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

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Botswana Diamonds, Brexit, Connemara Mining Company, Dalata Hotel Group, GAN, Green REIT, Irish shares, Irish Stock Exchange, Irish value investing, ISEQ, Mincon Group, New Ireland Fund, TGISVP, The Great Irish Share Valuation Project, UDG Healthcare

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 fantasy – no 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:

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

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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:

Company:   Irish Residential Properties REIT   (IRES:ID)

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:

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):

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

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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.‘

The Celtic Phoenix…Five Consecutive Years of Market Gains & 6.6% GDP Growth!?

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Celtic Phoenix, intrinsic value, Ireland, Irish shares, Irish Stock Exchange, Irish value investing, ISEQ, stock valuation, TGISVP, The Great Irish Share Valuation Project

A picture’s worth a thousand words – here’s a 5 year chart of the ISEQ:

Truly, a thing of beauty…

And over the life of the blog, the Irish market has delivered four consecutive years of gains:

2012:   +17.1%

2013:   +33.6%

2014:   +15.1%

2015:   +30.0%

Cumulative Gain:   +134%

[And yes, the title of the post’s correct…the ISEQ also managed to eke out a small gain in 2011: +0.6%.]

And here’s the cumulative gains (over the same period) of the other major indices I use as portfolio benchmarks:

S&P 500:   +63%

FTSE 100:   +12%

Bloomberg European 500:   +46%

Wow, even the S&P’s performance looks positively pedestrian…

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

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Aer Lingus Group, Aminex, Connemara Mining Company, Fastnet Oil & Gas, Irish shares, Irish Stock Exchange, Irish value investing, ISEQ, Kenmare Resources, NTR plc, portfolio performance, TGISVP, The Great Irish Share Valuation Project, Zamano

Continued from here.

My commentary & analysis of last year’s TGISVP losers & winners may have been meat & veg for some, but let’s kill the suspense & move on to dessert… How did 2014 performance stack up for the TGISVP Portfolios, vs. our ISEQ benchmark? Let’s take a look at the Beta Portfolios first:

[NB: Here’s a reminder of how they were constructed:

TGISVP – Beta Portfolio:  Assume an investor goes equally long all 27 stocks with positive Upside Potential (e.g. invests EUR 1 in each stock, for a total of EUR 27). The other 54 stocks, identified as neutral (2) or over-valued (52), are ignored. The portfolio return contribution from each stock is simply its Gain/(Loss)%/27.

TGISVP – Smart Beta Portfolio:  Stocks are chosen on the same basis as the Beta Portfolio, with one twist: All 27 stocks are divided into quartiles – assume EUR 4 is invested in each top quartile stock, 3 EUR in the next quartile stocks, down to EUR 1 in the bottom quartile stocks (for a total of EUR 70). This preserves diversification, but focuses the portfolio on stocks with the most Upside Potential.]

[NB: Again, see my last post – the appropriate benchmark return here is 4.7%, reflecting the ISEQ’s performance from March-30th ’til year-end. For reference, calendar year ISEQ performance was 15.1%].

The Great Irish Share Valuation Project – 2014 Portfolio Performance

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Irish shares, Irish Stock Exchange, Irish value investing, ISEQ, portfolio performance, TGISVP, The Great Irish Share Valuation Project

It’s already well over a fortnight into the new year…time to scramble & take a closer look at last year’s portfolio performance! Let’s begin with The Great Irish Share Valuation Project – for reference, here’s my H1-2014 review. First, some notes:

– I managed to cover a grand total of 81 Irish companies, from the beginning of Feb ’til end-May last year – except for NTR plc, a new Wexboy portfolio holding I wrote up last August.

– I obviously referenced the latest share price when assessing each company’s individual valuation & upside potential. And March-30th was an appropriate mid-point date for the entire exercise, so I’ll adjust my benchmark accordingly: Keeping things simple, I’ll use the closing price level on that date as a starting value for my ISEQ Index performance.

– I should highlight the benchmark return was 4.7% (from March-30th ’til year-end). Which is substantially lower than the ISEQ’s actual FY-2014 performance of 15.1%** (the Irish market obviously enjoyed a great Q1 surge), though it’s clearly an appropriate benchmark to use. Sure, doing TGISVP on a nice & neat calendar year basis would be awesome…but that would require me conjuring up six/seven dozen write-ups & valuations, from scratch, on New Year’s Day! It’s never gonna happen…

[**Ireland was a top quintile global performer in 2014. And, of all countries, Argentina topped the charts with a spectacular 54.5% return! Which might well suggest buying Russia today (down 44.9% last year) could ultimately prove to be a very brave & smart decision, eh?!]

TGISVP – One Last Yr-End Snapshot

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Donegal Investment Group, Irish shares, Irish Stock Exchange, Irish value investing, ISEQ, NTR plc, Petroneft Resources, REACT Energy, TGISVP, The Great Irish Share Valuation Project, US Oil & Gas, Zamano

Now we have 2014 closing prices, let’s begin the New Year with The Great Irish Share Valuation Project: As you survey your year-end portfolio (and ponder potential 2015 buys & sells), an updated Irish stock ranking might prove useful – in terms of current share price vs. my TGISVP target price (i.e. current Upside Potential).

Since completing my usual valuation phase (as of end-May), I’ve added just one new stock write-up (NTR plc) & updated three stock valuations – Petroneft Resources (PTR:LN), Prime Active Capital (PACC:ID) & Fyffes (FFY:ID) – therefore, please be aware target prices in this post are now up to 11 months old. So while intrinsic valuations mostly tend to change quite gradually, pay close attention to any subsequent news & results (and possible valuation implications) – and, notably, to the potential impact(s) of the H2-2014 collapse in the Brent/WTI oil price. [Though let’s not overestimate this factor…I’m always amused by muppets who fondly entertain the notion a gyrating oil price is somehow relevant to the actual prospects of their favourite (but hopeless) junior resource stock!?]. And while we’re at it, I should also highlight our Irish stock universe is now down to 77 listings, after four H2-2014 market exits:

– Kentz Corp (KENZ:LN) was taken out by SNC-Lavalin Group. This acquisition was already locked down by the time the oil price started to slide (Petroceltic International wasn’t so lucky…), so this ultimately turned out to be a beautifully timed deal (and at a beautiful price & premium) for KENZ shareholders.

– TVC Holdings (TVCH:ID) distributed its stake in UTV Media (UTV:LN) to shareholders, and delisted shortly thereafter to continue its residual wind-down in private.

– REACT Energy (REAC:LN) has been suspended, pending clarification of the company’s financial (i.e. funding) position. That’s a shame – REAC’s yet another potentially good/great business undermined by insufficient funding. [I did see upside potential for REAC, in asset terms, but warned ‘Of course, the big problem here still is funding’]. This is a common hand-to-mouth complaint for many small(er) companies, but unacceptable when it comes to public companies – it seems an obvious fiduciary duty for management to scale (back) operating & capital expenditure plans, if necessary, to match the funding their company actually has available.

TGISVP – An Updated Snapshot

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Donegal Investment Group, Fyffes, Irish shares, Irish Stock Exchange, Irish value investing, ISEQ, NTR, Petroneft Resources, Prime Active Capital, TGISVP, The Great Irish Share Valuation Project, Zamano

Unfortunately, after starting with such promise, the months of September & October now appear to be living up to their more usual fearsome reputation. At this point, we’re forced to commiserate over a 10% correction (in round numbers) for the ISEQ from its most recent (early-Sep) high, including a 6.3% fall last week. And the fact the index is down almost 14% from its (end-Feb) 2014 high just compounds the misery. But corrections also present a good opportunity to re-evaluate battle plans… Now, I’ll obviously be reviewing The Great Irish Valuation Project in greater detail at year-end, so I’m going to strictly limit my comments here.

Updated snapshots of this year’s top winners & losers might prove instructive… [NB: Each stock’s gain/loss is simply measured from its TGISVP evaluation date (i.e. Feb-May, except for NTR), so actual YTD performance rankings of stocks might look a little different]. First we have the Sewer Shit:

Maybe it’s worth picking through the rubble for a couple of bargains? Hmm, perhaps not – with a couple of notable exceptions, all I see here really are bombs that may still explode in one’s face. As for ‘investors’ who already own some of these stocks, what can I say…if they’re stupid enough to buy ’em in the first place, I’m surely not the person who’s going to persuade them to finally cut their losses & run!

H1-2014 TGISVP, Portfolio Performance

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Alpha Portfolio, Beta Portfolio, Irish shares, Irish Stock Exchange, Irish value investing, ISEQ, portfolio performance, Smart Alpha Portfolio, Smart Beta Portfolio, TGISVP, The Great Irish Share Valuation Project

Now, let’s take a look at H1-2014 performance for The Great Irish Share Valuation Project. The valuation phase (covering 80 companies) ran from Feb to May, so the mid-point of these posts (March-30th) is the most appropriate start date for benchmarking purposes. Since then, the ISEQ is down 5.8% (as of end-June), so any TGISVP out-performance will be doubly welcome…

Actually, the ISEQ’s recent decline has been even more pronounced – since its end-Feb high, the index is down 9.5%. [And we have a similar pattern with the UK’s AIM All-Share, down a whopping 12.7% since its March high. Clearly, the major indices have been performing very differently…I expect to revisit this divergence in my next post]. Despite that, it’s worth highlighting the ISEQ still managed a 3.5% gain for the entire first half – a nice reminder the Irish market seems to enjoy disproportionate first quarter gains nearly every single year.

OK, before looking at overall performance, let’s have some fun – who were the individual winners & losers to date?! [Remember, for each stock, we’re only looking at gains/losses since its TGISVP evaluation date (i.e. Feb-May), so these tables don’t necessarily reflect full H1 performance…though I’m sure there’s plenty of overlap!]. Here’s the Sewer Shit:

This includes most of the usual suspects – junior resource stocks on their inevitable march to zero…