Aryzta, Celtic Phoenix, Formation Group, Fyffes, Hibernia REIT, Independent News & Media, Irish shares, Irish Stock Exchange, Irish value investing, ISEQ, Kerry Group, Kingspan Group, Mainstay Medical International, Origin Enterprises, TGISVP, The Great Irish Share Valuation Project, WisdomTree ETF
Um, apologies, the blog’s been quiet since early last month – though I’ve certainly been keeping up with readers via Twitter…Good Lord, I’m now up to 25K+ tweets!? Actually, I’ve been more than usually focused on stocks both old & new in my portfolio. Which seem to be increasingly bifurcated between special situation stocks where I continue to engage with/push management to enhance and realise shareholder value, and growth stocks (at the right price) where I can sit back & watch smart management compound shareholder value over time.
Hmmm, put it like that & growth stocks seem like the far more compelling choice..!? Though in reality, each presents their own unique risks/opportunities. And for me, somewhat perversely, one tends to inspire the other…dealing with recalcitrant management can inspire me to seek out smartly managed growth stocks, but actually seeing it done right, such companies also highlight the compelling value lurking out there just waiting to be tapped (sometimes, literally, overnight) if only management would come to their senses (or a third party steps in & does it for ’em).
Anyway, a little break’s a good thing – and we’re all feeling much better now, with most markets recovering their Jan/Feb losses this month. Hopefully, this new-found momentum will continue (at least ’til the usual ‘Sell in May & go away’ debate!), as markets generally remain flat/down over the past year – it’s been a tough period for nearly all concerned (spare a thought for those poor billionaire hedge fund managers!), clearly exacerbated by oil’s elevated volatility & influence.
And as promised, a good time to kick-off The Great Irish Share Valuation Project, with the ISEQ on a breather for the past year (down 0.6%) (but still over 40% off its all-time high, as set nearly a decade ago now), and the Celtic Phoenix offering more opportunity than ever… Long-time readers will be familiar with TGISVP (here’s my kick-off posts from 2012, 2013 & 2014), where I attempt to analyse & value every listed Irish stock out there (and usually piss off some tired & emotional shareholders in the process). The great thing about the Irish market is its size…one of the few globally (with about 70-80 stocks, in total) which actually presents investors with the opportunity to really get down & dirty with every single stock. And it’s a real stock pickers’ market, as I’ve previously highlighted:
‘And it’s worth noting brokers often segment the Irish market into very different sector/exposures. And so, accordingly, it tends to attract pretty dissimilar investor constituencies, who may only focus on: i) a handful of the largest caps, regardless of valuation & exposure, ii) stocks which (may) offer cheap/alternative access to overseas growth (a surprisingly large number of Irish companies are UK/Europe/globally focused), iii) stocks offering domestic exposure (notably, economic pure-plays are actually pretty rare), iv) a listed commercial & residential property sector that’s only emerged in the past couple of years, and finally (& perhaps most notoriously) v) a (junior) resource stock sector that’s been decimated in the last few years.‘
And despite the exclusive Irish focus of these posts, I’m also hoping TGISVP will prove useful & interesting for international investors – over the years, such readers have been kind enough to comment & email their appreciation of the wide variety of valuation techniques & perspectives I employ here across a really broad spectrum of companies. And I have to ask, if you’re not particularly interested in Irish stocks…well, why not?!
Again, my Celtic Phoenix post highlights the fantastic performance the Irish market’s clocked up – blowing most markets out of the water globally, with five consecutive years of gains. And notably, the gains on my TGISVP Alpha & Beta Portfolios have (generally) far out-paced the ISEQ itself – culminating in a magnificent 32.5% & 38.5% out-performance for my TGISVP Alpha & Smart Alpha Portfolios, respectively, in 2014 (full post here).
All in all, a great sales pitch, eh..?!
OK, almost kick-off time, just a few last/important notes to get through (intro to my first ever TGISVP post is useful reading too):
– An Irish Company: Any company which conducts a major portion of its business in Ireland, is genuinely headquartered in Ireland, and/or whose management (directors, shareholders or history) are predominantly Irish.
– I must have about eighty companies to tackle here, and I’d like to do justice to each of them, so ongoing TGISVP posts will follow over the next few months. And note I’ll pick stocks in random order…just to spice things up!
– For each stock, I’ll include a corporate/IR website link, generally the most active ticker (many have Irish/UK/even US listings), and link(s) to prior TGISVP posts, etc. which are definitely worth reading as additional reference. Note my exclusive focus on recent news/results & valuation, so I obviously encourage you to do further research on each company’s management, business & history.
– Can’t STRESS this one enough: If I identify a stock as under-valued, it doesn’t necessarily mean I’d touch it with a barge-pole, regardless of upside potential…obviously, there are far more quantitative & qualitative factors to consider before buying a stock!
– I’ll include an (evolving) TGISVP Excel file in each post with detailed figures & calculations – please feel free to review/agree/disagree with my assumptions, and/or revise valuations for your own personal use. I primarily use Last Twelve Months financials (see latest annual/interim results), ‘less I specify something different…if you can’t understand/confirm any figures, just comment/email me.
– Most importantly, read my Disclaimer!!! Ultimately, this is purely a research exercise, and all valuations are necessarily rough & ready. Let me repeat: If I buy a stock, I’d perform far more detailed research first…you should too!
Company: WisdomTree ISEQ 20 UCITS ETF (WTIE:ID)
Last TGISVP Post: Here
Market Cap: EUR 28 Million
Price: EUR 12.426
This ETF’s the only non-US listed Irish fund available, but its market cap/AUM also remains far smaller than the alternatives, New Ireland Fund (IRL:US) or iShares MSCI Ireland Capped ETF (EIRL:US). But notably, WisdomTree took over here last year, and if anybody’s qualified to put some marketing muscle & momentum behind the fund, they are…so stay tuned! TGISVP isn’t about predicting the ISEQ itself, so I’m assuming no potential upside/downside here (as the share price approximates NAV*):
EUR 12.426 NAV * 1.0 P/B = EUR 12.426
[*I’m fudging NAV here slightly, to actually equal the current share price.]
However, if you’re bullish on the Irish market (yes, I remain bullish!), this ETF (& its rivals) obviously represent a quick/easy way to gain exposure…albeit it’s large-cap exposure, as the top 5 holdings comprise almost 75% of NAV!
Price Target: EUR 12.426
Company: Formation Group (FRM:LN)
Last TGISVP Post: Here
Market Cap: GBP 14.3 M
Price: GBP 6.5p
At 2.05p per share, I tagged FRM as a ‘penny stock, which…could rally very nicely if it catches investors’ attention’. Little did I see it trading sideways for a year…only to transform, in a mere eight months, into a bloody six-bagger (hitting a 12.7p high). A typical case of small PIs losing their friggin’ minds!
Formation is: i) a governance nightmare, with the Kennedy family owning a 60% stake & activities devoted primarily to related-party deals/JVs, and ii) essentially, a construction management company (a perpetually unattractive business for most investors) that still can’t turn a profit, despite the ramp-up in revenue…and risks. Granted, the Kennedy Show works both ways, as FRM earned a quick £2 million on this related-party deal & the construction business arguably covers an otherwise substantial overhead burn for such a small company. [Though if we exclude the sweetheart profit, FRM’s actually made zero progress vs. my £6.9 million adjusted equity estimate from two years ago]. But overall, considering the improved investor sentiment & likely near-term news/profits from its Iverson Road development, a 1.0 Price/Book ratio now seems appropriate (based on adjusted equity, to reflect the post year-end write-back of non-recourse Dunbar Assets loans):
(GBP 7.6 M Equity + 1.0 M Neg Equity Reversal) * 1.0 P/B / 221 M Shares = GBP 3.9p
PIs got well ahead of themselves here…despite being sliced in half since the Jan high, FRM remains substantially over-valued. And if 6.25-7.25p support breaks, we’ll probably see another nasty shake-out. But the elevated share price may still be good news for management, as a substantial fundraising might be possible, which would help close the value gap here (as NAV would increase) – and with two well-known Irish politicians appointed since as directors, a new focus on Irish investors/projects wouldn’t be surprising, though Greater London residential also remains attractive.
Price Target: GBP 3.9p
Company: Kingspan Group (KSP:ID)
Last TGISVP Post: Here
Market Cap: EUR 3,910 M
Price: EUR 22.05
Kingspan’s firing on all cylinders… The transition towards more energy efficient buildings & building techniques – in both developed & (increasingly) emerging markets – provides an attractive secular growth tailwind, while relentless industry consolidation underpins an eat or be eaten strategy. Management capitalised on the company’s financial strength (as I’d expected) in late 2014, with an astonishing six month blitz of acquisitions. US/Canadian acquisitions propelled North America to 20% of total revenue, while buying Joris Ide rounded out pan-European exposure & delivered a 25% step-change in revenue. [Astonishingly, KSP still finished FY-2015 with net debt at just 1.0 times EBITDA]. With two acquisitions only closing in H1-2015, annualised H2 results offer a better run-rate, in terms of revenue/profitability.
That pegs current trading margin at 9.4%, on €3.1 billion of revenue, leaving Kingspan’s peak 13.3% margin (from 2006) well within its grasp again. A fairer valuation would average the two – implying an 11.3% margin, which deserves a 1.125 Price/Sales ratio (noting the company’s superior cash generation). [NB: Observing market/M&A multiples over the years, per my rule of thumb a 10-12.5% operating margin deserves a 1.0 P/S multiple (on average). And higher margins justify expanded multiples, e.g. a 30% margin might deserve a 4.0-4.5 P/S multiple. Also, see my related DCC notes & commentary here]. And with finance expense a mere 5% of trading profit, Kingspan’s got substantial firepower to pursue more earnings-enhancing acquisitions (without impacting valuation, or imposing undue financial risk). We should upgrade our valuation accordingly, by: i) adjusting for (surplus) cash, and ii) adjusting for incremental debt potential of €0.6 billion*, which would increase finance expense (at a standard 5%) to a still-manageable 15% of trading profit – but we’ll apply my usual 50% haircut to be conservative. [*Here’s the math: (288.4 M Trading Profit * 15% – 14.8 M Finance Expense) / 5%]. Recognising the current & potential growth trajectory here, we should also factor/average an appropriate earnings multiple into our intrinsic value estimate: With earnings up 21% & 70% in the last two years, just about any multiple’s justified…again, to be prudent, we’ll limit ourselves to a 20.0 Price/Earnings ratio, based on a 123 cents adjusted diluted EPS H2-2015 run-rate:
(EUR 1.23 Adj Dil EPS * 20.0 P/E + (3,078 M Rev * 1.125 P/S + 212 M Cash + 569 M Debt Adjustment * 50%) / 177 M Shares) / 2 = EUR 23.50
Kingspan’s now marginally under-valued – quite surprising for an outstanding growth story which offers an attractive combination of organic growth & a steady diet of acquisitions. Management’s discipline financing this growth is remarkable too – they’ve increased the outstanding share count a mere 6% in the past decade, relying instead on the judicious use of leverage. KSP’s never really been a cheap stock, but noting its balance sheet strength & capacity to generate cash, plus the white space still ahead (for example) in N America & the Rest of the World, the current share price & price target are well deserved. I wouldn’t be at all surprised to see them marching ahead together in the years to come.
Price Target: EUR 23.50
Last TGISVP Post: Here (also, see here & here)
Market Cap: EUR 2,932 M
Price: EUR 33.03
[NB: The ARYN:VX ticker’s more liquid, but the company still prepares EUR accounts, so I’m referencing the Irish quote for convenience.]
Well, that’s some piss-poor decision-making we’ve seen here in the last couple of years. I already described the €0.7 billion Cloverhill/Pineridge acquisitions as an overpriced & desperate attempt to maintain revenue/earnings growth, but investors suspended their disbelief for another year. The rot finally set in with the purchase of a 49.5% stake in Picard, for almost €0.5 billion – investors didn’t appreciate the diversification into a minority stake in a retail business which offered no real synergies, not to mention another substantial increase in leverage (albeit, mostly on a non-recourse/non-consolidated basis). The sale of Aryzta’s majority stake in Origin Enterprises (OGN:ID) (to help fund these acquisitions) also diluted EPS, while underlying earnings growth itself evaporated…clearly, this wasn’t what the average Aryzta investor signed up for!? Not surprisingly, the share price ended up sliced in half, as I’d predicted at EUR 63.15 per share.
With Origin gone, the P&L’s a different beast: Revenue’s significantly lower (despite acquisitions), but headline EBITA margin’s much higher (at 13.6%, inc. Picard)…however, operating free cash flow (operating cash flow, less capex & intangibles) margin of 8.1% still falls well short. But with the board now conceding cash generation is more important than earnings growth/guidance, this gap should close, so a 1.0 P/S multiple (based on an average 10.8% margin of €425 million) seems fair at this point. Unfortunately, gross debt now exceeds €3.1 billion (inc. €0.8 billion of hybrid debt) – we should haircut our valuation accordingly, to reflect the dilution & financial risk this leverage poses (as would a potential acquirer). With net finance cost (inc. hybrid coupons) of €130 million amounting to 31% of our average margin, debt would need to be halved to hit a more manageable 15% – though bearing in mind some of that debt’s subordinated, plus cash on hand, let’s back out 50% of the hybrid debt – net-net this implies a €1.2 billion negative debt adjustment. As for earnings, that’s yesterday’s story, so a 10.0 P/E is perfectly adequate (based on a prospective 375 cents adjusted diluted EPS):
(EUR 3.75 Pros Adj Dil EPS * 10.0 P/E + (3,922 M Revenue * 1.0 P/S – 1,207 M Debt Adjustment) / 89 M Shares) / 2 = EUR 34.05
Aryzta’s actually fairly valued now – but investors have little to look forward to here in the short term. The CEO, Owen Killian, has dug a real hole for the company that’s gonna be painful to climb out of…and if that’s not enough, the fact he was abruptly forced to sell most of his equity stake to meet a margin call last month is more than reason to fire him on the spot. Bizarrely, the idiot board chose to replace his shares with fresh options instead, so he remains as a lame-duck CEO. But an eventual management reshuffle wouldn’t come as a surprise, nor would a classic kitchen-sink write-down…except that won’t help relieve Aryzta’s debt burden.
Price Target: EUR 34.05
Company: Origin Enterprises (OGN:ID)
Last TGISVP Post: Here
Market Cap: EUR 856 M
Price: EUR 6.814
Origin also recently hit my previous Price Target (of EUR 6.34 per share). Adverse weather & squeezed farm incomes may be an obvious culprit, but management deserves some blame too… Here’s the latest annual FY-2015 report (see p. 29): A 15.0% EPS CAGR is touted by management, stretching back to the original IPO in 2007. Except the company enjoyed massive post-IPO/acquisition-led growth the following year – re-base accordingly to 2008 & the CAGR nearly halves to 8.5% pa. And that includes plenty of other moving parts/JVs/associates, which the company’s been slowly divesting since…2011 offers a pretty clean comparison vs. 2015, with Agri-Services revenue/operating profit growth halved again, notching up an average 4.2% pa rate over the last 4 years! Unfortunately, none of that includes the significant FY-016 earnings reversal management’s now flagged…
The moral of the story: Don’t pitch yourself as a growth stock, unless you’ve got the numbers & strategy to back it up! Growth in the fertiliser game’s all about consolidation, whereas Origin’s been mostly all about divestment – fortunately, with Valeo now sold, only animal feed’s left as a potential non-core asset – with just €80 million spent on acquisitions in the past three & a half years. Time for a step-change… Overall, it’s a pretty stable core business, so management needs to start milking it for cash to return to shareholders (via dividends/buy-backs), or else accelerate growth by ramping up its leverage & acquisition pipeline/spending (more acquisitions, bigger acquisitions, or both…) – at this point, I’d still prefer a bet on the latter.
Post-divestments, Origin’s adjusted operating margin’s a little lower at 5.3%, which now deserves a 0.5 Price/Sales ratio. But we should also reflect a much improved balance sheet (& acquisition capacity) – since the business is seasonal, let’s adjust for average unrestricted cash on hand (in the last year) of €117 million. And with actual interest paid amounting to just 8.3% of operating profit, debt could increase an additional €101 million (again, at a 5% rate) & still leave interest coverage at a manageable 6.7 times (i.e. 15% of operating profit) – as usual, to be prudent, we’ll haircut this debt adjustment by 50%. And in terms of profitability, management’s guidance of 52 cents adjusted diluted EPS will hopefully see earnings re-based for growth, so a prospective 12.0 P/E now seems appropriate:
(EUR 0.52 Pros Adj Dil EPS * 12.0 P/E + (1,434 M Revenue * 0.5 P/S + 117 M Avg Cash + 101 M Debt Adjustment * 50%) / 126 M Shares) / 2 = EUR 6.64
So, Origin’s fairly valued here – plus we no longer face an over-hang, with Aryzta (see above) exiting its majority stake last year. Looking ahead, hopefully we’ve reached an inflection point, with management now fully focused on leveraging the core business. And Origin’s agronomy unit may be an intriguing wild card/kicker, as we see opportunities (& unicorns) blossom elsewhere in agri-tech/big data. Again, this depends on management…they still need to recognise the potential value in granting it more autonomy, rather than treating it as simply a fertiliser sales & marketing unit.
Price Target: EUR 6.64
Company: Mainstay Medical International (MSTY:ID or MSTY:FP)
Last TGISVP Post: Here
Market Cap: EUR 69 M
Price: EUR 16.10 (average of MSTY:ID & MSTY:FP prices)
[NB: MSTY trading volume/price action remains sparse & unreliable – a share price average provides a more sensible reference price.]
I know the biotech/medical device sectors have (generally) been ultra-popular, but I still struggle to understand why investors would buy MSTY over the last couple of years…cash burn’s high, but progress has been pretty slow. Granted, Australian/European clinical trials have produced clinically important/statistically significant results, ISO certification has been obtained, and hopefully we’ll see CE Mark approval soon enough – but enrollment’s only beginning for US trials now, so potential FDA approval’s still a couple of years away.
For the moment, I continue to evaluate Mainstay in cash terms: It has $16.6 million of cash on hand, but debt’s already reached $10.4 million, so it’s prudent to also include net payables of $1.3 million…plus we need to factor in at least another year of cash burn (at $11.8 million pa):
(USD 16.6 M Cash – 10.4 M Debt – 1.3 M Net Payables – 11.8 M Annual Cash Burn) / 1.1268 EUR/USD / 4.3 M Shares = Zero
Yup, I now peg MSTY’s value at zilch, nada, kaput… Hark, I hear the shareholders spluttering with outrage – what about the value of its intellectual property, the possible revenue opportunity, a potentially generous acquirer, etc?! To which I’d reply, what about the interim cash burn, the risk of regulatory/commercial failure, the potential dilution to come, the debt-related risk, etc? I’d particularly highlight the latter: To see a zero revenue/cash burning company draw-down debt (at a huge credit spread) inspires zero confidence in management, and clearly signals shareholder value isn’t the No. 1 priority here.
Price Target: ZERO
Company: Kerry Group (KYG:ID)
Last TGISVP Post: Here (also, see here & here)
Market Cap: EUR 14,280 M
Price: EUR 81.15
KYG’s price rally & current multiple suggests an outstanding earnings record. In fact, for many shareholders, that’s a given…I wonder if they ever check the figures!? The reality’s actually quite different, as I’ve highlighted before: While Kerry’s trading margin has steadily improved (from 9.4% in 2011, to 11.5% in 2015), it’s based on underlying revenue growth of just 3.1% pa in the last 5 years – which translates to a declining trend in adjusted EPS growth of 11.1% in 2011, an average 10.0% in 2012-2013, and an average 8.2% in 2014-2015. Somehow…that’s worth a 27 P/E?! Aahh go on, sell me another story…
Yeah, I know: Kerry has an incredible growth trajectory ahead as it migrates from Consumer to its higher margin Taste & Nutrition business, cranks up its acquisition machine, benefits from increasing economies of scale, yada yada. But that was the pitch five years ago, and also ten years ago…how much longer will investors ignore actual feedback? At this point, they’d do well closing their ears (to the story) & opening their eyes (to the actual figures).
Noting a predictable shortfall in Kerry’s operating FCF, a 1.0 P/S multiple (on €6.1 billion of revenue) is adequate for its current 11.5% trading margin. With net finance cost just under 10% of trading margin, an additional €0.7 billion debt adjustment is appropriate – which we’ll haircut by 50%, as usual. As for earnings, Kerry lacks the growth to deserve a premium multiple, but obviously has a stable/high quality business & enjoys consistently positive investor sentiment, so a 12.0 P/E is warranted:
(EUR 3.015 Adj Dil EPS * 12.0 P/E + (6,105 M Revenue * 1.0 P/S + 714 M Debt Adjustment * 50%) / 176 M Shares) / 2 = EUR 36.45
Kerry is ridiculously overvalued, a dangerous blue chip if I ever saw one…not that I’ll persuade many of its devoted fans. But the greater the multiple & blind faith it enjoys, the more it risks being felled, if/when an abrupt change in sentiment finally hits…as we saw with Aryzta. Which doesn’t mean I’d necessarily advocate KYG as a short – many of its shareholders are buy & hold types, who are pretty oblivious to price & valuation, so it might require really serious/unexpected bad news to actually provoke a crisis of confidence. Or perhaps the shares end up trading sideways for years on end, with buyers slowly drifting away…if so, and shareholders think my call on Kerry was wrong, they’re bloody welcome!
Price Target: EUR 36.45
Company: Hibernia REIT (HBRN:ID)
Last TGISVP Post: Here
Market Cap: EUR 870 M
Price: EUR 1.277
Hibernia’s NAV has appreciated nicely in the last couple of years, and it managed to pull off a substantial €300 million follow-on placing. Highlights in the past year include significant pre-lets to Twitter at €50 psf & HubSpot at €45 psf, the fit-out & rental of 213 residential units in Wyckham Point, Dundrum (for €3.7 million pa rent), EPRA Index inclusion, and internalisation of the investment manager. And with €63 million of cash & zero leverage outstanding at year-end 2015, the company has plenty of reserve firepower.
The in-place office portfolio now enjoys an average rent of €32 psf, with an ERV of €40 psf (though long-term leases mean this will only be realised over time). But Hibernia has obviously enjoyed windfall gains to date from purchasing NAMA & bank distressed assets/loans, and it sports a passing rent yield of 4.4%, so 1.0 P/B is a fair multiple – we’ll use the latest pro-forma EPRA NAV (to reflect the recent internalisation):
EUR 1.224 Adj EPRA NAV * 1.0 Price/Book = EUR 1.224
Hibernia’s fairly valued. In fact, Irish property stocks have taken a breather for the past year or so, but accelerating (& now sustainable) Irish economic momentum would suggest further NAV appreciation ahead. Noting Hibernia’s mixed investment mandate, I suspect we’ll see a larger residential allocation in due course…considering the overwhelming supply/demand imbalance that’s now emerged (inexplicably) from the vast post-crisis surplus of residential stock we were wringing our hands over not so long ago. Looking ahead, sector performance will increasingly depend now on property management & development skills, and on raising dividends towards average global REIT yields.
Price Target: EUR 1.224
Last TGISVP Post: Here
Market Cap: EUR 477 M
Price: EUR 1.605
Fyffes bounced back nicely in the past year & a half, after being dumped at the altar by Chiquita shareholders (who voted instead for a Cutrale-Safra cash offer). While revenue was basically unchanged in 2014, adjusted EBITA/diluted EPS jumped 23% & 27% respectively. Growth continued in 2015, with revenue up 12%, while adjusted EBITA/diluted EPS were up another 14%. This was capped in early April by the C$145 million acquisition of Highline Produce, Canada’s largest mushroom producer.
Highline’s revenue wasn’t confirmed, so we’re forced to rely on Fyffes’ current €1.2 billion revenue. Adjusted EBITA margin is currently 3.7%, but incorporating Highline’s pro-forma C$18 million EBITDA figure (I’d estimate EBITA equivalent to be C$14.7 million), this should reach 4.6%. Unfortunately, operating FCF’s averaged just 30% of adjusted EBITA in the last 3 years…equivalent to a mere 1.4% margin. Let’s average the two, to arrive at a 3.0% average margin, which deserves a 0.275 P/S multiple. Based on this, acquisition funding will absorb the majority of Fyffes current cash & (prudent) debt capacity. The Highline acquisition’s also pretty accretive, which should help maintain current earnings momentum, so a 14.0 P/E ratio makes sense here:
(EUR 0.1273 Adj Dil EPS * 14.0 P/E + 1,223 M Rev * 0.275 P/S / 297 M Shares) / 2 = EUR 1.46
Fyffes looks marginally over-valued to me…but might still look cheap to growth investors, who probably don’t care about the consistent & substantial shortfall in cash earnings. However, the significant increase in debt may now place greater emphasis on cash generation, which might potentially conflict with management’s desire to continue the current earnings momentum – let’s wait & see how they square that circle. Meanwhile, let’s not forget, a potential re-merger with Total Produce (TOT:ID) is still the obvious elephant in the room – now more than ever, after the failure of the Chiquita merger…
Price Target: EUR 1.46
Company: Independent News & Media (INM:ID)
Last TGISVP Post: Here
Market Cap: EUR 230 M
Price: EUR 0.166
Well, the drama’s over at INM, new management’s been installed, and now the balance sheet’s relatively clean…but I’m a bit stumped as to what happens next. The company’s restructuring & sale of its APN News & Media (APN:AU) stake has eliminated all debt, and left the company with €60 million of (surplus) cash. Just as importantly, there’s finally a step-change in cash generation – with capex, exceptional expenses & negative working capital all declining. Unfortunately, revenue’s still dead in the water, with circulation declines offsetting ad growth & no real sign of change – management’s still touting strong digital ad revenue growth, but it’s a total red herring since it comprises a mere 4% of total revenue!
Presuming (still a big presumption) this trend in cash generation is maintained, we’re now looking at a 10.2% operating FCF margin on €321 million of revenue – all things considered, that now deserves a 0.875 P/S multiple, to which we can obviously add surplus cash. With zero interest expense, one might also expect a debt adjustment – unfortunately, INM still has an €86 million pension deficit on the balance sheet, and if we consider it a debt-proxy, it effectively absorbs what would otherwise be available debt capacity:
(EUR 321 M Rev * 0.875 P/S + 60 M Cash) / 1.4 B Shares = EUR 0.246
Obviously, a radical revaluation from my EUR 0.114 Price Target two years ago, reflecting the benefits of financial restructuring & improved cash generation – leaving INM looking substantially under-valued now. Denis O’Brien (with a 29.9% stake) & Dermot Desmond (a 15% stake) are in the driving seat here – both have an obvious eye for value, but are primarily growth-oriented investors/entrepreneurs. And neither appears to harbour any illusions INM’s some trophy asset (as so often happens with billionaires & media properties) – in fact, the exact opposite may be true, with both very keen on staying out of de papers..!
So, does this mean INM: i) ends up being run (PE-style) as a declining but still locally dominant business, with cash generation & return of capital being maximised (particularly interesting in light of the current share price discount vs. intrinsic value), ii) becomes a potential media/technology platform for new acquisitions/growth, or iii) ends up for sale, or even an O’Brien/Desmond bid target, noting the company’s dramatically improved financial situation & valuation? Certainly a good question…and maybe a good bet too!?
Price Target: EUR 0.246
OK, that’s all for now, folks – TGISVP Part II will follow in due course. And of course I’d be delighted to see all your questions/feedback, via comments & email. Here’s my first TGISVP file, for reference:
2016 – The Great Irish Share Valuation Project – Part I
Pingback: 2016 – The Great Irish Share Valuation Project (Part II) | Wexboy
When can we expect part 2? Hopefully Total Produce will be in it. Do you see FFY & TP becoming one again?
Pure coincidence, but your wish….!
Simon Cummins said:
Did you see this below
Simon Cummins said:
Any thoughts or views on PVR ?
Simon F Cummins
Tel : +353 01 657 9700
Fax : +353 01 657 9799
Mobile: +353 86 248 8402
Triangle Computer Services Ireland Ltd â¢ Wilton Plaza, Wilton Place â¢ Dublin 2 â¢ Phone +353 01 657 9700 â¢ http://www.triangle.ie
Um, outstanding debt & zero revenue is never a great combo…
I’m tackling all these stocks in batch/random order, so I’ll get to $PVR:LN in due course…stay tuned!
Hey – how do you get to the (3,078 M Rev * 1.125 P/S + 212 M Cash + 569 M Debt Adjustment * 50%) / 177 M Shares), is that coming from deals? Why add add’l debt to get to share px? And please, why the 50% haircut (for deals going badly?)? Thanks
As detailed above (and also see previous DCC notes/commentary I highlighted), the (3,078 M Rev * 1.125 P/S) comes from H2-2015 revenue run-rate & an 11.3% trading margin (an average of current 9.4% margin & peak 13.3% margin, as I’m pretty confident KGP will re-attain this peak margin again).
The 212 M cash comes straight from the latest balance sheet. As it stands, KGP/shareholders effectively earn nothing from this cash – but if this cash, for example, were returned tomorrow morning to shareholders, there’s no reason to believe that would negatively affect Kingspan’s P/S multiple (or its financial strength), and shareholders would have an additional 212 M cash to re-invest (or invest elsewhere). [Or spending the money on an acquisition would obviously produce a more attractive return also]. I adjust my valuation accordingly.
The same logic applies re debt capacity – a strong company like Kingspan could draw down significant debt (at a low interest rate) for an acquisition tomorrow, which would hopefully significantly enhance earnings & the value of the company/share price, with no significant impairment to its overall financial strength. Again, I’d adjust my valuation accordingly…this will rightly distinguish the valuation of strong companies from weak companies (and I penalise weak companies accordingly – see Aryzta, for example). However, I’m also aware: i) management may never actually draw down this debt capacity (for acquisitions, share buybacks, investment, etc.), ii) additional acquisitions/investment also present risks, iii) net & gross cash/debt may be very seasonal, etc. – so in my book, it’s prudent to haircut this debt adjustment by 50% to allow for these risks (of course, if it’s a negative debt adjustment, prudence will generally dictate no haircut).
Origin Enterprises $OGN:ID recently hit my two yr-old price tgt of €6.34 per share
Origin Enterprises $OGN:ID lks fairly valued nw…based on current financial strength & guidance of 53 cts per shr
Except today we hv an Origin Enterprises $OGN:ID trading update citing adverse weather again… http://www.investegate.co.uk/origin-enterprises–ogn-/rns/third-quarter-pre-close-trading-update/201604280700085818W/ …
Disappointing Q3 trading & lower revs fr Origin Enterprises $OGN:ID – 52 cts per share guidance abandoned, but not refreshed…
Origin Enterprises $OGN:ID I wdn’t rush to update my valuation -technicals will be more important for now, anyway…
As I’ve highlighted b4, Origin Enterprises $OGN:ID tested €6.15-25 twice in past 6-7 mths…break cd see €5.00…today might be challenging.
Wex hi. Great start to a well loved project, thanks! Can I ask one very small question?
For Kingspan I see EUR212M on their balance sheet and you’ve counted the whole lot after having noted you’re adjusting for surplus cash – how are you judging here what’s surplus and what isn’t? Their inventories and receivables just outstrip their payables so without getting too cute, that should all net out over the next 12 months and all things being equal you’ve still got the 212 – is that your thinking? Would you be less generous if there was a big working capital deficit?
If I adjust for surplus cash, I’m looking at the overall financial strength of the business – so I would check: i) balance sheet cash isn’t a once-off/seasonal (cash avgd €189 million in the last year), ii) agreed – working capital appears healthy/stable, iii) there’s no serious cash flow shortfall vs. earnings, and iv) all debt metrics are healthy. All these look good for Kingspan, so if they utilised their ‘surplus’ cash on an acquisition (for example), I see no risk/impairment to the business (& no impact on their usual working capital cycle) – and obviously the return for shareholders should be far superior to an effective zero rate on idle cash!
Also note, when I adjust for surplus cash, I’m usually adjusting for additional debt capacity too – but I generally haircut this figure by 50%, so that will provide some reasonable wiggle room on my cash/debt adjustments.
You’ll note I also included cash & debt adjustments for Origin, for similar reasons, but included no cash adjustment for Kerry & (particularly) Aryzta as their numbers & financial strength don’t stack up as well.
Thanks Wex. I had actually noted your different adjustments regarding cash amongst the different names you covered. I always try to think carefully about haircutting cash and find myself wincing a little at EV calcs that always just slap on every last penny but your explanation on Kingspan is very clear and to be honest, makes sense.
As an aside, I’m the one that was interested in how you’d look at a 2.0 company full of R&D, amortisation and (whisper it) stock based comp… and seeing as you’re now up to the big 25 on Twitter, *that* would be a fascinating Desert Island Disc of a valuation…!
Agreed with Max, outstanding project and much appreciated,
Yes, I use what might be described a bastardised EV analysis with many stocks…and I prefer my approach as it really forces me to focus on each component, esp. cash & debt, as a separate/distinct analysis (rather than some rote/default EV calculation). Obviously, that’s something that should be part of your investment checklist anyway, for any stock, but this is a great way to make it integral to your (valuation) analysis.
As for $TWTR, if you search back…
I’m actually relatively comfortable with Twitter’s valuation at this point, from an EV or a value-per-user perspective. I’m even comfortable with the user base, even if it no longer grows (as quickly) & remains a fraction of the $FB user base – it’s silly to presume a smaller audience than $FB is a failure, different platforms/networks will obviously have a different reach & an ultimate value-per-user (which isn’t necessarily related to size, above a certain minimum critical mass). [And let’s not forget: $FB user base growth must & will obviously come to a grinding halt in the not-too-distant future]. So the real challenge, as usual, is anticipating/forecasting the growth, monetisation, execution, existential risks & opportunities ahead for Twitter!?!
Overall, the sector & its valuations/prospects are fascinating, so maybe you will actually see a $TWTR valuation from me at some point…
I am very happy to see you back in this outstanding project.
Good luck to you and to us, your readers!
Thanks, Max, and good to hear from you!