It’s already well over a fortnight into the new year…time to scramble & take a closer look at last year’s portfolio performance! Let’s begin with The Great Irish Share Valuation Project – for reference, here’s my H1-2014 review. First, some notes:
– I obviously referenced the latest share price when assessing each company’s individual valuation & upside potential. And March-30th was an appropriate mid-point date for the entire exercise, so I’ll adjust my benchmark accordingly: Keeping things simple, I’ll use the closing price level on that date as a starting value for my ISEQ Index performance.
– I should highlight the benchmark return was 4.7% (from March-30th ’til year-end). Which is substantially lower than the ISEQ’s actual FY-2014 performance of 15.1%** (the Irish market obviously enjoyed a great Q1 surge), though it’s clearly an appropriate benchmark to use. Sure, doing TGISVP on a nice & neat calendar year basis would be awesome…but that would require me conjuring up six/seven dozen write-ups & valuations, from scratch, on New Year’s Day! It’s never gonna happen…
[**Ireland was a top quintile global performer in 2014. And, of all countries, Argentina topped the charts with a spectacular 54.5% return! Which might well suggest buying Russia today (down 44.9% last year) could ultimately prove to be a very brave & smart decision, eh?!]
– During H2-2014, I published some fresh TGISVP posts/files – with updated share prices, FX rates, rankings, etc., plus a handful of new valuations & price targets. This performance post, however, will obviously reference my original share prices & price targets (for all 81 companies I covered).
– fyi Here’s my latest updated TGISVP post (as of New Year’s Day) – you’ll notice it now only includes 77 companies, as:
ii) TVC Holdings (TVCH:ID) delisted, after returning the majority of its assets to shareholders. Here, I’ll assume an exit value of (EUR 66.2 cts + 0.101 UTV Media (UTV:LN) shares + 9 cts approx. residual NAV) per TVCH share.
iii) REACT Energy (REAC:LN) and US Oil & Gas (USOP:G4) are suspended, as I highlighted here. I’m not at all persuaded we’ll see these suspensions lifted, but since they only happened (in Dec), I’ll be kind & use last quoted share prices (GBP 11p & GBP 24p, respectively) as exit values here.
Right, moving on – let’s look a closer look at the individual losers & winners for the year. [NB: We’re only looking at gains/losses since each stock’s TGISVP write-up (i.e. basically, since Feb-May), so these won’t necessarily correspond with other FY-2014 performance tables you might see (though I’m sure they’ll overlap)]. First, let’s cover what I call the Sewer Shit:
Well, most of these aren’t even worth a sentence each…you know the ones I mean, the usual junior resource stock no-hopers! Though kudos to John Teeling who managed no less than three losers on the table! [Clontarf Energy (CLON:LN), Petrel Resources (PET:LN) & Connemara Mining Company (CON:LN)]. And I’m sure this isn’t the first time…surely investors should have learned their lesson by now?!
Even companies with genuine underlying asset value, like: i) REACT Energy (REAC:LN) – approved/operational projects, or ii) Providence Resources (PVR:LN) & Kenmare Resources (KMR:LN) – actual reserves/resources, can end up getting hammered when they’re burdened with continuing negative cash flows & pretty insurmountable funding challenges. Well, Kenmare did actually raise a huge amount of funding over the past number of years, but it also illustrates the Catch-22 junior resource stock investors suffer almost inevitably:
The odds are already stacked against junior explorers ever achieving any kind of real exploration/operational success. And all too often, success still ends up as failure, in financial terms… Because raising the required project/capex funding to exploit the company’s assets proves impossible, or it means existing shareholders get diluted to near-oblivion. The alternative is debt (even more impossible to obtain), but shareholders then risk getting wiped out if things go wrong. Kenmare already managed the former, and now risks the latter… But a lot of shareholders have desperately pinned their hopes on the long-running possibility of a bid from Iluka Resources (ILU:AU). I wouldn’t be so hopeful – if they’re still keen on a deal, Iluka will be far more focused on negotiating with the bankers now, not shareholders!
Two final disappointments: Prime Active Capital (PACC:ID) – I was bearish on its cell phone store business, but bullish on its valuation & the possibility of a sale. In due course, a sale was announced & the USD 10 million headline price tag was promising! However, as per the press release & subsequent interims, shareholders end up with just EUR 1.5-1.6 million of cash/equity – at this point, I still don’t fully understand the numbers/situation here. Needless to say, the share price kept falling…even a measly EUR 0.9 million market cap is generous, considering the overall failure & ongoing costs of the company.
And GameAccount Network (GAME:LN) strikes me as even more egregious… I’m bullish on the business model – noting the political clout the US casino industry wields, and the schizophrenic attitude American regulators exhibit towards online gaming, I expect casinos will be granted an (unfair) first-mover advantage if/when online gaming is (progressively) approved nation-wide. [NJ is a good example]. In that scenario, GAME’s a good actor & is perfectly positioned to exploit multiple/lucrative opportunities accordingly.
Meanwhile, shareholders must be feeling somewhat misled… GAME listed in Nov-2013, with up-to-minute financials confirming net revenue of GBP 10.9 million for the first 10 months of the year. Assuming a 13 million annual revenue run-rate seemed perfectly reasonable – I mean, the company was priced for a 75 million market cap! Unfortunately, the FY-2013 results (released Apr-2014) revealed a measly 1.4 million of revenue for Nov/Dec-2013. Maybe it was a timing issue…er, except the subsequent interims reported a mere 4.2 million of revenue (down 54% yoy!). No great surprise then we see the share price has collapsed 76% from its Jan-2014 high…
And now let’s enjoy some quality time with our Top Trumps:
I’m delighted to see two of my portfolio holdings listed here – NTR plc & Zamano (ZMNO:ID) – and also Total Produce (TOT:ID), which I sold off last year for a hefty (& pretty low-risk) profit. Since my Aug write-up, NTR announced it was exploring a sale of its US wind farms, and then appointed Marathon Capital (in Nov) to formally launch a sale process – assuming a satisfactory sale & unlocking of value, the company also intends to provide further significant liquidity to shareholders. The shares have enjoyed a nice surge in the past 4-5 months, but noting these very tangible developments, I’m bemused to see it retrace almost 15% from its Sep high!? How soon some investors get bored…
Zamano also enjoyed a tasty increase in its share price – like NTR, it still remains significantly undervalued. It’s worth highlighting the company’s recent IMS, which was pretty encouraging – both in terms of the Vodafone/direct carrier billing news & the ongoing growth in both revenues and profitability. We can look forward to seeing FY-2014 results by March, at the latest – cash generation will be particularly interesting, with cash already comprising nearly 30% of ZMNO’s current market cap.
In contrast, much of Total Produce’s opportunity now lies behind it… Medium-term earnings growth has been limited (particularly when you note the company’s acquisition spending), so the shares now trade much closer to fair value. And share repurchases are unfortunately far less attractive now – considering TOT traded at a ridiculous EUR 0.40 less than 30 months ago, management wilfully & idiotically missed out on a huge opportunity here. Its one other opportunity also lies in the past, but fortunately it can be revisited…a re-merger with sister company Fyffes (FFY:ID) would capture attractive synergies, and now makes perfect sense after Chiquita Brands International (CQB:US) recently dumped Fyffes at the altar.
Aminex (AEX:LN) & Kentz Corp (KENZ:LN) made the table – they’re actually the only resource-related stocks to clock a positive return for the year! Noting its pre-bid share price & the subsequent sector carnage, I think we can safely assume Kentz would have otherwise finished the year in negative territory – shareholders should thank their lucky stars! On the other hand, Aminex did nothing for most of the year, then exploded higher (by almost 300%!) in Sep. This can be traced back to a fresh investor relations blitz, where management (in the space of a week!) upped its estimated resource potential for its Tanzanian Ruvuma PSA from 1.2 Tcf to 1.9 Tcf to 2.3 Tcf. [Worth noting a brand new team came on board just six months earlier..!] Since junior management teams always believe they’re sitting on millions of boe, the investor response & sheer scale of the rally is mystifying. A slow & painful reversal wouldn’t surprise me in the least…in fact, maybe not so slow, AEX is already down 27% this year!
On the flip-side, since October, Ryanair Holdings (RYA:ID) & Aer Lingus Group (AERL:ID) have surged as collapsing oil prices & sentiment really started to sink in with investors. The Ryanair rally I certainly didn’t see coming, but I’ve been consistently bullish on Aer Lingus as a cheap Irish play & a potential takeover target. This has now come to pass, with International Consolidated Airlines Group (IAG:LN) (headed by ex-Aer Lingus pilot, Willie Walsh) now apparently working on its third bid for the company since mid-December. [AERL’s up another 12% this year]. This certainly isn’t a done deal yet, and we really haven’t heard from major shareholders (i.e. the Irish government & Ryanair) at this point. But the government would be glad of the money (subject to certain routes/competition assurances?), and it would offer a potential face-saving exit for Ryanair, which has pretty much exhausted all avenues now in terms of hanging on to its shareholding (not forgetting its own prior bids were peremptorily rejected!).
DCC (DCC:LN) & Paddy Power (PWL:ID) are excellent long-term growth stories, coupled with fortress balance sheets. DCC is a consummate roll-up machine, and its consistent execution has been progressively rewarded this year by investors in terms of a premium multiple. However, recent investor enthusiasm for Paddy Power has been more surprising, as the company’s endured a long & unexpected run of bad luck since 2013 – while FY-2013 net revenue grew 12%, diluted EPS growth was only 2%. Things got worse in H1-2014, with revenue up just 4% & earnings going into reverse (down 19%). A worrying trend (not to mention a rather unexpected CEO change)…except management pulled a rabbit out of the hat with their H2-2014 outlook, highlighting 45% growth in revenue for the start of the period & expected full year EPS growth in the mid-teens. The recent IMS confirmed this with 38% revenue growth & expected EPS growth in the mid/high-teens. If anything like this run-rate can be maintained into 2015, Paddy Power looks back on track & priced accordingly.
I can’t say the same for Glanbia (GLB:ID) & First Derivatives (FDP:LN), with both trading far north of my estimated fair values. In fact, investors are even more besotted with them now, with GLB up 25% in the past 2 months & FDP powering ahead with a 35% rally in the past 3 months. Glanbia now trades on a 25+ P/E – that’s for a business that delivered 8% EPS growth in 2013, expects 8-10% growth for 2014, and promises the same 8-10% annual growth ’til 2018!? GLB investors are like dairy farmers at a farm auction, dazzled by the 2015 milk quota abolition & all bidding top euro…
First Derivatives strikes me as even more ridiculous – it trades on a 42+ P/E & a 3.9 P/S multiple, with investors perhaps seduced by Big Data dreams. Those metrics might make sense if FDP was a red-hot software company…but it’s not, it’s actually a consulting company (74% of revenue), with a sub-12% operating margin (again, consulting!), 6-9% diluted EPS growth in the past 18 months, and barely breakeven cash flow (exc. property disposals).
Last & certainly not least, we have Datalex (DLE:ID), which continues to significantly out-pace my fair value price target. As I’ve acknowledged before, Datalex presents a specific valuation challenge – on the one hand, the current P&L would suggest it’s over-valued, but on the other hand it’s obvious a significantly higher percentage of revenues should fall straight to the bottom line in the future. The company also presents a rather unique M&A target, which probably explains the presence & patience of its existing major shareholders. For new shareholders though, the current share price may offer little in the way of an adequate margin of safety.
To Be Continued…