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…

Crushin’ It: FY-2015 Portfolio Performance

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benchmarking, Bloomberg Euro 500, emerging markets, frontier markets, FTSE 100, FTSE AIM All-Share, hedge funds, ISEQ, portfolio allocation, portfolio performance, S&P 500, value investing

OK, Top Tips done – now, it’s performance time!

And already I’m fully aware the designated performance benchmark here is very different for me than everybody else…which is, of course, entirely my own fault! Because I chose to include the ISEQ as 25% of my benchmark, and it’s performed quite spectacularly every single year. Which, you’ll have to admit, is terribly unfair… 😉

Unfair, because it jacks up my benchmark return every year. And because it’s such a painful & galling reminder that if I’d been just a little bit dumber, and simply overdosed on the Irish market, doubtless I’d now be reporting a totally amazing performance. Except…who bets their entire portfolio on a single market? Esp. the Irish market, which is a mere rounding error globally (in terms of market cap)? Intellectually, prudent diversification makes all the sense in the world, but emotionally it’s a lose-lose proposition: ‘Cos markets surge & you loathe being diversified, you just want to concentrated on the winners…then markets collapse, and being diversified is great, except you’re still inescapably miserable because you’re actually losing money! But at this point, the ISEQ’s clearly my personal cross to bear – so let’s just stick with it – here’s my 2015 benchmark:

Obviously, it’s been a game of two halves – with most markets suffering in the second half – so I’ve also added a H1 vs. H2 breakout. But wouldya ever take a gander at that ISEQ performance! Who’d have expected an additional +12.0% rally, after an +18.0% surge in H1? And that’s nothing…if I described a market which had clocked 15%+ annual returns in 2012-2014, would you ever have guessed a +30.0% return for 2015?! Methinks not… But then again, I’ve actually been consistently bullish on the Irish market for the past 4 years now – which I’m v pleased by, except when I agonise over the fact I capitalised far too little on such prescience. Sad, sad, sad…

Wexboy Portfolio Performance – Total Gain & CAGR (since Blog Inception)

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benchmarking, Bloomberg Euro 500, FTSE 100, hedge funds, investment blogs, ISEQ, portfolio allocation, portfolio performance, S&P 500, track record, value investing

Crikey, the blog’s 4 years old soon! So this post’s been on my to-do list for quite some time now…as they say in the hedge fund world, you’re nothing ’til you’ve racked up a 3 year track record! And maybe it’s the perfect time for it, anyway – with an hysterical media insisting the market (& the global economy) are on the verge of collapse again, a reminder of the opportunity & rewards of medium/long term equity investment may offer some welcome relief.

First, I should remind readers of my approach since day one. When I started out here, there were some great investment blogs (some which I read to this day) that served as inspiration. Except many didn’t have any kind of portfolio tracking, or performance, which frustrated me… Now, don’t get me wrong, performance certainly isn’t the be-all & end-all of any blog. Quite obviously, the quality of the investment ideas & analysis is far more important.

Or is it..?

I mean, how on earth do you evaluate an investor’s conviction regarding a specific stock…when you don’t know whether he’s really putting his money where his mouth is (or even if he owns the stock at all)?! I’m not talking dollar/euros & cents here, disclosing the relative size of a position is more than enough. Call me crass & materialistic, but I tend to pay a hell of a lot more attention to someone telling me about their new 10% portfolio holding, rather than some 2% place-holder – how about you?! And then there’s the sad fact that investing isn’t just about investment ideas. As any hedge fund honcho will tell you, a great analyst doesn’t necessarily make a great fund manager…

‘Cos play money ain’t the same thing as real money!

[NB: And nope, I’m not (& have never been) a frustrated hedge fund analyst!]

So, when it comes to investment blogs, it’s natural to want a more holistic view of what an investor really brings to the table. Are they prepared to expose their portfolio to real-time public scrutiny? And if they are, can they actually live with that decision? For example: How do they perform under pressure, and how do they deal with the pernicious impact(s) of fear & greed? Do they insist on defending a failed investment thesis & going down with the ship, or can they bring themselves to admit they’re wrong…even when they secretly believe they’re still right? Or as any good trader might ask:

Do you wanna be right, or do you wanna make money..?!

Smokin’ the S&P…H1-2015 Wexboy Portfolio Performance!

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Alternative Asset Opportunities, Argo Group, Bloomberg Euro 500, Donegal Investment Group, EIIB, FTSE 100, ISEQ, KWG Kommunale Wohnen, Newmark Security, NTR plc, One51, portfolio performance, S&P 500, takeover offers, Universe Group, value investing, Zamano

Oh Lord, where did July go..?! I’d hoped to publish my H1-2015 portfolio performance report a week/ten days ago, but I guess the days kinda slipped away – who can fault a bit of fun in the sun, esp. when my portfolio holdings are slowly but surely marching higher (despite all the China volatility & the fact the US market’s totally sucking wind this year).

Now, if you’re a regular reader, I recently detailed my (still) developing bubble thesis (Parts I to IV), suggesting an increased focus on large cap stocks (a new global Nifty Fifty) might be more profitable. [Though I’m also v conscious of certain small/micro cap successes in the past 12-18 months – a bar-bell strategy, in terms of market cap, may ultimately prove more compelling]. But in terms of immediate portfolio changes, I hastened to add: ‘I don’t believe there’s any great rush here, necessarily’. Well, that being said…let’s first kick off with some (end-June) portfolio changes!

Portfolio Sales:

Alternative Asset Opportunities (TLI:LN):  TLI had a great H2-2014 run – gaining over 22% (inc. a 2p return of capital), making it my top holding at year-end (at 11.1%). Since then, the insured have enjoyed a real stroke of luck, with just one maturity announced. Not surprisingly, the shares are off YTD in sympathy (reducing my holding, in % terms). But I’d focus on TLI’s portfolio instead – adjusting for minor FX unfavourability, and an additional 2p ret. of capital, TLI’s underlying NAV decline was limited to just 3%.

And I see no change in prospects: We’re at the end of a long & painful life expectancy adjustment process (in fact, June NAV inc. a meaningful positive LE impact), and the insured are now 91.5 yrs old on average – maturities will inevitably accelerate (peaking in 2019-20). There’s little financial risk (with an available credit facility, zero debt & cash on hand), and TLI’s focused on regular returns of capital. Sure, we can debate valuations, but shouldn’t lose sight of the big picture – as per the latest results, the portfolio now consists of $132 million in death benefits vs. a current carrying value of $45 million.

But owning such a defensive & uncorrelated investment isn’t as compelling a requirement for me today, and I see equally attractive (albeit, more correlated) opportunities elsewhere. I’ve reduced my shareholding accordingly, from 9.1% to 7.0%. [NB: I normally don’t add to individual holdings beyond a 7.5% limit – TLI remains a substantial position for me].

Wexboy Portfolio – FY-2014 Performance

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Alternative Asset Opportunities, Argo Group, Bloomberg Euro 500, emerging markets, FTSE 100, FTSE AIM All-Share, ISEQ, NTR plc, portfolio allocation, portfolio performance, S&P 500, Saga Furs, value investing, VinaCapital Vietnam Opportunity Fund, Zamano

Crikey, the days are flying by already, eh?! Here we are, January’s nearly over & a FY-2014 performance review would look a bit silly in February… So let’s bang this one out: So, how did the Wexboy Portfolio perform for FY-2014? [For reference, here’s my mid-year review]. First, let’s take a peek at my usual benchmark:

Maybe this is hindsight talking, but looking at these index returns, they (nearly all) make perfect sense to me now! But duh, isn’t that true most of the time!? That is, assuming you accept momentum generally trumps value in the market…

The Irish market enjoyed the highest return, as it continues to accelerate slowly but surely out of an unprecedented recession. Of course, the recession was inevitable, but was unfortunately compounded by the foolishness of the banks & then the government itself. However, the scale & trajectory of the burgeoning recovery (now & to come) is well-deserved. Ireland may have waved goodbye to currency flexibility, but it’s one of the very few countries that still proved willing & able to take the public & private pain of radical fiscal & competitiveness adjustment, and now it’s starting to pay off in spades… [Right now, Beardy Krugman must be wishing Ireland was wiped off the map!]

The US market wasn’t far behind, though for entirely different reasons. Being the epicentre of a global financial crisis proved an excellent strategy…ideally, you end up being rewarded as the first country to subsequently escape recession! But it seems blindingly obvious the US recovery (& accompanying market rally) wouldn’t exist without the GUBU fiscal & monetary debasement we’ve witnessed. Which presents a dilemma for investors: Do you abstain, on the basis it promises an even more catastrophic disaster to come (as we’ve regularly seen since the late ’90s, as a direct consequence of the Fed’s actions & inaction)? Or do you believe the Krugmanesque fairy tale of a free lunch – government stimulus & QE really can deliver sustainable economic recovery at no perceived cost? [Hmmm, maybe a dine & dash strategy does offer a free lunch…well, ’til you’re caught!] The answer, I suppose, is the usual one:

Don’t fight the Fed!

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%].