.9 B of impaired loans & a 30% haircut to 1.6 B of past due but not impaired loans – an equity adjustment’s obviously required. Bearing in mind the poor equity/total assets & loan-to-deposit ratios, continuing (pre-impairment) operating losses, and the further increase in impaired/past due (gross) loan balances, I’m not prepared to place more than a 0.5 P/B multiple on the bank:
(EUR 2.4 B Equity – (7.9 B Impaired * 60% + 1.6 B Past Due * 30% – 4.0 B Actual Provision)) * 0.50 P/B / 36.5 B Shares = EUR 0.016
Permanent TSB shares require a bloody health warning – they’re massively over-valued, and almost as toxic as their loan portfolio! Haven’t taxpayers lost enough already? They should steer clear…
Price Target: EUR 0.016
Company: Kentz Corp
Price: GBP 750p
And Kentz marches ever onward… Shareholder must now be breathing a sigh of relief that management emphatically rejected the Amec and M&W Group bid approaches last August. There was a pretty measly premium on offer, anyway – so I suspect even a protracted bid battle wouldn’t have produced an acceptable take-out price for shareholders. The excellent share price performance since is rousing confirmation of the wisdom of management’s decision. But now we obviously have to wonder if the shares have gotten ahead of themselves..?
Well, the business continues to go from strength to strength. We’ve seen some large wins in the past 6 months – the $640 million Ichthys LNG Project & the 190 M Qatar Petroleum contract, for example. All told, the company now enjoys a 4.1 B backlog (as of end-Feb, up 58% from Dec-2012), and a colossal 15.6 B pipeline (up 18% yoy). It also pulled off a 435 M acquisition of Valerus Field Solutions, which adds an additional 493 M of revenue (and 51.5 M of EBITDA). Capping this, final results were released last week, which confirmed 17.3% EPS growth.
The operating profit margin’s now 6.9%, on nearly 1.7 B of revenue, but this is tempered by continued working capital investment – not unusual for a company like Kentz. Considering the history of success, and the current backlog/pipeline, it might seem unfair to handicap my valuation because of this cash shortfall – but let’s be conservative here: The current operating free cash flow margin is 3.4%, so let’s average the two & utilize a 5.2% adjusted margin (or 85 M). But this allows us to be generous & assume 100% of the Valerus EBITDA will be realized as margin (at least on a cash basis). This bumps our adjusted margin up to 137 M, on a new revenue run-rate of almost 2.2 B – a 6.4% adjusted margin. This continues to deserve a 0.6 P/S multiple. With 400 M of the Valerus acquisition to be funded with a loan, interest expense should jump to around 21 M, a whisper over 15% of our adjusted margin. Therefore, we’ll no longer add a (positive) debt adjustment, but we can certainly still adjust for the company’s cash pile (247 M less 35 M earmarked for Valerus). Things are much simpler on the earnings front: EPS has increased by 17.3% & 19% in the past two years, and has generally exhibited similar/superior earnings growth in the past. I’ll stretch to a 20 P/E multiple for that kind of quality:
(USD 0.681 EPS * 20 P/E + (2,150 M Revenue * 0.6 P/S + 212 M Cash) / 118 M Shares) / 2 / 1.6638 GBP/USD = GBP 792p
Kentz is probably the type of company (& sector) investors instantly love or hate…but judging by the figures & its long-term record, it remains marginally under-valued at this point. Barring some unforeseen project disaster, it’s reasonable for shareholders to also expect another significant uplift in intrinsic value within the next year, based on the current backlog & pipeline. Not to get all starry-eyed, but it’s worth highlighting Kentz’ market cap is still under $1.5 B – a mere tiddler in the industry – which suggests its best growth opportunities may still be ahead, rather than behind it…
Price Target: GBP 792p
Company: GameAccount Network
Prior Post(s): None – New IPO (Nov-2013)
Price: GBP 140.5p
This recent IPO seems to have slipped under the radar for most people, and I suspect many don’t realize it’s really an Irish company (just look at the board). It’s also another IPO for the Smurfit family – Escher Group Holdings (ESCH:LN) is another example – who reinvented themselves in the past few years & became venture capitalists. GameAccount Network primarily focuses on its B2B business, providing gaming software systems & online gaming content, plus it has a smaller B2C business (MoneyGaming.com). It’s active in the UK & Europe, and has had surprising success in the US to date – for example, working with Betfair Group (BET:LN) & Trump Resorts last November to launch in New Jersey’s new online gaming market.
When it comes to IPOs, I think it’s more dangerous than usual to focus on EPS & earnings growth rates. Let’s focus instead on revenue & operating profitability: The company reported 10 month net revenue (to end Oct-2013) of GBP 10.9 M in its admission document. Pinning down profitability’s not so easy though – operating profit is 2.5 M, whereas operating free cash flow is 1.0 M (2.5 M if you ignore working capital changes). And management helpfully provides a ‘Clean EBITDA’ of 4.7 M. Now, I think we all know investors in the sector are perfectly happy to focus on (a high multiple of) EBITDA, but let’s compromise here: If you dig a little, there’s two major items we can add back to operating profit – 1.2 M of transaction bonuses & IPO costs, plus 0.2 M for legal & termination costs. That puts adjusted operating profit at 3.9 M, a hefty 36% margin – which I peg at a 3.25 P/S multiple (on a grossed up 13.0 M of net revenue).
Hark, I hear the outrage already..!? Yes I agree, investors would probably opt for (much) higher multiple, but look closer – 63% of GAME’s net revenues come from a single client! I consider my valuation multiple a reasonable compromise between higher sector multiples & the risk of a devastating client loss… Plus it allows me to (fairly) comfortably apply a (positive) debt adjustment: Based on the company’s 4.7 M of (annualized) adjusted operating profit (& zero debt), management could easily draw down 14.2 M of debt for expansion, acquisitions, etc. – as usual, I’ll haircut this by 50%. We can also adjust for 2.7 M of cash on hand, plus a net 13.2 M raised by the company in the IPO:
(GBP 13.0 M Net Revenue * 3.25 P/S + 15.9 M Cash + 14.2 M Debt Adjustment * 50%) / 55 M Shares = GBP 118p
GameAccount Network’s mildly over-valued at this point. But it’s nicely profitable, and has plenty of cash on hand for expansion (and/or acquisitions). Presuming a steady/substantial reduction in customer concentration (the NJ gaming launch will help, though it’s off to a slow start), we may reasonably anticipate accelerated growth in GAME’s intrinsic value, based on healthy revenue/profit growth & expanding valuation multiples.
Price Target: GBP 118p
OK, that’s enough for now. Good Christ, this was definitely one of my longest bloody posts ever! I swear, this series is really about valuation & investing itself – the parade of Irish companies seems almost incidental…
Now, here’s my usual (updated & re-ranked) TGISVP file: