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Continued from here.

Apologies, I abandoned TGISVP for a few months there…dealing with a mild case of PBSD. Yes, I mean Post-Brexit Stress Disorder, which I suspect the entire island’s been experiencing too! Dare I say it, Ireland’s officially the kids in this bloody divorce – did Brexiteers ever stop & consider them when they were voting? Which begs the question:

What did they really think they were voting for..?!

Noting the 51.9% final tally for the Leave vote, we can presume a distinct minority of the population specifically voted for Hard Brexit. And yet, that’s what the UK now seems to be getting. [Again, when the Tories voted for Theresa May, what did they really think they were voting for..?!] But maybe it was inevitable…by default, Remainers now favour a Soft Brexit, which unfortunately seems to have persuaded the entire Leave campaign they believed in Hard Brexit from day one. And that’s what we’re seeing reflected in May’s government, which on occasion appears to have swung even to the right of Enoch Powell, and where Hammond & Carney were even branded traitors for simply highlighting some of the inevitable fiscal/economic consequences of a (Hard) Brexit. And anyway, the Soft Brexit peddled by the Leave campaign was sheer fantasyno open borders (except the Irish border!?), no nasty EU-type regulations, free trade into the EU, jobs for all, etc. – basically, you can have your cake & eat it too (ooh la la, that’s a bit French!). In the end, it’s hard to know which was worse – the cynicism of the Leave campaign, or the gullibility of millions of Brexit voters who swallowed it hook, line & sinker…

But anyway, despite May’s current stance, we’re really no better informed than we were in the aftermath of the referendum, and it will be a few years down the road (possibly with an additional transition period) before a new Brexit reality’s nailed down properly. [And never under-estimate the possibility of another referendum!] Which means it’s still nigh on impossible to evaluate the potential future impact on Irish companies & the economy – overall, my (generally positive) perspective on Brexit hasn’t changed much since July, with the EUR/GBP rate still presenting the primary medium-term challenge. [Fortunately, the rate’s back within a percent of July levels, after hitting 0.9100+ in October]. But as I’ve highlighted before, Irish companies have actually proven themselves time & again over decades of Irish-UK exchange rate volatility. And looking at a longer term chart, today’s rate isn’t all that extraordinary anyway:

eurgbp-10-year

And it’s important to note most listed Irish companies have developed stand-alone businesses in the UK over the years, rather than focus on UK exports. [Not to mention, UK-focused Irish companies have tended to re-denominate accounts into sterling & even migrate solely to a London listing]. At this point, I believe it would be foolish for investors to ignore/avoid Irish companies & the inherent/underlying strength of the domestic economy. As for TGISVP, there’s not much point holding off any longer, waiting for new road-signs…but then again, any major change(s) in investment perspective or valuation would surely prove ill-informed. Probably the best approach is to: i) perhaps briefly comment on a company’s Brexit prospects (if relevant), and ii) potentially consider adjusting revenue to reflect recent sterling depreciation, if it has a substantial UK business.

[And God no, right now I’m not even going to consider a potential Trump Effect for Ireland…there’s plenty of time to ponder Trump next year (or not)!]

[NB: And if it wasn’t clear already, please view TGISVP as more of an occasional/ongoing exercise now, rather than an annual project. And I believe I mentioned this in comments (or on the message boards): I don’t intend measuring TGISVP portfolio results any longer – though I’ll still employ the same quantitative approach – I think I’ve already proved the value of the project over the first three years of results!]

So, let’s dive right back in (for a brief refresher on the TGISVP analysis & valuation approach, see here):

Company:   Green REIT   (GRN:ID)

Last TGISVP Post:   Here

Market Cap:   EUR 926 Million

Price:   EUR 1.341

Back in 2014, I pegged Green REIT’s fair value equal to its initial EUR 0.967 NAV. Looking at the share price today, that might seem like an awful call…but I’d disagree. Because GRN’s a good example of a mistake too many investors make: No matter how confident you might be about a company’s prospects, overpaying doesn’t just reduce or even eliminate your margin of safety, it may also rob you of expected future returns. Case in point: While I expected Green’s NAV (& in turn, my fair value estimate) to appreciate, I’m impressed to see a total NAV return (inc. dividends) of almost 60% (18.6% pa) here since early-2014! Unfortunately, investors were happy to pay up at the time, so they must look back & reference a EUR 1.20 market price (which inc. a significant NAV premium) for performance purposes. Almost inevitably, that premium’s now evaporated, leaving GRN trading at a discount…so instead, shareholders barely realised an 18% gain (6.1% pa, again inc. dividends), less than a third of the underlying NAV return! On average, you’d expect a better return from the market itself (in fact, the ISEQ was a far better bet)…so much for capitalising on a great stock/story!?

Overall, my valuation perspective hasn’t changed. Prime office yields in Dublin have moved lower (4.65%, per latest CBRE updates), with Green REIT close behind on a 5.2% portfolio yield. Obviously, Brexit presents a potential economic threat (& has clearly knocked sentiment)…but then again, the harder the Brexit, the more attractive Dublin likely becomes as an EU relocation/investment destination. And GRN looks well placed anyway, with 93% of its portfolio focused on Dublin, a 98% occupancy rate, and total gearing of just 19%. Applying a 1.0 Price/Book multiple, and adjusting for the recent annual dividend payment, we get:

(EUR 1.52 Dil EPRA NAV – 0.046 Div) * 1.0 P/B = EUR 1.47

Green REIT looks marginally under-valued here. And I don’t consider the recent NAV discount swing cause for alarm – experienced investors should be used to a 10-20% premium/discount appearing on a regular basis, presuming underlying NAV looks realistic (which it does, based on current yield/other metrics). However, progress will be tougher from here on – not to denigrate the Irish REITs, but gains to date were primarily derived buying in bulk from the banks & NAMA at 7-8.0% yields & then progressively marking down portfolios towards a 5.0% yield. More active portfolio management, reversionary rent potential & development opportunities/gains will now become far more important. But despite this recent (& extraordinarily biased) Phoenix article, shareholders here can draw comfort from having Stephen Vernon as Chairman (of GRN’s Investment Manager) – his reputation in the Irish property market precedes him…

Price Target:   EUR 1.47

Upside/(Downside):   10%

Company:   Mincon Group   (MIO:ID)

Last TGISVP Post:   Here

Market Cap:   EUR 162 M

Price:   EUR 0.77

Mincon’s IPO in late-2013, in the teeth of a commodity bear market, may not have seemed like the smartest idea at the time…but looking back, it seems like genius. Founder Patrick Purcell & family retained a 57% majority stake, while the IPO proceeds allowed management to adopt a longer-term operating perspective (in an obviously difficult environment), invest in restructuring, new product development & other growth initiatives, and also execute a number of bolt-on acquisitions.

[NB: There have been some notable departures (CEO, CFO, Chairman & Senior Independent Director) – some to be expected, like the 2015 departure of the former CEO after 30+ years, others perhaps not. Something to monitor… However, the current CEO Joe Purcell obviously offers continuity, while the recent NED appointment of old hand Hugh McCullough is also reassuring.]

These acquisitions, plus some encouraging organic growth, have delivered healthy revenue growth in the last couple of years – the current revenue run-rate (as of end-June) has reached a new 74 million peak. However, operating margins which previously averaged almost 23% (prior to 2015) have taken a big hit since, though now appear stable around 14% – consistent cash flow shortfalls (due to increasing receivables & more decentralised inventory, neither of which appears alarming) would suggest we focus on the last twelve months (LTM) operating free cash flow (Op FCF, i.e. operating cash flow, less capex) margin of 8.7% instead. In terms of valuation, averaging the two extremes seems fair, with the resulting near-16% average margin deserving a somewhat generous 1.67 Price/Sales multiple*. We’ll also incorporate surplus cash of €36 million into our valuation, which is available to fund earnings-enhancing investment, acquisitions, share buybacks/tender offers, etc. (& the recent trading update implies an additional €1.3 million of cash). Finance expense is de minimis, so an incremental €16 million of debt** can be comfortably employed here also (limiting finance expense to 15% of Op FCF) – as usual, I’ll apply a 50% haircut to this debt adjustment to be conservative:

(EUR 74 M Revenue * 1.67 P/S + 37 M Cash + 16 M Debt Adjustment * 50%) / 211 M Shares = EUR 0.80

Mincon is pretty much fairly valued here – if you’re finally ready to take the plunge, it may still offer a compelling lower-risk play on the natural resource sector. The company’s tackled some necessary restructuring, invested in new product development, boasts a strong balance sheet, potentially could double current operating margins, and a weak euro adds a powerful new tail-wind (with Brexit posing zero threat). It’s also encouraging to see significant stake-building from Setanta Asset Management (a rare Irish value shop, at 13.5%) & Norman Rentrop (at 8.4%) – with management now emphasising internal investment over acquisitions (which they prudently perceive as too expensive), I wouldn’t be surprised if these shareholders push for a tender offer in due course, to reduce what may otherwise become a growing cash pile.

Price Target:   EUR 0.80

Upside/(Downside):   4%

[Again: *Per my rule of thumb, based on long-term observation of market/M&A multiples, 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. **Here’s the math: (6.4 M Op FCF * 15% – 0.2 M Finance Expense) / 5.0% Financing Rate]

Company:   Botswana Diamonds   (BOD:LN)

Last TGISVP Post:   Here      

Market Cap:   GBP 6.7 M

Price:   GBP 1.975p

Welcome back to The Never-Ending John Teeling Story…  I had previously tagged BOD as worthless, so I’m gobsmacked to see it worth more today, at least in terms of market cap (share price is actually lower, but the share count doubled). Nothing’s changed…just more reports of ALROSA geologists wandering around Botswana, taking samples & finding the odd 1mm (that’s not a typo!) micro-diamond here & there. Sure, an ALROSA JV is impressive, but I’m beginning to wonder if it’s really just a staff holiday scheme for their (probably) badly paid geologists…put in a week or two on safari  in Botswana, then head down to Durban’s Golden Mile for an all-expenses-paid getaway! The only impressive news is the appointment of James Campbell as MD – his resume’s certainly exemplary, but it remains to be seen what he can do with something like BOD!? As for the company’s finances, they’re more appalling than ever – annual cash burn will likely exhaust cash on hand (less net payables) some time in H1-2017:

(GBP 0.5 M Cash – 0.1 M Net Payables – 0.6 M Annual Cash Burn) / 338 M Shares = Zero

Yup, once again, BOD’s obviously worthless – how they keep raising money is beyond me. It’s astonishing to think unrelated parties, i.e. the great unwashed, occasionally buy this stock. Have they ever looked at the price chart…what are they hoping for here, exactly?!

Price Target:   Zero

Upside/(Downside):   (100)%

Company:   Dalata Hotel Group   (DHG:ID)

Last TGISVP Post:   Here

Market Cap:   EUR 821 M

Price:   EUR 4.485

Back in 2014, Dalata was still essentially an uninvested Hotel SPAC – valuing it accordingly, i.e. based primarily on its net cash, I tagged it (probably unfairly) as overvalued. Fortunately, management has since lived up to its pedigree & delivered a burgeoning hotel empire – spending, within a year, over €550 million on 16 hotels in (primarily) Ireland & the UK, the transformational deal being the acquisition of the Moran Bewley’s Hotel Group. The company then replenished its war chest in Sep-2015, raising another €160 million from a placing & open offer. Since then, the portfolio’s been expanding steadily (to over 6,600 rooms) with a focus on rebranding & refurbishment as Clayton and  Maldron Hotels, RevPAR has increased significantly (to €74.90), while occupancy’s reached 79.0%, with new & existing hotel development opportunities also now being actively exploited. Dublin remains the main profit engine, enjoying 46% EBITDAR margins, followed by the UK (on 36% margins), with the Regional Ireland portfolio the laggard on sub-22% margins. As per today’s trading update, trading remains brisk, with no sign of a Brexit impact – fortunately, a majority of the UK portfolio is hedged with sterling liabilities, so sterling weakness isn’t that significant in terms of return on capital/equity.

Which is very relevant, as I’d prefer a return on equity (RoE) valuation approach here (vs. most analysts & their focus on earnings/EBITDA multiples), reflecting DHG’s deliberate asset-heavy investment policy…which is now far less usual in the sector. H1-2016 net profit (exc. acquisition costs) was approx. €17.5 million, which equates to an annualised 6.3% RoE. However, I suspect H2 net profit will move significantly higher, so FY average RoE might come in closer to 7.5%. But that obviously includes a large depreciation expense, a significant portion of which wouldn’t necessarily be considered economic – so, somewhat arbitrarily (& I think conservatively), if we add-back 50% of the €14 million annual depreciation charge, we’re looking at something more like an underlying 8.8% RoE. [I should highlight that leverage (sub-30% Net LTV) poses no undue risk]. Of course, increasing property values (H1 comprehensive income actually included a €42 million revaluation bump!) could also significantly inflate underlying RoE – accounting for such revaluation potential, current operating performance trajectory, additional debt capacity, plus likely development gains to come, a 1.33 Price/Book multiple should adequately reflect a likely double digit underlying RoE:

EUR 578 M Equity * 1.33 P/B / 183 M Shares = EUR 4.20

Dalata looks pretty much fairly valued here. Its attractiveness as a potential buy will be dependent on whether you’re encouraged by the underlying supply-demand equation (apparently, a substantial under-supply of rooms in Dublin & select UK cities), or are more fearful of the ongoing Brexit implications (I suspect sterling volatility’s more of a risk to tourism flows/patterns than Brexit itself). Longer-term, the impact of Airbnb (& similar services) needs to be evaluated, especially as Clayton & Maldron are more value-biased/budget-conscious brands. Meanwhile, Dalata’s low leverage gives it the flexibility to take a more defensive or offensive stance, as appropriate.

Price Target:   EUR 4.20

Upside/(Downside):   (6)%

Company:   Connemara Mining Company   (CON:LN)

Last TGISVP Post:   Here

Market Cap:   GBP 1.1 M

Price:   GBP 1.45p    

Oh Lordy, Teeling companies always seem to come along in pairs…though the long-term CON price chart is far more abysmal! I suppose shareholders should be relieved my forecast of a 100% share price decline hasn’t happened – CON’s only fallen 70% since! Compared to diamond exploration in Botswana, I guess desultory gold & zinc exploration efforts in Ireland obviously aren’t as exciting. Again, Teeling’s hooked an impressive farm-out partner here – Teck – but has since ended up dependent on their indifferent mercy. Unfortunately, even though the annual cash burn here is low (due to the company’s farm-out policy), CON’s cash less net payables position already puts it in the hole:

EUR 495 K Cash – 545 K Net Payables – 281 K Cash Burn = Zero

Give me strength…again & again, worthless.

Price Target:   Zero

Upside/(Downside):   (100)%

Company:   UDG Healthcare   (UDG:LN)

Last TGISVP Post:   Here

Market Cap:   GBP 1,653 M

Price:   GBP 668p

Ugh, well that looks like a disastrous call!? ‘Course, there’s plenty of water under the bridge since (& fair value estimates obviously change), but I anticipated a substantial UDG price decline back in 2014…in reality, the shares almost doubled in the last few years! So, time to stick or twist? Trouble is, UDG Healthcare’s one of those suspect Irish stocks (which shall remain nameless here) which consistently report a significant gap between IFRS & adjusted earnings, and (perhaps more importantly) between adjusted operating profit & underlying Op FCF…so which figures exactly should one focus on when attempting a valuation?! Not to mention UDG’s colossal P/E multiple – 27.7 times continuing adjusted diluted EPS, no less – which doesn’t remotely reflect the pedestrian underlying earnings growth we’ve actually seen in recent years. But let’s back up here…

And go back to 2015, which marked a decisive turning-point for UDG Healthcare – in Q3, the company announced the 0.4 billion sale of its supply chain services division, the original core business of United Drug (inc. its Irish pharmaceutical wholesaling business). [The CEO Liam Fitzgerald marked the occasion by also pre-announcing his own early retirement, after leading the company for 15 years, to be replaced by COO Brendan McAtamney]. Thereby unveiling a higher margin & (supposedly) faster growth company, focusing on: i) sales, marketing & healthcare communications services, and ii) pharmaceutical contract packaging & clinical trials materials – all intended to exploit the ongoing trend for healthcare companies to outsource non-core & specialist activities on an international basis.

Which has delivered a (totally transformed) 11.1% adjusted operating margin on continuing ops. revenue of 934 million – unfortunately, we continue to see the same cash flow issue each year, on average a 20%+ shortfall in Op FCF (vs. adjusted operating profit) over 2015-16, implying an adjusted 8.6% margin is more appropriate in determining a suitable 0.875 Price/Sales multiple. [There will be a meaningful currency hit next year from a stronger dollar (UDG will report in dollars from now on), but I expect this to be broadly offset by underlying revenue growth & recent acquisitions]. Interest coverage remains within a reasonable range, based on €275 million of debt left outstanding…but we can treat the effective sale proceeds, i.e. €384 million of surplus cash, as incremental value. As for earnings, UDG’s two main divisions boast underlying 25%+ operating profit growth over the 2010-2015 period, but in reality their 2016 growth rate isn’t much better than the sub-9% growth in underlying adjusted diluted EPS over the last 3 years – bearing in mind UDG may still be in transition, plus the usual stability of its earnings, we’ll basically split the difference in growth trajectories & assign what seems like a pretty balanced 15.0 Price/Earnings multiple:

(EUR 0.2861 Adj Dil EPS * 15.0 P/E + (943 M Rev * 0.875 P/S + 384 M Cash) / 247 M Shares) / 2 * 0.8438 EUR/GBP = GBP 387p

The numbers have changed, but I still reach the same conclusion – UDG’s as wildly over-valued as ever. It might be foolish setting this price target, because the outcome’s probably binary… Once they’re comfortable with an investment thesis, plus a valuation multiple/range, investors are loathe to change their minds…so if necessary, companies often have the time/space to grow into any valuation eventually. Of course, if things start going horribly wrong, everybody & their mother suddenly wakes up & notices all kinds of issues – the earnings gap, mediocre earnings growth (vs. the P/E), poor cash flow, a looming debt burden, etc. Of course, the latter doesn’t apply here (for once), as UDG’s in a comfortable net cash position (though doubtless it’s lining up more acquisitions) – so it’s unlikely anything goes pear-shaped here. Regardless, I see no value – the stock may never take a dive, but it could go nowhere for years as the underlying fundamentals catch up.

Price Target:   GBP 387p

Upside/(Downside):   (42)%

Company:   GAN   (GAN:LN)   (formerly GameAccount Network (GAME:LN))

Last TGISVP Post:   Here

Market Cap:   GBP 25 M     

Price:   GBP 36p

GAN’s share price has collapsed 80% from its all-time high in early-2014 – frankly, I’m surprised it didn’t receive a bigger thrashing!? I’m not sure I’ve ever witnessed a more cynical IPO launch – shareholders obviously didn’t realise they were buying into a company which boasted of its growth trajectory, but in reality sported a P&L where half its revenues & all its profits were actually non-recurring! It’s amazing management has even a shred of credibility left, considering the circumstances of the IPO, the subsequent collapse in revenue & the ongoing incineration of shareholder cash. Even now, management keeps reporting something called Clean EBITDA…which is utterly ridiculous & misleading when you’re burning that much cash! And the P&L isn’t much better, since they capitalise as much spending as possible.

Anyway, despite innumerable RNSs re contract wins, the only bright spot in the last few years finally came with the release of their H1-2016 interims. This showed a return to growth, with revenue up +35% yoy (driven by simulated gaming) to £3.9 million. Now one swallow does not a summer make, especially with this management team, but noting the revenue trajectory (& recent sterling weakness), an annualised revenue run-rate of £7.8 million would be very hard to miss. Alas, cash burn hasn’t improved – excluding a (potentially once-off?) tax refund, the company’s still burning £6.5 million pa!? Which means cash on hand of £4.0 million (plus £1.75 million from two recent placings) could disappear within a year, unless we see a radical improvement. So, on the one hand, such a company isn’t worth any more than the proverbial pound…but to an investor familiar with the sector, operating margins of 20-25%+ are entirely possible, given a larger revenue base or takeover by a larger competitor. Let’s just split the difference – in my book, that implies a 1.5 Price/Sales multiple, plus cash/less annual cash burn:

(GBP 7.8 M Net Revenue * 1.5 P/S + 4.0 M Cash + 1.8 M Placings – 6.5 Annual Cash Burn) / 70 M Shares = GBP 15.6p

GAN is still ridiculously over-valued – and still in a hole so deep, it may take a lot more dilution & share price weakness before we’re through… The one giant saving grace here – which may explain the presence of Dermot Desmond with a 4.6% placeholder stake – is the network of (mostly simulated gaming) relationships that GAN’s building up with local casinos across the US. That’s the real intangible value here…which could be an absolute goldmine in the hands of a larger competitor, and/or if the schizophrenic federal/state laws & attitudes re (online) gambling are more comprehensively reformed/relaxed (although, at best that’s bound to be slow & piecemeal). [Now I say it, what does Trump think about all this..?!] Then again, buying into a cash burning company, led by an untrustworthy management team – simply in the hope of a takeover – is almost inevitably a painful experience…

Price Target:   GBP 15.6p

Upside/(Downside):   (57)%

Company:   New Ireland Fund   (IRL:US)

Last TGISVP Post:   Here

Market Cap:   USD 63 M

Price:   USD 11.80

IRL is the only Irish closed-end fund available globally to investors. At first glance, its performance may appear to be lousy – the share price has actually declined significantly since 2014, while the ISEQ is up almost 30%!? But we have to take into account the income/capital gain distributions it’s paid out over the last 3 years (yes, a rather annoying aspect of US closed-end funds), plus the substantial depreciation of the EUR/USD rate over the same period – back of the envelope, taking these into account, I calculate IRL’s actually outperformed the index by a small but decent margin! Noting the usually small average discounts we see on US closed-end funds, plus the occasional insane premium on flavour of the month/year funds, a 1.0 Price/Book multiple is entirely fair here:

USD 70 M Equity * 1.0 P/B / 5.3 M Shares = USD 13.11

IRL remains nicely under-valued. Just take care, as usual, to examine the specific fund holdings & allocations – despite the active management (which can still add value, I believe, in a market like Ireland), obviously the fund’s top holdings are still concentrated (though better than its peer ETFs). In this instance, the top four holdings comprise 50% of the portfolio…but sure, they’re all great companies: CRH (CRH:ID), Ryanair (RYA:ID), Paddy Power Betfair (PPB:ID) & Bank of Ireland (BKIR:ID).

Price Target:   USD 13.11

Upside/(Downside):   11%

OK folks, that’s it for now, TGISVP Part V will arrive 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:

2016-The-Great-Irish-Share-Valuation-Project-Part-IV

Wishing you all a Very Merry Santa Rally & a Happy New Year!

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