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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:   Tullow Oil

Prior Post(s):   2012 & 2013

Ticker:  TLW:LN

Price:   GBP 800p

Well, I’ve definitely offended TLW shareholders in the past two years – particularly in 2012, when I predicted a 339p price target (vs. a share price of 1543p at the time). WTF..?! But I must admit, their response was far more dignified than that of the junior resource hoi polloi – clearly a better class of people. [The other day, I was amused to read about a US small-cap CEO lamenting his shareholder base used to ‘include those nice guys at Fidelity’, but now it was ‘just guys in muscle tees from Jersey!’] Hmmm, maybe they just weren’t taking me too seriously? But at this point, I bet they’re taking their bloody losses seriously. 😉 Ouch, down nearly 50% in the past two years (after bouncing from a recent 736p low).

Well, Tullow obviously needs to pick up its game on the exploration front, results were decidedly mixed in 2013. [It’s interesting to see how exploration drilling success (or failure) is still such a primary share price driver for a company the size of Tullow]. At this point, continued exploration success in Kenya has become increasingly important for the company, with estimated gross recoverable resources of 600 million boe (potentially a billion boe plus) to tap. I suspect we’ll also see a continuing secondary focus on Atlantic Margins exploration, but other non-core exploration (& mature production) assets will be likely disposal targets. Which explains the latest annual report cover: Africa’s Leading Independent Oil Company – current production in West Africa, future potential in East Africa.

Meanwhile, production continues to increase, revenue now exceeds $2.6 billion, and the adjusted operating profit margin’s just over 45%. This is before an elevated level ($871 million) of exploration write-offs, plus a small disposal profit. But there’s obviously an underlying run-rate for write-offs (see 2009-11?), which probably pegs the margin closer to 40% – that deserves a 4.25 Price/Sales multiple. Net finance expense is 48 M, but I’m bemused to note underlying net interest expense is more like 148 M. [Most of the finance revenue’s exceptional, and I’m a little astonished to see over 100 M of interest expense capitalized! See Note 5. in the 2013 AR – the accounting treatment’s familiar (look at any property company’s accounts), but I don’t ever recall seeing an E&P company use it on such a grand scale]. However, Tullow’s generating 2.0 B of cash from operations, so it has ample flexibility to deal with its debt/debt servicing – no (negative) debt adjustment’s required here. I’m a little surprised management didn’t bother to provide an adjusted EPS – noting this, and its volatile basic earnings history, I won’t bother with a P/E multiple this year. In terms of net assets, though, we have gross cash of 353 M vs. gross debt (& net derivatives) of just over 2.2 B. Commercial reserves now stand at 382 M boe – let’s presume a 50:50 Proved & Probable split, and my usual $10 & $5 per boe (respective) in-the-ground valuations. We also have 1,026 M boe of contingent resources which I’ll include, but at a 75% haircut – i.e. a $2.50 per boe valuation. Put all this together & we have:

(USD 2,647 M Revenue * 4.25 P/S + 353 M Cash – 2,224 M Debt + 382 M Proved/Probable boe * $10 * 75% + 1,026 M Contingent boe * $10 * 25%) / 2 / 1.6575 GBP/USD / 910 M Shares = GBP 491p

Tullow’s remains way over-valued, which suggests more of the same – i.e. a steady grind lower for the share price… However, I suspect actual performance will pretty much depend on exploration results once more. The key question for investors will be: Can Tullow step up & produce sufficiently exciting news flow to arrest the current slide?

Price Target:   GBP 491p

Upside/(Downside):   (39)%


Company:   Orogen Gold

Prior Post(s):   2012 & 2013

Ticker:  ORE:LN

Price:   GBP 0.195p

For the past two years, I’ve assessed Orogen’s shares as (nigh on) worthless – the market responded accordingly, slicing the share price in half…each year! But I have to admit my interest was piqued a little this year. I notice the CEO hard at work, making himself available for regular stakeholder conference calls. I’m impressed…because the share price keeps going down! Yes, I should explain: a) if things were going horribly wrong, he’d simply avoid shareholders, b) if he’s a flimflam artist, surely he’d coax a higher share price out of investors (at least temporarily), or c) maybe there’s a tiny bit of substance here?!

I also warmed to the Chairman’s statement from the last interims – it’s refreshing to see his last para coming from a junior resource company. And he cited the old saying: ‘The easiest place to make a new mine is beside an old one.’ Unfortunately, this was followed by his resignation six weeks later (for personal reasons). That announcement & the steady selling of his 5.3% stake since has been another damper on the stock. [Though Anton Bilton – of Raven Russia (RUS:LN) – is still hanging in there with a 5.8% stake]. On the operational side of things, Orogen’s also stepped up in the past year – getting a lot more exploratory drilling work done at their Mutsk project (Armenia) & in the Deli Jovan district (Serbia). It’s interesting to note the high grades reported in Serbia, plus the fact both projects are near-surface.

But there’s no sign of any reserves/resources, the share count’s ballooned to 2.4 billion shares, and I’ve no idea how a sub-5 million market cap company would go about potentially raising the funds required for a mine!? Orogen has about 1.6 years of cash on hand & that’s about it… We’ll value it in the usual manner:

(GBP 1.6 M Cash + 0.65 M Placing Cash * 93% – 1.3 M Annual Cash Burn) / 2.4 B Shares = GBP 0.03p

Despite my warm & fuzzy comments (apologies for the momentary lapse), Orogen shares are still nearly worthless…

Price Target:   GBP 0.03p

Upside/(Downside):   (82)%


Company:   Irish Continental Group

Prior Post(s):   2012 & 2013

Ticker:  IR5A:ID

Price:   EUR 30.95

OK, I really don’t get it… Can someone please explain, and then explain again in words of one syllable: When it comes to foreign value-oriented investment managers, what the hell’s so goddamn sexy about Irish Continental? Franklin Templeton owns 16%, Marathon’s has another 7%, and Wellington keeps building its stake (now at 7.2%). Now, it’s obviously reassuring to have a long-standing (& shareholder-friendly) CEO in place – who owns almost EUR 100 million worth of stock – but I still can’t make the figures stack up.

Things are picking up nicely for the container & terminal division, but that’s a smaller part of the business (39% of revenue, but just 17% of operating profit). The main ferry division continues to bump along, with revenue up just 1.1%, and stronger operating profit growth attributable to reduced fuel costs. A 27% jump in adjusted EPS is impressive at first glance, but almost entirely due to the impact of the 2012 tender offer – underlying EPS growth was less than 1%! Let’s look to operating margins instead: Since the company enjoys generous operating cash flows & limited net capex, we’ll focus on FY-2013 operating free cash flow of EUR 35 million. This confirms a continued improvement in margin (to 13.2%), so let’s bump our valuation up to a 1.2 P/S multiple.

I consider this multiple generous, as: i) margin upside may be limited from here – looking back to 2007, the operating profit margin peaked at just over 14% (admittedly, revenue was almost a 100 M higher), and ii) back of the envelope, I reckon their average ferry’s now entering its late teens – sooner or later, capex will pick up for repairs/refits & then for lumpy new purchases. [Presumably the company will delay a new capex cycle well into a sustained upswing in revenue & profit]. Operating free cash flow can support the current 4.5 M interest paid bill fairly comfortably, so we’ll only adjust for 18.5 M of cash on hand & 17.0 M received since (final settlement of the Pride of Bilbao outstanding receivable). [I should highlight the net pension deficit of 37 M, though it’s nearly halved since its peak. However, this demands ongoing attention as the gross pension liability’s a rather scary 265 M]. This amounts to:

(EUR 265 M Revenue * 1.2 P/S + 18.5 M Cash + 17.0 M Receivable) / 18.4 M Shares = EUR 19.15

Irish Continental’s over-valued & perplexing. I mean, how do you explain the shares trading on a 2.2 P/S & a 22.6 P/E when underlying EPS growth’s sub-1%? I certainly can’t. Now, I don’t see the business throwing up any nasty operating surprises for investors, but the share price may end up waiting ’round a very long time for intrinsic value to catch up. Or it might get whacked if any of the main shareholders attempt to exit…

Price Target:   EUR 19.15

Upside/(Downside):   (38)%


Company:   Kingspan Group

Prior Post(s):   2012 & 2013

Ticker:  KSP:ID

Price:   EUR 14.48

Kingspan continues to make steady progress. No new acquisitions were announced in 2013, as the company digested its 2012 activity – but with nearly EUR 200 million of cash on hand, and decent interest coverage, I’m sure we’ll soon see them back on the acquisition trail. The stock’s a great play on Europe & the UK – but the US represents a huge long-term opportunity for the company, with only 13% of sales currently coming from N America. Of course, it’s a wonderful stock for the greenies & champagne socialists (OK, sorry, that phrase sounds a little dated now!) to buy – having Al Gore as an investor is a great advertisement for Kingspan. [Er, except he’s steadily reducing his stake now…] They must have a lot more of the folding stuff than I expected, because I pegged Kingspan as fairly valued last year & it’s bloody rallied 66% since!

Adjusted operating profit margin’s now improved to 6.9%. My prior assumption – that Kingspan will eventually regain its peak 13.3% margin – still looks pretty valid (unless Europe falls apart). Averaging the two, for a 10.1% margin, I’ll bump my valuation up a notch to a 0.9 P/S multiple. Interest expense is now 11.5% of adjusted operating profit, which is comfortable – let’s incorporate Kingspan’s (surplus) cash pile as a valuation adjustment. Also, with two years of 18% basic EPS growth under our belts, let’s now assign a P/E ratio: Noting adjusted diluted EPS is actually up 22.5% yoy, Kingspan’s prior growth history, and the wind clearly at their backs, a 20.0 Price/Earnings multiple’s appropriate here. Which gives us:

(EUR 0.536 Adj Dil EPS * 20.0 P/E + (1,790 M Revenue * 0.9 P/S + 197 M Cash) / 168 M Shares) / 2 = EUR 10.73

After last year’s rally, it’s no big surprise to see Kingspan’s fairly over-valued. But you’ll probably see investors stick with this stock as an economic momentum play, or for SRI reasons. Noting the current operating trajectory, intrinsic value may actually catch up with the share price in the next 18 months or so, anyway.

Price Target:   EUR 10.73

Upside/(Downside):   (26)%


Company:   Formation Group

Prior Post(s):   None

Ticker:  FRM:LN

Price:   GBP 2.05p

A reader alerted me to FRM – it’s a London-focused construction & property development/management company that looks British at first glance, but can equally be considered Irish. It’s been controlled by the Kennedy Family (Irish-born David Kennedy Sr is the patriarch) since 2007, and its biggest projects were Dublin-based (well, before things went horribly wrong…). And considering the sudden explosion of investor interest in Irish property (see here & here – an astonishing EUR 600 million of equity-funding announced in a single day!), I think any kind of Irish property connection merits a place in TGISVP! [And here’s a teaser – I’m debating whether I should include two other (non-REIT) Irish property companies in TGISVP…].

Formation actually started out as a sports management & marketing agency, founded by footballers Kevin Moran & Jesper Olsen, and agent Paul Stretford. [Moran & Stretford still have an 8.8% stake in FRM]. All sporting related assets & litigation, plus other non-core assets/activity, are now gone – the company operates close to break-even & the main asset’s a GBP 6.2 million stake in the Aldgate East development. The balance sheet needs some adjusting actually: i) Inventories of 3.9 M (investment properties in Bristol & Bradford) are funded by 4.3 M of non-recourse debt. These are being sold (or handed back to the bank), so 0.4 M of negative equity will be wiped shortly from the balance sheet, ii) the Aldgate East investment will be settled (for 6.7-6.8 M, presumably in cash) in the next few months – let’s presume a 0.5 M uplift from the current balance sheet value, and iii) 16.5 M treasury shares have just been sold to the Kennedy Family (increasing their aggregate stake to almost 60%), raising 0.3 M of cash. [NB: As of the final results, the company had 0.2 M of cash. And receivables & payables basically net off, though 0.8 M’s been received since (as a reduction in payables & 0.3 M of parking spaces)]. However, it would be prudent to adjust for a further 0.2 M of operating losses in the next year. [It will probably require at least another 50% revenue increase for FRM to break-even – fortunately, the business appears to have momentum, with 2013 revenue up almost 150% yoy].

Worrying about the Kennedy control is a little pointless here – because virtually all revenues come from Kennedy development projects also (plus the family’s the other shareholder in the Aldgate investment)! This shouldn’t come as a surprise, as this unusual set-up’s been in place since day one – when Columbia Design & Build was originally acquired from the Kennedys. Though I’m a little astonished to see it’s business as usual in the UK, considering the Kennedy loan issues in Ireland… But FRM’s a small company – there’s far more upside for David Kennedy to try raise new equity/rebuild the company (vs. screwing existing minority shareholders). It’s also a penny stock, which will soon be debt-free/cash-rich – so it could rally very nicely if it catches investors’ attention, particularly if there’s a whisper of getting involved in the Dublin market again. Reinvestment of the Aldgate proceeds will obviously be a key driver here… A 0.8 Price/Book multiple seems reasonable at this point:

(GBP 6.0 M Equity + 374 K Neg Equity Reversal + 500 K Aldgate Gain + 313 K Treasury Cash – 240 K Operating Loss) * 0.8 P/B / 221 M Shares = GBP 2.5p

Formation Group’s somewhat under-valued. On one hand, it’s a governance situation many investors wouldn’t touch with a barge pole. On the other hand, it’s on the verge of being a small, cheap & cash-rich situation – just as many investors will find it an easy stock to hold while they await the possibility of interesting news/deals to come…

Price Target:   GBP 2.5p

Upside/(Downside):   23%


Company:   C&C Group

Prior Post(s):   2012 & 2013

Ticker:  GCC:ID

Price:   EUR 4.608

I was a little dubious of C&C’s US cider strategy last year, particularly the price they paid (20.3 times EBITDA!) for the Vermont Hard Cider Company. [Though it’s charming to discover a cider brewery’s actually called a cidery]. Sure, (craft) cider’s getting some attention in the US, but that’s part of the whole craft beer juggernaut… Which is fueled by the rise of hipsterdom, I suppose. I mean, if you’re sporting interesting facial hair, you obviously drink an interesting beer – right?! When you’re not drinking a bourbon cocktail served by a mixologist, of course – btw did you know Jack & Coke’s a cocktail? [OK yes, I know Jack’s not actually bourbon…] While craft beer probably has some staying power (er, once it’s all bought up, desecrated & marketed by Big Beer), I suspect cider will always remain an occasional niche drink.

OK, back to the numbers: There was a nice 28% acquisition-led bump in interim revenue, but we see high acquisition costs reflected in an 8% operating profit increase & a mere 1% growth in earnings. Operating margin’s edged down to 21.6%, so let’s shave our valuation back to a 2.125 P/S multiple. C&C’s saving grace is its continuing financial strength – it still has plenty of cash on hand, and interest coverage is very comfortable at just 6.9% of operating profit. [Interest expense will rise, but higher operating profit should help]. EUR 193 million of incremental debt would increase that ratio to 15% – as usual, let’s utilize just 50% of that figure in our valuation, plus we can throw in C&C’s entire cash pile. As regards earnings, they’ve essentially remained flat for the past 18 months – it’s hard to see how management can now deliver against its 10-16% earnings growth forecast for FY-2014!? A 10.0 P/E is a logical multiple, which puts us at:

(EUR 0.278 EPS * 10.0 P/E + (550 M Net Revenue * 2.125 P/S + 162 M Cash + 193 M Debt Adjustment * 50%) / 347 M Shares) / 2 = EUR 3.45

C&C remains fairly over-valued, but it continues to command a surprising amount of overseas institutional interest. Maybe investors consider it a likely acquisition candidate, but I’m not sure I see a natural acquirer here. Yes, there’s been a never-ending wave of sector consolidation, but considering C&C’s 550 M of revenue & its portfolio mix, it seems like a small & awkward target for any of the big boys.

Price Target:   EUR 3.45

Upside/(Downside):   (25)%


Company:   Minco

Prior Post(s):   2012 & 2013

Ticker:  MIO:LN

Price:   GBP 1.925p

I’ve enjoyed making fun of Minco management for the past two years. In turn, they were unfortunately making fun of shareholders… Anybody who bought MIO as some kind of cheap resource stock investment really need their bloody heads examined – since it’s very obvious management will piss every last dollar away… The cash pile’s already down to $11.7 million, and burning at an annual 5.2 M clip. Which is probably kind – now they’ve completed the Buchans Minerals Corp acquisition, effort/expense now end up spread over the UK, Ireland & Canada!

Of course, they’ve nothing to show for their efforts to date – a redundant comment really, as history would suggest management will need another decade to make any kind of tangible progress. Plus there’s the small fact any resulting value will never end up in shareholders’ wallets anyway… It’s very tempting to say Minco’s worthless, but let’s be somewhat rigorous here – it’s reasonable to presume it’s currently worth cash, less cash burn, plus the value of its 30 M Xtierra (XAG:CN) shares:

(USD 11.7 M Cash – 5.2 M Annual Cash Burn + 30 M Xtierra Shares * CAD 0.14 / 1.0981 USD/CAD) / 1.6575 GBP/USD / 478 M Shares = GBP 1.3p

Minco remains well over-valued, with no end in sight for shareholders…

Price Target:   GBP 1.3p

Upside/(Downside):   (32)%


Company:   Botswana Diamonds

Prior Post(s):   2012 & 2013

Ticker:  BOD:LN

Price:   GBP 2.375p

Botswana Diamonds is another John Teeling red ink special…are you buying?! You gotta admire his gumption, though – he managed to sign a JV exploration agreement with Sunland Holdings, one of Alrosa’s (ALRS:RM) (presumably) innumerable subs. Of course, in subsequent press releases, this has been quickly elevated to ‘our JV partner Alrosa, the biggest diamond producer in the world.’ For the moment, Alrosa’s involvement actually appears limited to providing a small team to go prospecting with BOD over its licences. But as they’d say in Ireland, fair fucks to Teeling for nailing the deal..! Unfortunately, this doesn’t change BOD’s dire financial situation. Its GBP 0.3 million of cash on hand is dwarfed by the company’s net payables & annual cash burn:

(GBP 273 K Cash – 448 K Net Payables – 767 K Annual Cash Burn) / 169 M Shares = Zero

Botswana Diamonds is totally worthless – it’s amazing this company still has a 4 M market cap, even more so that it actually has shareholders! I mean, who voluntarily calls a broker & buys BOD, of all the stocks in the world?! Surely there’s some charity which takes care of people like that..?

Price Target:   Zero

Upside/(Downside):   (100)%


OK, time to wrap this up again for the moment – here’s my usual (updated & re-ranked) TGISVP file:

2014 – The Great Irish Share Valuation Project – Part VII