C&C Group, Clontarf Energy, Conroy Gold & Natural Resources, DCC, Falcon Oil & Gas, Grafton Group, ICON, Irish Continental Group, Irish Residential Properties REIT, Irish shares, Irish Stock Exchange, Irish value investing, ISEQ, Karelian Diamond Resources, TGISVP, The Great Irish Share Valuation Project
Continued from here:
Last TGISVP Post: Here
Market Cap: EUR 465 Million
Price: EUR 1.115
Back in 2014, I was lukewarm towards IRES – it seemed cobbled together, and commercial property appeared to offer more obvious gains & investor interest. But since then, the Irish media (& in turn, certain politicians) have become increasingly hysterical about foreclosures, evictions*, mortgage rates, and the general housing crisis**. [*Apparently, a landlord deciding not to renew a lease is now deemed an eviction by some… **For overseas readers, it may be hard to keep up: The housing crisis no longer refers to the huge Irish price collapse…it’s now an appalling shortage of housing, just a few years later!?] We’ve also seen widespread criticism of the Central Bank’s new mortgage regulations…generally by the same people who criticised the Bank for its lack of regulation in the boom years!
Ironically, all this attention is fueling a continued rise in residential property prices (exacerbating the very housing ‘crisis’ they’re wringing their hands over!). Just as importantly, it’s re-directed investor interest – IRES is now the highest rated Irish property stock, in terms of premium to book. It’s certainly a unique story: IRES is already the dominant professional residential landlord* in Ireland, focusing on Dublin apartments, which perfectly captures an ongoing generational shift (as we’ve seen in the US) towards urban living, delayed marriage & kids, and an increasing preference to rent vs. own. [*Plus the only landlord with experience of N American apartment amenities & management – which offers interesting potential in what is still a relatively unsophisticated market].
Unfortunately, IRES hasn’t lived up to the promise of its prospectus. Touting gross rental yields of 8.6-10% & net yields of 6-7% was sheer fantasy…and a promised 4.5-5% dividend yield now looks problematic. As of the latest trading update, IRES has now assembled a (relatively new) 2,000+ apartment portfolio (costing €519 million & boasting 97% occupancy), with an LTV ratio of just 23% & an additional €200 million of investment/development capacity. However, the gross portfolio yield is now 6.2%, while the net’s just 5.0%…which is actually flattered by a significant portion of the portfolio being located in West/Southwest Dublin (i.e. Inchicore/Tallaght direction), which tends to offer higher rental yields but less potential for capital appreciation (vs. South Dublin, for example). But overall, the scope for capital gains seems compelling, noting particularly the recent 10-15% pa rent increases (albeit, interrupted by the recent heavy-handed two year rent freeze), though obviously this should already be reflected within the IRES portfolio valuation/yield & investors’ total return expectations – a 1.0 Price/Book ratio still seems appropriate:
EUR 1.035 Dil EPRA NAV * 1.0 P/B = EUR 1.035
IRES is now trading close to fairly valued. With such a high occupancy rate & an impressive 81% net rental income margin, investors shouldn’t expect much net yield improvement here…so ultimately, IRES mightn’t be all that compelling to dividend investors. Its best hope really is to continue riding the market for gains, along with specific opportunities for (re)development in its portfolio, the potential introduction of a more high-end/N American offering (which may prove challenging), or even student accommodation (which is currently pretty non-existent in Ireland on a private/professional basis, let alone on a potentially higher-end basis). But the irony is, if IRES is actually successful in any/all of these efforts, I have to wonder whether Cairn Homes (CRN:LN) (for example) might prove the bigger beneficiary, as it’s far more obviously geared towards high-end/development opportunities & gains..?
Price Target: EUR 1.035
Last TGISVP Post: Here
Market Cap: GBP 0.8 M
Price: GBP 0.175p
The more I think about it, the more I understand the Teeling empire – the whiskey fuels the hopes & despair of his junior resource investors! With ‘projects’ in Ghana, Peru & Bolivia, you’d be forgiven for thinking this was some kind of globe-trotting major… In reality, it’s an over-reaching minnow, whose share price crashed so hard it now exceeds the shares’ par value (which must be remedied before CLON can pull off yet another placing). As for its projects, they are supposedly multi-million opportunities…but in reality, they’re more accurately described as cash draining legal & political quagmires.
But even the muppets have now lost faith here, and Teeling’s dropping hints of a new story (or two) to come, a classic junior resource strategy: There’s only so long you can beat a dead project, but management would never dream of folding up tents & calling it a day (like normal businessmen), so a brand new story (& placing) is the inevitable solution. What’s really amazing is seeing this work, over & over again…one should never under-estimate the unwavering gullibility of suckers! Clontarf’s cash on hand is totally swamped by its outstanding net payables & annual cash burn:
(GBP 0.2 M Cash – 0.9 M Net Payables – 0.2 M Annual Cash Burn) / 454 M Shares = Zero
Again, Clontarf’s clearly worthless. Muppets, get a clue…
Price Target: Zero
Market Cap: EUR 933 M
Price: EUR 4.985
Back in 2014, there was plenty of investor faith built into Irish Continental’s valuation…which has obviously paid off! Considering my bullishness re Ireland’s prospects, I under-estimated the company as a domestic economic play, and (more particularly) how operationally geared it was towards increased volume (which now seems obvious, with hindsight – it’s forced to operate with a relatively fixed cost base). Revenue growth averaged 10% pa for the past two years, while earnings growth was 12% in FY-2014, but exploded in FY-2015 with EBITDA up almost 50% & adjusted EPS up 88% (assisted by lower fuel prices & a stronger sterling). Net debt declined steadily, hitting just €26 million as of the latest trading update (which confirmed continued volume growth), and the pension deficit’s basically cured at this point (though the gross liability remains huge, which bears watching). Much of the volume/revenue growth to date has come from the terminal/container business & RoRo freight services, but steady growth in the core ferries unit (which accounts for 64% of total revenue & seems to be relentlessly gaining market share) may increasingly drive future results. On the other hand, the recent bounce in the oil price, sterling weakness/volatility, plus the upcoming UK referendum, are all head-winds which mitigate the positive impact of Ireland’s ongoing economic recovery.
Adjusted operating margin in FY-2015 was 17.8%, well above the previous peak of 14% back in 2007 – that deserves a 1.75 Price/Sales ratio, based on Last Twelve Months (LTM) revenue of €327 million (as of end-April). We can also adjust for (what is obviously) surplus cash of €25 million. Plus we can expect interest paid to be significantly lower in FY-2016: I estimate €1.9 million, vs. a prior €2.8 million – which would imply an additional debt capacity of €137 million (at a 5% rate), for say a new-build (just announced!), would still limit total interest paid to a reasonable 15% of adjusted operating profit. As usual, we’ll apply a 50% haircut to this debt adjustment to be conservative. As for earnings, we can’t assume the same trajectory going forward, but looking ahead to consensus estimates a 20.0 Price/Earnings multiple (based on FY-2015 adjusted diluted EPS) does appear justified:
(EUR 0.287 Adj Dil EPS * 20.0 P/E + (327 M Rev * 1.75 P/S + 25 M Cash + 137 M Debt Adj * 50%) / 187 M Shares) / 2 = EUR 4.65
Irish Continental’s also trading close to fairly valued. While it’s certainly enjoying a sweet spot right now, the valuation’s a reminder of the potential oil & UK risks the company now faces, while we also need to see whether it can maintain significantly higher operating margins. Looking ahead though, delivery of a €144 million new-build cruise ferry (plus any resulting fleet re-configuration & disposal) may prove a huge opportunity (or risk!) for the company – for comparison sake, the company’s total post-depreciation PPE currently amounts to just €170 million, so this ferry’s gonna be a real game-changer!
Price Target: EUR 4.65
Last TGISVP Post: Here
Market Cap: GBP 2.7 M
Price: GBP 0.85p
Shareholders are a lucky bunch: In 2014, I predicted an 84% share price collapse, but KDR’s only suffered a 63% decline since! Yeah, cold comfort, indeed… This is a Dick Conroy vehicle – but despite the near-monthly press releases, the confidential Rio Tinto info/sample sharing agreement, and the supposed potential to become a profitable open pit diamond miner, to date shareholders have dick to show for it…well, except for this dreadful long-term price chart. Yep, irritated muppets are now dying to respond by spelling out Karelian’s exciting findings, grades, projects, plans, etc. in excruciating detail. But so bloody what…every single junior resource company can boast the same, yet how many ever discover a commercial resource, let alone ever successfully develop it, let alone ever deliver an ultimate profit to the average shareholder (who’s inevitably been diluted into oblivion at that point)?!
Karelian only had a month of cash on hand, but just completed a gross €317 K placing. Unfortunately, it also has €169 K of net payables outstanding (inc. €50 K up-front for a new diamond mining permit), and an €810 K cash burn rate (annualised, based on the latest interims – recent news/plans suggest no abatement in spending):
(EUR 69 K Cash + 317 K Placing Cash * 93% – 169 K Net Payables/Mining Permit – 810 K Annual Cash Burn) / 318 M Shares = Zero
This time ’round, Karelian really is worthless. What’s astonishing is how little cash they’ve raised…well actually, it’s not astonishing at all, but at the implied cash burn rate since end-Nov, the company’s literally surviving on fumes & should be dead already!?
Price Target: Zero
Last TGISVP Post: Here
Market Cap: EUR 1,190 M
Price: EUR 3.75
Oh Lord, I need something stronger than a cider here… Last month brought another set of dismal results. At first, I couldn’t reconcile the shitty divisional performance with a (3.1)% headline decline in net revenue…’til I found an (8.9)% constant currency decline buried in the results!? To see a 9% sales decline in such a (supposedly) stable business is truly astonishing – of course, management offers all the usual excuses: Bad weather in Ireland, drink driving regulations in Scotland, a perennially ‘challenging’ market in England, and
a fucking disaster an alcoholic root beer attack in the US…
At least FY-2016 brought C&C’s quixotic adventures in the US (like so many other Irish companies now) to an end, only three years after swooping in to buy the Vermont Hard Cider Company (and it took just two years to write down almost two thirds of the purchase price!). Which was no surprise, I was highly critical of the deal from day one – both the ludicrous multiple they paid & the business logic (cider’s always gonna be a quaint niche drink in the US). Pabst Brewing Company will now have total control of C&C’s US business, and a long-term purchase option. C&C will also distribute the Pabst portfolio in the UK & Ireland, boasting it ‘should prove to be a great addition to the developing premium C&C portfolio’ – which seems particularly clueless!? Yep, PBR is maybe the cheapest redneck beer you can buy in a bar, which some years back ironically transformed it into a hipster favourite (I’ll admit, I’ve drank more than my fair share of PBR + A Shot specials in US dive bars). Not sure how C&C thinks this will translate in Dublin, or London…and anyway, PBR’s dead now, Narragansett (which you’ll remember, if you know your ‘Jaws’) is kicking its ass.
C&C’s saving grace is its financial strength – it has €0.2 billion of surplus cash & a more than sustainable level of debt. Ironically, the slowdown in its business has also delivered a substantial & sustained cash flow improvement. Adjusted operating margin is 15.6%, but operating free cash flow (Op FCF: Operating cash flow, less net capex/intangibles) margin has reached 19.5% – a 2.0 P/S multiple appears justified. We’ll also adjust for cash – and noting finance expense is currently less than 7% of Op FCF, we’ll adjust for €0.2 billion of additional debt capacity (thereby bumping finance expense to a still reasonable 15% of Op FCF). As usual, we’ll apply a 50% haircut to this debt adjustment. As for earnings growth, there is none – literally, zero growth in the last 5 years – so a 10.0 P/E is still more than generous:
(EUR 0.242 Adj Dil EPS * 10.0 P/E + (0.7 B Net Rev * 2.0 P/S + 0.2 B Cash + 0.2 B Debt Adj * 50%) / 317 M Shares) / 2 = EUR 3.77
Somewhat surprisingly, C&C is now actually fairly valued. But you’ll notice a huge divergence in my earnings-based vs. enterprise-based valuations, highlighting wildly different perspectives of the company. On the one hand, you have a deal-happy* management team, who always find the next crisis, and can’t seem to knuckle down & milk the underlying business potential here. [*An (attempted) run at Spirit Pub Company being the most ludicrous example. Hopefully, the negative price/investor reaction was a wake-up call…a significant share buyback programme since is a promising step (& is mildly accretive)]. On the other, we have a strong balance sheet & attractive cash flow, and some juicy M&A multiples we can benchmark against (explaining the otherwise inexplicable presence of so many US institutional investors here?) – but at €1.2 billion, I have to wonder if C&C’s simultaneously too big & too small to attract any serious bid interest?
Price Target: EUR 3.77
Last TGISVP Post: Here
Market Cap: GBP 5,512 M
Price: GBP 6,210p
Forget Bill Ackman & his wares…here’s the kinda platform company you should be looking at! DCC marches ever onward, hoovering up a steady diet of acquisition targets – in the last year, it completed its two largest ever acquisitions (Butagaz & Esso Retail France), thereby delivering a huge uplift in operating profit & earnings. Which means DCC Energy now contributes over two thirds of operating profit – add DCC Environmental (a complementary business which still needs bulking up) & it’s almost 75% of operating profit. As I predicted, DCC Food & Beverage has now been sold off, and it seems likely DCC’s other divisions will eventually share the same fate – particularly DCC Technology, a volatile/low margin business, whereas DCC Healthcare’s a more attractive business which deserves a much higher multiple if spun-off in its own right.
Adjusted operating margin has now expanded, with the latest acquisitions, to 2.8% – which deserves a bump to a 0.25 P/S ratio. Interest paid of €64 million looks excessive (vs. operating profit), but is clearly offset by almost €1.2 billion of balance sheet cash. I calculate a 30% reduction (€0.4 billion) in average debt would increase interest coverage to my normal tolerance level of 6.7 times (i.e. interest paid would equal 15% of operating profit) – so accordingly, we’ll allow for a reduced €0.7 billion cash adjustment. As for earnings, we’ve seen 9.8% & exceptional 27.2% growth in the last two years, so a 20.0 P/E ratio now seems entirely reasonable:
(GBP 255.1p Adj Dil EPS * 20.0 P/E + (10.6 B Rev * 0.25 P/S + 0.7 B Cash Adj) / 89 M Shares) / 2 = GBP 4,463p
I tagged DCC as fairly valued in my last write-up, but after rallying 125% in just over two years, it looks significantly over-valued. In fact, it now trades on a 24.3 P/E – perhaps understandable in light of recent results, but it doesn’t really reflect DCC’s long-term earnings trajectory, or leave much room for error. That being said, I can’t recall DCC ever really putting a foot wrong, so we may not see a set-back here…the stock may just need a year (or two) of consolidation to comfortably grow into its valuation.
Price Target: GBP 4,463p
Last TGISVP Post: Here
Market Cap: GBP 70 M
Price: GBP 7.625p
Here’s another bunch who were mightily upset with my valuation of their precious stock. Last time ’round, I even tagged FOG as worthless…which was completely ridiculous, as the stock’s only fallen by a quarter since! For investors in the junior resource sector these days, that probably feels like a huge win!? But all props to Falcon – despite zero progress in Hungary & South Africa, they managed to pull off a ‘monumental’ farm-out deal in the Beetaloo Basin, Australia with Origin Energy (as operator) & Sasol. [Noting John Craven’s record at Cove Energy, I suspect much of the credit is his]. Which meant A$20 million cash up-front for Falcon, and more importantly, a 30% stake in a carried, no-cost drilling programme for nine exploration & appraisal wells over the next five years.
So, how do we value FOG now..?
Well, the drilling results (3 wells, to date) are promising, and the resource potential here (as with most Australian projects) may be gigantic…but isn’t that always the case with these projects, at this point?! And we’re talking about an unconventional oil & gas project here, and a farm-out deal signed literally a month before the oil price collapse (in mid-2014) – today, we’re in a horrible environment, with resource companies (large & small) slashing expenditures simply to survive, and focused solely on their lowest-cost/highest-probability prospects. FOG devotees will point to the impressive A$180 million drilling programme – but that’s an ‘intangible asset’ which might prove worthless if there’s no sign of a reserves report at the end of the programme, or if Falcon’s partners choose to walk away (as Hess did previously). I think the sensible thing to do here (for the moment) is to take the value of Falcon’s implied share & apply a fairly arbitrary 50% haircut. [Believe me, this isn’t any more arbitrary than the abstruse valuations FOG shareholders might cough up]. To this we’ll add $14.2 million of surplus/restricted cash, and adjust for a $3.5 million annual cash burn:
(AUD 180 M Drilling Programme * 30% Stake * 50% * 0.7388 AUD/USD + USD 14.2 M Cash – 3.5 M Annual Cash Burn) / 1.4161 GBP/USD / 922 M Shares = GBP 2.4p
Falcon remains massively over-valued. Yes, all the resource potential in the world is worth whatever hopeful shareholders want it to be…but it can just as easily be worth zero. However, it is worth noting Falcon should have enough cash (all else being equal) to actually see out the entire Beetaloo drilling programme, so the real believers here will continue to treat FOG as an option bet (on a potential commercial discovery) for some years to come…but I’m still willing to bet that option will come a lot cheaper.
Price Target: GBP 2.4p
Last TGISVP Post: Here
Market Cap: USD 3,637 M
Price: USD 65.59
Since 2014, ICON’s racked up an incredible performance: The company’s enjoyed net revenue growth of 10%+ pa (in constant currency terms), but the real story here is the expansion in its operating margin, which more than doubled from 9.1% in FY-2013 (I did highlight margins were expanding rapidly on a quarterly basis) to 19.0% in the recent Q1-2016 results. [Earnings have exploded accordingly, with adjusted diluted EPS up 62% & 39% in FYs-2014 & 2015, respectively. And 24%+ earnings growth momentum was maintained in Q1]. While I expect ICON can maintain its net revenue growth trajectory, earnings growth will clearly slow…but surveying best-in-class peers in the sector, there’s no reason to presume 15-20%+ operating margins can’t be maintained.
Bearing this in mind, plus the FY-2016 outlook provided in Feb, there’s no reason we can’t annualise Q1-2016 results for valuation purposes. That pegs net revenue at $1.6 billion (for an operating margin of $0.3 billion, at 19.0%) – to which we’ll apply a 2.0 P/S multiple. We’ll also adjust for $0.25 billion of surplus cash. And net debt’s falling rapidly, so if we (conservatively) annualise Q1 net interest expense (of $2.9 million), we can see ICON remains massively under-leveraged – I calculate an additional $0.7 billion in debt would still limit interest expense (to 15% of operating profit), but let’s apply our usual 50% haircut to this debt adjustment. And annualised diluted Q1 EPS amounts to $4.48, to which we’ll apply a somewhat miserly 20.0 P/E:
(USD 4.48 Dil EPS * 20.0 P/E + (1.6 B Net Rev * 2.0 P/S + 0.25 B Cash + 0.7 B Debt Adj * 50%) / 55 M Shares) / 2 = USD 79.00
For such a fast-growing stock, ICON is (rather amazingly) pretty under-valued. The management team clearly agrees, spending almost $0.5 billion last year buying back shares – which is nicely accretive, considering ICON’s underlying intrinsic value. In fact, my only real complaint here is the ongoing lack of leverage: When you’re signing multi-year service agreements with Pfizer et al, all of which contribute to a $3.95 billion backlog (equivalent to 2.5 years of net revenues!?), you can afford to be a hell of a lot more aggressive…i.e. spend your quarter of a billion surplus cash AND lever up the balance sheet properly, whether it’s on share buybacks and/or acquisitions.
Price Target: USD 79.00
Last TGISVP Post: Here
Market Cap: GBP 2.6 M
Price: GBP 23.25p
[NB: Don’t be fooled by what appears to be a respectable share price…there was a 100-for-1 consolidation in Nov-2015, so the shares have actually collapsed 85%, while the outstanding share count’s effectively tripled.]
And yes, you’ve guessed it, here’s the other Dick Conroy vehicle…and this one’s supposed to be the real deal! I mean, how else would you describe ‘the potential for 15–20+ million ounces of gold within the 30 mile gold trend covered by the Company’s licences’?! But the company’s been touting its Clontibret
gold project gold mine project for a decade now, and has been tripping over other gold prospects left, right & centre (they’re obviously all connected)…yet there’s precious little tangible progress to show for it all. OK, let’s be kind, at least there’s a JORC resource report – which is almost five years old now – just like there was last time I looked at Conroy in 2014, since nothing else has changed…
Which confirms the project contains 260 K indicated oz of gold (at this point, we’ll ignore inferred oz) – I’m comfortable using my usual long-term $150 per proved oz in-the-ground gold valuation here, except we’ll apply a 75% haircut to reflect indicated status. Other assets include net debt of €0.4 million, but Conroy’s managed a placing & a subscription/debt conversion since, so that’s another €1.8 million gross. We also need to include €2.4 million of net payables, and adjust for an annual cash burn of €1.3 million:
(0.3 M Indicated Gold oz * $150 * 25% / 1.1277 EUR/USD – EUR 0.4 M Net Debt + 1.8 M Placings * 95% – 2.4 M Net Payables – 1.3 M Annual Cash Burn) * 0.7963 EUR/GBP / 11.0 M Shares = GBP 45.1p
Wow, the miracle of the summer solstice has come early: No kidding, Conroy’s now hugely under-valued! Ulp, the message board muppets are really gonna hate me now…because now they’ve gotta love me for this!? But they shouldn’t get too excited – while ascertaining some kind of underlying intrinsic value is crucially important, it’s just one item on a very long checklist when it comes to investing in junior resource stocks. I mean, how exactly does a £2.6 million company propose to raise $41.5 million for Phase I of the proposed Clontibret gold mine? And if it actually does, how much dilution & leverage would that imply for current shareholders? And how robust is that $947 production cost per oz estimate anyway – it doesn’t offer a great deal of margin for error. And…I could go on.
It’s upside, Jim, but not as we know it…
Price Target: GBP 45.1p
Last TGISVP Post: Here
Market Cap: GBP 1,577 M
Price: GBP 667.5p
Kudos to Grafton’s CEO, Gavin Slark – he took the reins five years ago now, and pointed the company unerringly towards a 7.0% operating margin target. In the wake of crisis and recession, progress was obviously slow & steady at first…but with the vast majority of revenues earned in the UK & Ireland, two of the fastest growing EU* economies, there’s been a tremendous improvement in performance. [*Better to ignore the Brexiteers’ attempts to kibosh this, and don’t believe the bloody polls – everybody who lies (as they do) or changes their mind, is bound to vote Remain in the end, as we see reflected in the odds quoted by the bookies (who invariably tend to beat the pollsters). Remember, money talks, opinion squawks…] Perhaps most impressive is that Grafton’s recovery has been primarily organic, a combination of steady revenue growth and an accelerating expansion in margin & earnings. Though it’s intriguing to see the company kick into higher gear at the end of last year, with the €91.5 million Isero acquisition – this deal gives Grafton a beach-head into the Netherlands & a higher-margin specialist distributorship model it can potentially expand across its entire business.
Per the latest trading update, LTM revenue has now reached £2.3 billion. However, this doesn’t capture some incremental acquisition revenues – I calculate the full year impact of the Isero deal, plus two recent bolt-ons (T Brewer/Allsand Supplies), will add another £53 million of revenue. Adjusted operating margin’s now reached 5.7% – noting the current growth trajectory, a 0.6 P/S multiple is now comfortably justified. To this, we can add £0.2 billion of surplus cash. And £7.5 million interest paid implies interest coverage of 18 times plus – an additional £0.3 billion of debt would be sustainable, but we’ll apply our usual 50% haircut to this debt adjustment. As for earnings, Grafton might be just a merchanting business, but we’ve actually seen EPS growth average over 50% in FYs-2013 & 2014, and 19% in FY-2015 – presuming continued margin expansion, and noting the revenue growth spurt in the trading update, a 20.0 P/E seems entirely fair at this point:
(GBP 0.407 Adj Dil EPS * 20.0 P/E + (GBP 2.4 B Rev * 0.6 P/S + 0.2 B Cash + 0.3 B Debt Adj * 50%) / 236 M Shares) / 2 = GBP 778p
As I predicted, the GFTU share price has gone nowhere for the last two years, as it waited patiently for the company’s valuation to catch up. But today, we find Grafton Group is now significantly undervalued. And what’s more, it’s got an ultra-strong balance sheet, and looks ready to flex its deal appetite for real – don’t forget, the company was previously a veritable acquisition machine, and there’s obviously plenty of consolidation (in the UK, particularly) & virgin territory (across Europe) still ahead of it…
Price Target: GBP 778p
OK, that’s all, folks – TGISVP Part IV will follow in due course. As usual, I’d be delighted to see any/all of your questions & feedback, via comments & email. And for reference, here’s an updated TGISVP file – please note prior valuations are updated to reflect current share prices (& FX rates, if applicable), and all stocks/valuations (new & old) are ranked according to their current upside potential: