2016 – The Great Irish Share Valuation Project (Part II)

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Circle Oil, CRH, Escher Group Holdings, First Derivatives, Galantas Gold Corp, IMC Exploration Group, Irish shares, Irish Stock Exchange, Irish value investing, ISEQ, iShares MSCI Ireland Capped ETF, Keywords Studios, TGISVP, The Great Irish Share Valuation Project, Total Produce, Tullow Oil

Continued from here:

Company:   First Derivatives   (FDP:LN)

Last TGISVP Post:   Here

Market Cap:   GBP 494 Million

Price:   GBP 2,038p

My last write-up was bang in the middle of a sickening price reversal. While FDP got nearly sliced in half at the time, my price target’s been massively adrift ever since. Clearly, I was wrong to speculate FDP’s consulting business* might eventually grind to a halt – as banks continue to retrench, we’re actually seeing an increasing reliance on IT outsourcing, while reduced head-count & market evolution demanded ever greater technology capacity & automation. [*Let’s not forget consulting (64% of revenue) remains FDP’s primary business, and its margins are far less scale-able than software]. And revenue’s continued to forge ahead, at an average 28% pa in the last three years, assisted by FDP’s serial acquisition strategy (three new acquisitions & a consolidation of Kx Systems in the last 18 months, or so). Earnings growth trailed though, as FDP essentially bought revenue/technology (rather than profits…with new Big Data & IoT opportunities also being touted) & the share count’s been diluted almost 25% in the last couple of years. [Even on a revenue basis, those acquisitions look damn expensive – averaging over 7 times sales, vs. a 4.2 P/S multiple for FDP]. But FY-2016 was clearly a real gang-busters year, boasting 41% revenue & 33% EPS growth.

However, we’re still seeing a huge disconnect between EBITDA & operating free cash flow margins (Op FCF: Operating cash flow, less net PPE/intangible expenditure). But presuming software is the ultimate driver of the business, EBITDA will become increasingly relevant: A decent compromise for now is to use an adjusted margin, averaging the latest 19.9% EBITDA margin & Op FCF margin of 7.2% (noting a prior year margin of just 2.6%) – a 13.6% adjusted margin deserves a 1.33 Price/Sales ratio. And noting FDP’s financial strength (with net debt of just £15 million), we can adjust for (surplus) cash & also add a debt adjustment. [Based on this adjusted margin, I calculate another £23 million in debt (at an assumed 5% rate, for acquisitions etc.) would still limit finance expense to 15% of adjusted margin – as usual, let’s apply a 50% haircut, just to be conservative]. Of course, we also need to value FDP as a growth stock: While earnings growth has accelerated to 33%, we should still recognise the huge/ongoing disconnect vs. cash flow (& reported earnings, which are now about 40% lower than adjusted diluted earnings) – limiting ourselves to a 20.0 Price/Earnings ratio, based on adjusted diluted EPS, seems only prudent (or maybe even generous):

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2014 – The Great Irish Share Valuation Project (Part II)

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Circle Oil, Dalradian Resources, IFG Group, Irish shares, Irish Stock Exchange, Irish value investing, ISEQ, Merrion Pharmaceuticals, Ovoca Gold, portfolio performance, Prime Active Capital, REACT Energy, TGISVP, The Great Irish Share Valuation Project, UTV Media

Continued from here. As usual, I encourage you also click on the 2012 & 2013 links for each company, to add some valuable colour/background. Now, let’s jump right in:

Company:   Circle Oil

Prior Post(s):   2012 & 2013

Ticker:   COP:LN

Price:   GBP 20.625p

Look at Circle Oil’s latest interims, what’s not to like? Revenue up 20%, EBITDA up 34%, and cash generated from operations (after working capital changes) up 69%. And if you annualize net profit, Circle’s trading on a 6.6 P/E! But it’s not as simple as that… Focusing on a P/E ratio’s a rather pointless (& misleading) exercise when it comes to junior resource companies. [Well, most don’t have any ‘E’ anyway!] Even if they’re fortunate enough to be producers, they’re often melting ice-cubes – i.e. they’re exploiting a (sometimes rapidly) depleting reserve base. Basically, they haven’t diversified enough, spent enough, and/or mastered the art of reserve replacement. That’s how the majors play the game, of course – but for the juniors, it’s much more of a lucky (& lumpy) game. This is one of the main issues Circle faces right now.

[Well, two other big issues: i) About 27% of its shareholder base remains a potential stock over-hang – Libya Oil Holdings owns 18%, while Kaupthing Bank owns 9% – not surprisingly, both stakes are essentially ‘frozen’! And: ii) Investors are still leery of the fact a majority of Circle’s production is in Egypt. Maybe a little unfairly, as the company doesn’t appear to have suffered any disruption/interference to date. But it does suffer from another long-standing Egyptian problem…getting paid! Fortunately, the situation’s stabilized somewhat, but Circle continues to have more than 6 mths of trade receivables outstanding].

At the current production rate, Circle’s only got about 6-7 yrs of reserves left. That’s not something you can tag with a P/E ratio! And despite a $42 M pa exploration/capex spend, it hasn’t managed to put new reserves on the board recently. OK, I’m probably being a little harsh here – despite this spend, the company’s actually generating positive free cash flow. Far better than most junior resource companies out there…OK, we all know 9 out of 10 juniors are rubbish anyway! Because of this reserve depletion, and COP’s current (relatively small) market cap, I’ll continue to value it on an asset basis.

As of mid-2013, net 2P reserves were down to 16.3 M boe. No allocation between proved & probable is provided, so let’s assume a 50:50 split & my usual $10 & $5 per boe (respective) in-the-ground valuations. There’s $30.6 M of cash on hand, and let’s include net trade receivables of 20.2 M. [That’s being kind – Egyptian receivables will likely remain a semi-permanent & illiquid asset]. We then offset 11.6 M of bank debt, and a 30 M convertible loan. [This may ultimately become equity, but the share price continues to trade below the loan’s conversion prices]. That gives us:

2013 – The Great Irish Share Valuation Project (Part X)

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2P Reserves, Circle Oil, Cove Energy, Falcon Oil & Gas, Irish shares, Irish value investing, John Craven, Norish, portfolio performance, share buyback, TGISVP, The Great Irish Share Valuation Project, Total Produce, Townview Foods, United Drug

Continued from here.

Company:   Norish

Prior Post:   Here

Ticker:   NSH:LN

Price:   GBP 51.25p

Last year, I pretty much tore Norish a new one..! Which was certainly well deserved: They own 8 UK cold-storage sites, which they actively manage – all for a bloody return lower than they’d earn leasing them out!? Despite this, I still flagged them as offering 42% upside – a year later, they’re now trading right in line with my target price. And finally, something’s happening here…

In Sep-12, they acquired Townview Foods, a Northern Irish meat trading firm with GBP 16.2 mio of annual revenues & a GBP 1.0 mio operating profit. The management team appears to have been left in place, as ‘Townview will continue to operate as a separate business within the Norish Group‘. This is encouraging – the last thing needed here are Norish executives messing up what looks like a decent/stable business.

The Great Irish Share Valuation Project IX

Tags

2P Reserves, Alkermes, Amarin, Anadarko, Andor Technology, Botswana Diamonds, Circle Oil, Clontarf Energy, Connemara Mining, Cooley Distillery, Cove Energy, Dragon Oil, Escher Group, Galantas Gold, Interior Services Group, iShares MSCI Ireland ETF, Jazz Pharmaceuticals, Jim Beam, John Teeling, Kentz, Minco, Ovoca Gold, Petrel Resources, PTT, Royal Dutch Shell, Siteserv, TGISVP, Tullow Oil, USPS, Worldspreads, Xstrata, Xtierra

Continued from here.

As I’ve mentioned, we’ve another 20 odd non-ISEQ listed Irish stocks to work through still. I should first note I’ve eliminated Alkermes (ALKS:US) and Amarin (AMRN:US) (and Jazz Pharmaceuticals (JAZZ:US) never even made the cut*). Clearly, an Ireland HQ is particularly attractive for pharma companies! Any reader care to enlighten us further..? I wasn’t fooled by this shell game, but they had some Irish directors/management/locations, so I planned to include them in TGISVP. Now I look again, their Irish ‘representation‘ is pretty small, and sure to get even smaller… So they’re out – unless someone wants to email and persuade me otherwise!?

I’ve also revised valuations for Worldspreads (WSPR:LN) and Siteserv (SSV:LN) – in fact, they kind of swap places in the rankings! I was briefly commenting here on both companies, and their respective scandals, and it got a little out of control..! I had to upgrade to a separate article. Note I’m keeping a file of all original share prices and valuations, which I’ll use for any performance/evaluation exercises at a later date. Right, let’s see if we find anything interesting in this batch: