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I expect to publish a performance-related post or two, but timeliness dictates I first take a closer look at what’s hot or not in The Great Irish Share Valuation Project. This year’s valuation phase was a 10 post epic stretching from Feb to May – so end-H1 presents a good opportunity to update share prices (plus some underlying valuation-related variables, primarily FX rates), and re-rank all 80 Irish shares in terms of their current upside potential. Obviously, I haven’t updated my underlying intrinsic valuations on the fly – that was never the intention – so pay close attention to any subsequent results & news flow for shares that might interest you. [But I generally find intrinsic valuations change slowly/incrementally]. I do have two last minute exceptions though:

Company:   Kentz Corp

Prior Post(s):   2012 & 2013 & 2014

Ticker:  KENZ:LN

Price:   GBP 926p

Well, this update’s pretty simple: Just a week ago, Kentz announced a recommended cash offer by SNC-Lavalin Group (SNC:CN) at GBP 935p per share. This seems to have taken the market by surprise, but it’s only an 18% premium vs. the 792p price target I published 3 months ago – arguably, one would expect such an additional control premium. I’ve even heard some PI mutterings about other potential bids… Yes, that’s always a possibility, but it doesn’t seem very realistic in this instance: With two other suitors rejected last year, I’m sure management explored all other possibilities before dropping their drawers for SNC-Lavalin.

Despite that, ideally I’d like to re-assess my valuation to determine whether a higher bid could be justified. But there’s been no subsequent results, except for a 10% increase in the company’s backlog (to $4.5 billion, plus a further $125 million contract announced in June). Which is clearly encouraging, but not much of a tangible basis for increasing my price target significantly. At this point, the most likely & logical price target is the recommended cash offer itself…

Price Target:   GBP 935p

Upside/(Downside):   1%

[NB: There are two other pending takeover offers to consider: i) A recommended share offer for Fyffes (FFY:ID) by Chiquita Brands International (CQB:US) – I expect this to close & already incorporated it into my 2014 FFY price target, and ii) a rejected share offer for Kenmare Resources (KMR:LN) by Iluka Resources (ILU:AU). I suspect KMR management (& shareholders?!) would prefer to go straight to hell, rather than accept this offer – unfortunately, the company’s current operating, cash & debt trajectory all suggest hell is actually a distinct possibility. I haven’t re-considered my much lower 2014 KMR price target at this point.]

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Company:   Petroneft Resources

Prior Post(s):   2012 & 2013 & 2014

Ticker:   PTR:LN

Price:   GBP 6.52p

Well, I’ve had plenty of Petroneft questions & debate from readers in this post (see comments) & others! Now we’ve had a fund-raising & a 50% farm-out of Licence 61 to Oil India (OINL:IN) – and possibly reached an inflection point – an updated valuation’s clearly warranted:

As of June 25th, total net outstanding debt was $24.9 million (from Arawak & Macquarie Bank). Which looks about right, as year-end debt was $30 M & cash was fairly minimal – the subsequent debt reduction was essentially funded by the net 4.8 M raised from the March placing. To this we can add the upfront farm-out payment of 35 M to be received from Oil India. Unfortunately, this is offset by a substantial dilution in asset value, with Licence 61/67 reserves reduced to 11.3 M of 1P & 72.2 M of 2P barrels of oil – which we’ll value at my usual ‘in-the-ground’ $10 & $5 per proved & probable boe of reserves:

($35 M Farm-Out Cash – 24.9 M Net Debt + 11.3 M boe Proved * $10 + 61 M boe Probable * $5) / 1.7107 GBP/USD / 707 M Shares = GBP 35.3p

So, Petroneft continues to look massively under-valued..!? OK, I know somebody’s dying to talk about Russian political risk, domestic Russian oil prices, the implied value of the Oil India deal, etc. Let’s skip that debate – note the farm-out was a totally distressed deal, my in-the-ground values are 100% valid in a global context (and I believe in the long-term power of convergence, smuggling, arbitrage, call it what you will), and (most importantly) my valuation incorporates a mere 20% of the company’s post-deal 3P reserves & exploration resources.

There’s also the cash situation – as PTR investors have painfully learned, cash (or lack thereof) is often far more relevant to market valuation & sentiment than underlying asset values. But what’s been overlooked in the past couple of years is Petroneft’s generation of 8 M of operating cash (on average) a year. Which actually translated into 3.6 M of free cash flow before interest expense (and 0.9 M after interest expense) in 2013! Now, we should see a reduction in operating cash flow (at least initially, due to PTR’s reduced stake in Licence 61), but the elimination of 3 M odd of annual interest expense should provide a decent offset. And Petroneft now has another 45 M on tap from Oil India for Licence 61 exploration & development expenditure (which doesn’t feature in my valuation).

If management exercises some prudence, it’s reasonable to assume the company can remain cash flow positive & debt free going forward, while Oil India funds a steady increase in production & (ideally) reserves. [NB: Plus we still have an activist, Natlata Partners, on the register with a chunky 14.75% stake – hopefully, they’re in for the long haul & will continue to hold management’s feet to the fire]. On the other hand, the share price still seems to be painting a very different picture..! But when a chart looks like this, the market will often hate a company & its share price long past what seems like an obvious inflection point:

PTR Chart

After enduring such a decline, many investors (new & old) can’t even stomach the thought of buying ’til the shares rally at least 100% – then gradually excitement, conviction, greed & momentum all start kicking in! My own portfolio holding in PTR was never very large (fortunately), and now amounts to a mere 0.6% – I’ve yet to decide if a value investing perspective’s at all useful in determining whether I should add to this position…

Price Target:   GBP 35.3p

Upside/(Downside):   442%

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Right, let’s get the crap out of the way – here’s the latest TGISVP Bum Dozen:

Bum Dozen

– Junior Resource Stocks:   Pretty much the usual suspects, and all of them basically worthless! Predicting their collapse is child’s play, of course – what actually surprises me is the continuing (& increasing?) market revulsion with the juniors right across the board. Perish the thought, but at this rate we’ll surely have muppets claiming they’re value investors next..!?

– Allied Irish Banks (ALBK:ID):   #hahahahahahahaha

– Merrion Pharmaceuticals (MERR:ID):   Merrion has negative equity & negative cash flow…yet it’s trading near 3 year highs! Do investors think it’s another tax inversion candidate?!

– Greencore Group (GNC:LN):   Greencore, you popinjay, you dodgy egg sarnie…how doth investors love you!? We’ve had another set of interims since – predictably, net debt’s increased yet again, though cash flow from operations has improved substantially (yoy). Judging by management’s enthusiasm, I expect the US to be a bottomless pit of investment for years to come – so operating free cash flow (of GBP 9.8 M) is unlikely to improve. In the most recent period, that unfortunately equates to just 1.2 times coverage of GNC’s net interest expense – that’s a skimpy bloody sandwich…

Now, let’s wash that nasty taste away with the latest TGISVP Top Dozen:

Top Dozen

[NB:  I own the bolded stocks – PTR (see above), DCP & ZMNO.]

– Donegal Investment Group (DCP:ID):   Love it…I currently have an 8.9% portfolio holding.

– Zamano (ZMNO:ID):   Ditto…I currently have a 7.6% portfolio holding.

– Junior Resource Stocks:   Somewhat ironically, this table’s also chock-a-block with the juniors! Heaven forbid, maybe we’ll finally reach a point where buying a basket of these stocks actually makes sense… But I don’t think we’ve reached a selling climax yet: Keep an eye on natural resource investment trust/companies (& closed-end funds), particularly those focused on the juniors – their share prices have already collapsed, but when you see their NAV discounts widen sufficiently (to 25-50%), that’s the real buying signal for the sector. Meanwhile, these suspects all appear to possess substantial underlying asset value – based on their reported reserves & resources – but continue to struggle with their cash burn rates & daunting fund-raising ambitions.

– REACT Energy (REAC:LN) & Formation Group (FRM:LN):   Frankly, these belong in the same damn bucket – they also have obvious tangible value & upside potential, but the cash & fund-raising required to meet their apparent ambitions is an equally large challenge.

– Ovoca Gold (OVG:LN):   Ovoca’s the odd man out…it’s controlled by the Russians, and that’s actually a far worse proposition than a company that’s merely operating in Russia! And results this week seem to suggest the company’s  liquid/realizable assets will soon be re-deployed into other Russian natural resource investments, so any prospect of shareholders receiving cold hard cash here appears increasingly remote.

– Norish (NSH:LN) & Prime Active Capital (PACC:ID):   Both are rather fascinating special situation stocks. Norish presents attractive upside, even as it stands – i.e. despite its astonishingly bad management team & strategy. And the stock could be worth a multiple of the current share price if its property portfolio (cold storage certainly couldn’t be described as a viable business) was sold off, and the proceeds re-invested into Townview Foods (a potential jewel in the crown) & share repurchases. Don’t hold your breath for management to do any of this though…an activist is obviously required here. On the other hand, PACC presents a far more immediate pay-out – its latest set of results makes for interesting reading: Shareholders will soon discover if their shares are worthless, or possibly worth a multiple of the current share price…

– Aer Lingus Group (AERL:ID):   And finally…Aer Lingus, which may be the last remaining Irish large-cap/blue chip bargain! Plus it offers an all too rare play on the Irish consumer & a potential inward surge of tourism. [With the Euro still holding up well, as I’d expected all along, Ireland’s one of the few European countries that’s now significantly cheaper for tourists (due to lower labour costs, etc.). This compares to the likes of Greece, for example, where rapacious unions still fight for high wages for the select few…while the rest of the country rots in near-permanent unemployment]. And speaking of, I’m amazed to see Aer Lingus management (which is otherwise doing a pretty good job, in my opinion) attempting once again to snatch defeat from the jaws of victory in its latest union dealings.

To pay public obeisance to the Expert Panel’s recommendations before obtaining definitive union agreement is a pathetic negotiating tactic. And insisting on a functioning internal dispute resolution mechanism in return for increased pension payments is even more ridiculous – what’s required from the union is absolutely no disputes, in return for a final pension payment (even if it costs more again). Once (or should I say if) this pension/labour dispute is put to rest, I’d actually expect a rapid & substantial improvement in shareholder value – this might be a substantial return of capital or a tender offer (to distribute surplus cash), and/or a potential new partnership or even a takeover offer..?!

Now, to wrap up, here’s my complete updated TGISVP file for your reference:

2014 – The Great Irish Share Valuation Project – End-H1

Cheers!

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