NTR plc – Breezin’ Right Along…

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activist investors, Alan Walsh, Chris Hunt, NTR plc, One Fifty One plc, Pageant Holdings, Pattern Energy Group, Riverstone, Tom Roche, Wind Capital Group, wind energy

Judging by the emails/comments I’m getting, there’s plenty of current & potential investors out there delighted to see Monday’s announcement from NTR plc, confirming the sale of its US wind farms. [i.e. NTR’s 201 MW Post Rock, KS & 150 MW Lost Creek, MO wind farms – both approx. 3 years old, with 20 yr investment-grade PPAs in place]. Like many corporate releases though, it raises just as many questions as it answers…including the most obvious question:

So, what are the implications now for NTR’s NAV & share price?!

Far be it for me to predict a near-term share price trajectory – let’s see what the next few weeks’ trading brings – but I’m obviously keen to arrive at a fresh NAV estimate, based on this key value-realisation event. First, let’s take a breath & revisit my original NTR investment write-up (from Aug-2014). I won’t recap it here…because I’d suggest (re-)reading that piece is probably essential prep for the rest of this post (it definitely was for me!).

Picking up where I left off, I wrapped up that post with this speculation: ‘…it will be interesting to see if there’s any fireworks at the [September AGM] meeting’ – little did I know how fortuitous, yet prescient, this would prove to be! Preceded by a number of critical press articles (which prompted this pre-AGM response), there were indeed fireworks at the AGM itself…I think it’s fair to say management looked a tad defensive & beleaguered by all the questions and attention!

However, the real AGM highlight was confirmation the board had already requested management (in April-2014, which of course ‘preceded and was entirely independent from any…shareholder discussions’) to consider the strategic options for NTR’s US wind assets. It was also acknowledged (as I’d already argued in my prior post) ‘there could be strong interest in the US wind assets given their quality and operational performance’, and that ‘a successful sale could result in an opportunity for an additional liquidity event for all our shareholders.’ This was capped off with a commitment to appoint expert advisers, and (subject to their report) to potentially move ahead with a sale process.

Shortly after the AGM, the company then confirmed its three main shareholders (representing 71.5% of NTR’s issued share capital) had reached agreement, and had ‘put a proposal to the Board that it initiate a process to sell the NTR US wind assets as soon as possible and that NTR implement a tender offer as soon as possible thereafter for NTR’s issued shares.’ Depending upon the tender price per share, One Fifty One plc & Pageant Holdings informed the board they intended to accept such a tender offer for all their shares, while Woodford Capital (family investment vehicle of Chairman Tom Roche) stated its intention not to sell any shares in such a tender offer. This obviously allayed any lingering investor concerns management wouldn’t follow through on a value-realisation strategy…as evidenced two months later by the appointment of Marathon Capital to formally launch a sale process for the US wind farms.

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NTR plc…Wind of Change?

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activist investors, Alan Walsh, grey market share, National Toll Roads, Nick Furlong, NTR plc, One Fifty One plc, Pageant Holdings, Rosheen McGuckian, Tom Roche, Wind Capital Group, wind energy, Yieldcos

NTR is a strange beast, neither fish nor fowl. Of course, regular readers will recognise that tends to intrigue me – the best opportunities often arise from misunderstanding & neglect. And NTR’s balance sheet intrigues me even more… But whoa Nellie, we’re getting ahead of ourselves here! Let’s back up:

We should begin with the Roche family dynasty – here’s a good potted history. Tom Roche Senior founded National Toll Roads – its first venture, the East-Link toll bridge, opened in 1984. The company slowly expanded, completing the West-Link bridge in 1990 & adding a second span in 2003. With the advent of the Celtic Tiger in the late ’90s & the completion of the M50, traffic volumes & revenues exploded, and the company became a goldmine. The government, in its wisdom, then decided to buy the West-Link in mid-2007 – just ahead of the credit crisis! NTR subsequently monetised the NRA’s index-linked payments of EUR 50 million pa (from Aug-2008 to Mar-2020) for an up-front consideration of EUR 0.5 billion. This was a great deal (followed shortly thereafter by an even larger sale of its Airtricity stake), but unfortunately the company was also in full Celtic Tiger mode at this point. With Tom Roche Junior taking the helm after his father passed away in 1999, NTR had ambitiously transformed itself into a developer & operator in renewable energy (solar, wind & corn-based ethanol) and sustainable waste management – in Ireland, the UK & across the US.

By Mar-2007, in just 3 years, the balance sheet more than quintupled to EUR 2.0 billion (funded by 1.5 billion of total liabilities)! Accompanied by a share price which managed much the same feat – I specifically recall the brokers hailing NTR as a new Irish blue chip to every last punter with a pulse & a wallet. [When I mention the company’s listing ‘status’, you’ll realise this pitch was even more dangerous than it sounds…] But investors eventually started getting cold feet – the shares peaked at EUR 7.00 in Jan-2007, well ahead of the crisis. Because of the West-Link & Airtricity sales, the company was sitting on a large cash pile as it entered 2008 – but it was also burning close to EUR 0.7 billion pa of free cash flow at the time. And despite the financial crisis, the spending never stopped… In Apr-2008, management actually embarked on a brand new investment folly (solar energy) with an initial USD 100 million deal to purchase a controlling interest in Stirling Energy Systems. Well, you know what came next…

I’ll spare you most of the blood & guts, let me just highlight total equity (exc. NCI) bottomed this year at EUR 117 million, down nearly 90% from a Mar-2008 peak of EUR 1.1 billion. [NTR’s real annus horribilis came in FY-2011, with a loss of EUR 381 million – one of the largest non-banking losses in Irish corporate history]. And the share price suffered even more horribly – reaching a EUR 0.25 low in Aug-2012, down 96% from its peak:

Donegal Investment Group (DCP:ID)

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activist investors, DCP, Donegal Creameries, Donegal Investment Group, Ian Ireland, Irish shares, Irish value investing, Monaghan Middlebrook Mushrooms, Ronnie Wilson, share repurchase, shareholder value

Time flies… I published my Donegal Creameries – Low Fat Diet write-up just over a year ago. Quite obviously, it’s been a successful call 🙂 :

In my original post, I referenced the closing DCP:ID share price (on Fri, May-3rd, 2013) of EUR 3.63. The following Tuesday (the Monday was May Day), the stock rallied 28%, before closing up 18.5% at EUR 4.30. [Another endorsement: My very first suggestion was a name change…which occurred just 2 months later!] A subsequent march higher, at periodic intervals, culminated in the stock doubling after 10 months (i.e. in Mar-2014). Since then, we’ve suffered a 17% retracement – so today’s EUR 6.00 share price seems like a bargain, eh?!

Total Produce – A Fresh Perspective

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activist investors, Balmoral International Land Holdings, Carl McCann, empire-building, Fyffes, Greencore Group, intrinsic value, Irish shares, Irish value investing, private equity funds, share buyback, TOT, Total Produce, Warren Buffett

…

Total Produce (TOT:ID, TOT:LN) was one of my very first blog write-ups, back in Nov-2011 at EUR 0.39. [And I’ve written about it a number of times since]. Less than two years later, we’ve enjoyed a nice double on the stock – which is now trading within spitting distance of my original EUR 0.882 fair value target. This warrants a fresh perspective… But looking back, now I remember – even then, I offered up a very specific perspective:

So we’re talking a business that really runs itself, just what I like! Particularly as I don’t have great respect for management (except if you compare them say to Greencore Group (GNC:ID) management – whose shareholders may finally be put out of their misery with a potential bid, rumoured to be coming from Dubilier Clayton & Rice). Carl McCann is Chairman, while his brother David’s in the Chairman seat over at TOT’s ‘sister’ company Fyffes (FFY:ID), and neither is really a patch on their father Neil McCann (I was sad to hear he passed away recently) who joined Fyffes in 1948. I think of the crazy worldoffruit.com online effort in the v late 90s (which ‘…received a very positive reaction from within the produce industry and looks set to dramatically change the way in which fresh fruit and vegetables are traded across the globe…’), the lack of earnings growth in the past few years, the ludicrous de-merger of Fyffes, Total Produce & Blackrock (now Balmoral Int’l Land Holdings, whose shares subsequently collapsed & are now delisted), etc.

I also look at the excessive B/S Cash of EUR 89.6 mio, and I’m bemused (and slightly alarmed) to remember a colleague telling me many years ago his impression that having large amounts of Cash on hand appeared to give management the warm and fuzzies, and they appeared to enjoy playing the banks off against each other for deposits (and perhaps even some jolly currency switching). All very well, I confess I’ve been through all that myself professionally, but always felt frustrated at having giant hoards of Cash on hand to invest – in an ideal world, I knew the best thing for shareholders and Return on Equity was to have zero Cash and just come in each day and draw down/pay down on a Debt/CP facility. With TOT, of course, the obvious answer to this Cash is frequent execution of small/medium sized acquisitions across Europe (similar to what DCC (DCC:LN) has done for years in its Energy business) – considering the nature/scope of potential business acquisitions, I think there’s a marvelous opportunity here to hoover up cos and double their operating margins v quickly through cost elimination and economies of scale.

Then of course there’s the silent but deadly fart in the room…finally figuring out it’s time to swallow their pride and reverse the Total Produce/Fyffes break-up – a nil-premium merger is the obvious way to achieve this and I imagine could easily yield 2-3 years of decent EPS growth even if the underlying business remained unchanged. But kudos to management for the 22 mio share buyback last year…! I was impressed, can you please repeat?

Why I Read (Part III)…

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activist investors, autodidactism, books, Bruce Kovner, consensus, contrarianism, fear and greed, Howard Marks, investing, Isaiah Berlin, latticework of mental models, literature, Magic Eye, mosaic theory, Nosce Te Ipsum, reading, Warren Buffett

OK, back in June & July, I covered two key benefits of reading:

Knowledge, Experience & Inspiration – a constant & wide-ranging diet of non-fiction reading’s essential for any investor, and something you’ll find all the great investors practice & recommend. 

Nosce Te Ipsum – I believe reading literature’s equally important, it’s one of the few ways you can truly know thyself (& other people). And painful self-awareness & examination offer the best hope of avoiding the potentially devastating impact of fear & greed on your portfolio.

It’s been a long time coming – let’s tackle the final benefit of reading, which I call:  Magic Eye. It’s definitely the most exciting – I guess I’d classify it as offensive, versus the rather defensive nature of the other benefits. But some context would be useful – let’s first talk a little about how I actually read:

Ever since I was a kid, I’ve always found it incredible how the entire world (even multiple worlds) can be encapsulated in a single book. And there’s almost never-ending mountains of them, just waiting to be discovered! In fact, they really are never-ending: In the UK, for example, 150,000 new titles are published each year! Faced with those kinds of numbers, I’ve always felt an overwhelming sense of urgency – how can I ever bloody read quickly & widely enough to ever make a dent in such a mountain?!

Portfolio Allocation (XIII – Alternative Investments)

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activist investors, Alternative Asset Opportunities, alternative assets, Argo Group, asset managers, catalyst, CLOs, correlation, distressed investing, Event Driven, hedge fund seeding, hedge funds, hedge funds of funds, Livermore Investments Group, mortgage hedge funds, portfolio allocation, proprietary trading, Raven Russia, Tetragon Financial Group, thematic investing, volatility

Continued from here.

For now obscure reasons, this series was originally called ‘Hitting the Century‘. At this point, I’ve bowed to the inevitable & given it a more sensible name. It’s still a v leisurely stroll through the topic of portfolio allocation. I usually touch on stocks I actually own quite briefly, as the main objective is to expand on the logic (& attractions) of my specific portfolio allocation. Also, since my approach to investing is better described as thematic rather than (say) geographic, I generally highlight a selection of stocks which may exploit particular theme(s). As a reminder, here’s the allocation pie-chart I’ve used for the series:

Hedge (7%):

Hedge funds were a far larger component of my portfolio. This reflected a gradual migration over the years from open-end funds (many moons ago), to closed-end funds & investment trusts/companies, and finally into hedge funds. This was accompanied by an increasing reluctance to delegate my investing & investments. [Which may surprise you, as investment companies still play a significant role in my portfolio. However, this tends to now reflect my delegation of a specific/specialist investment theme – or simply the selection of a fund itself as an attractive investment, due to the presence of a large discount/catalyst/etc.]. Hedge funds, however, appeared to potentially offer the magic combination of lower volatility/correlation & better long-term returns. Sure, maybe they’d under-perform a bull market, but who cared – they simply ignored down markets, right?!

Donegal Creameries – Low Fat Diet

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activist investors, An Grianan, Camposol Holding, catalyst, dairy, DCP, Donegal Creameries, Glanbia, Ian Ireland, Irish shares, Irish value investing, Monaghan Middlebrook Mushrooms, Produce Investments, Ronnie Wilson, seed potatoes

Last week, I published a surprisingly popular post:  I identified myself as an activist investor, rather than necessarily a value investor (or, heaven forbid, a growth investor!). I meant this in the broadest sense – an activist investor sees a v different company & valuation to the one which currently exists (in the minds of most investors). That obviously implies a corporate transformation – and catalysts are a great way to ensure it occurs. Hopefully, you’ve noticed this approach in a number of my previous investment write-ups, but I also promised a brand new example! So, without further ado, let me introduce:

Donegal Creameries plc (DCP:ID)

OK, let’s just dive right in – here’s a snapshot of their last 5 years:

Ugh, that’s enough to make any investor lactose intolerant..! Revenues have declined 38% over the last 5 years – not surprisingly, cumulative operating profit (OP) is a puny EUR 0.5 mio, while net income’s not much better at EUR 3.1 mio. In per share terms, it looks worse: Net asset value (NAV) declined 12% – even if we add-back dividends, shareholders only earned 1% for the entire period. At this point, we can safely assume the majority of investors (value, or growth) have already discarded Donegal, probably for years to come, as a potential investment…

The Activist Investor

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activist investors, catalyst, Charlie Munger, growth investing, Howard Marks, intrinsic value, latticework of mental models, mosaic theory, recapitalization, second-level thinking, shareholder activism, value investing, Warren Buffett

I’m obviously not averse to some growth – well, if I can buy it bloody cheap, or free – but I don’t think anybody would dream of calling me a growth investor!? But you may be surprised to hear I don’t consider myself a classic value investor either. Ideally (at least in relation to some investments), I like to think of myself as an activist investor.

In this instance, let me hasten to re-define activist in the v broadest sense: Activist investing isn’t necessarily about public engagement with a company’s management – far from it, in many cases. I believe the essence of activist investing actually lies in the investment analysis & the investment itself – not the investor (as many would presume). An activist looks at a company and, on that rare occasion, sees a v different enterprise vs. the company (most) other investors currently see…

– Perhaps he sees a company that’s genuinely worth more dead than alive. Or one that would be far more valuable in the arms of a larger rival. Or a company that has a jewel in the crown that’s obscured by other/inferior divisions, central costs, etc.

– Maybe it’s a company that has under-utilized assets that can be sold to reduce/eliminate excessive debt. Or a company that could execute a recapitalization, and transform its financial metrics & shareholder value.

– Perhaps it’s simply misunderstood – investors may simply not grasp a company’s management/business/strategy have changed in a major way, or they under/over-estimate the potential impact (for example) of some litigation or regulatory action.

Catalysts – A Summary (Part II of II)

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activist investors, Argo Group, Avangardco, binary outcomes, Carl Icahn, catalyst, Daniel Loeb, Expected Value, government regulation, Herbalife, IRR, junk bonds, litigation, major sale, NAV discount, Risk Arbitrage, Robert Chapman, share buyback, shareholder activism

Continued from here.

iv) Activist Investors are my next catalyst. Obviously, there’s no specific timetable here, but since most activists are performance-driven hedge funds, a 6 mth to 2 yr timeline is reasonable. Activists in the UK usually target asset discounts & realizations (so investment trusts/companies are ideal), while European/US activists are perhaps more biased towards operational change (which may require a longer investment horizon).

Most activists prefer to agitate for change behind the scenes, but some prefer to be more public: Carl Icahn (I read King Icahn at least once a year) is the king of the activists – he’s 77 now, but is more of top of his game today than he was 30 yrs ago! Other notorious activists (& 13D filers) are Dan Loeb of Third Point (and here, though he claims he’s mellowed now!) & Robert Chapman, who (presumably!?) introduced the first ‘fuck‘ in an SEC filing. More in-depth reading material includes ‘Risk Arbitrage‘ by Wyser-Pratte, ‘Extreme Value Hedging‘ by Orol, and certain chapters of ‘Free Capital‘ by Guy Thomas.

Argo – Escape from an Evil State!

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% of AUM, activist investors, alternative assets, AREO, ARGO, Argo Group, Argo Real Estate Opportunities Fund, Colony Financial, distressed assets, emerging markets, European sovereign debt crisis, Fortress Investment Group, intrinsic value, Investor Relations, Kyriakos Rialas, Livermore Investments, Mello Central, Price/Cash, Rialas brothers, share buyback, special situations, sub-advisory, The Argo Fund, Universe Group

OK, sorry to disappoint… This definitely isn’t a review of Ben Affleck’s new movie ‘Argo’! [I haven’t seen it yet, but it’s on my list – the reviews are uniformly good, and Affleck displayed a sure hand with ‘The Town’.]

No, this post is about Argo Group Ltd. (ARGO:LN), whose share price is also trapped in a rather evil state… Specifically, the price has steadily declined 35% in recent months to GBP 10.125p – when the company is profitable & has net cash/investments on hand of GBP 20.9p per share! Operational execution & performance ultimately offer the best escape route for Argo. [I’m delighted to see Argo has now launched a new liquid emerging market debt fund. This offers attractive exposure, I’m sure it will clock up a good performance, but real success will come down to the level of fund-raising that’s achieved.] But there a number of additional actions & strategies that may offer considerable assistance in making this escape. Here’s a copy of a recent letter I sent to Kyriakos Rialas, CEO of Argo:

‘November 07, 2012

FAO:    Kyriakos Rialas, CEO

Cc:       Andreas Rialas, CIO

Cc:       Michael Kloter, Chairman

Argo Group Limited

33-37 Athol Street

Douglas

Isle of Man

IM1 1LB