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

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 cold-storage business will continue to be run on a separate basis also, and I suspect some decisive action will finally be taken here. Since Norish has proved incapable of improving profitability here, the only logical plan is to now sell this division. The business, as it stands, appears to be worth far less than the properties themselves – far better to just sell the assets & pay-down debt. Hazarding a wild guess at the potential value of their sites, extracting Norish’s pre-Townview net equity of GBP 7.9 mio seems very achievable (basically equating to GBP 16.5 mio of property, plant & equipment, less GBP 8.4 mio in loans). On top of that, I reckon Townview’s 6.1% operating margin deserves about a 0.5 Price/Sales multiple, and should comfortably support any/all deferred consideration liability that may arise.

This scenario would clearly be trans-formative in terms of value – Norish could be worth a triple…

Price Target:   GBP 158p

Upside:   208%

_

Company:   Circle Oil

Prior Post:   Here

Ticker:   COP:LN

Price:   GBP 15.75p

Circle Oil’s one of those rare beasts, a junior oilie which is v nicely profitable!? It even has a P/E ratio & it’s trading on a ridiculously cheap 4.5 times! Unfortunately, this is somewhat academic… Focusing on a P/E ratio might make some sense with oil majors (since other investors are doing exactly the same), but for juniors it’s a pretty pointless exercise. Junior portfolios are far more limited, particularly in terms of reserves – so congrats if you’re twice as effective a driller/producer (vs. your peers), but that simply means you’re draining your reserves twice as fast also. And you’ll look twice as cheap as them on an earnings basis, but for half as long… Ultimately, you can’t escape the (investment) math. The simple reality is that two junior oilies, each possessing reserves of 5 mio boe, will have a pretty similar intrinsic value (particularly from an acquirer’s perspective) – regardless of any major difference in their respective P&Ls.

The fact Circle’s earnings are more than ploughed back into exploration costs also makes them somewhat academic (though they made good progress in closing the gap in their last interims). I made these points last year also & called for a 40% decline in Circle’s share price – which upset a few Circle jerks at the time. With the share price down 26% since, they certainly have egg on their faces (or whatever..!?), and I’ve a nice endorsement of my thesis (that a cheap P/E’s irrelevant here).

We need to focus on Circle’s reserves instead. Despite regular/encouraging drilling reports in the past year (to be expected, considering their specific drilling strategy), we’ve seen no fresh update on reserves. Therefore, we’ll continue to rely on their net 20.69 mio 2P reserves – I’ll assume my usual $10 in-the-ground valuation for proved & a 50% price haircut for probable (assuming a 50:50 split). They also have $30 mio of convertible debt outstanding, and their latest cash was reported to be $20.5 mio in December. Finally, their latest annualized run rate on cashflow has reduced v nicely to $(1.4) mio. Putting all this together, plus the lower share price, and we see Circle Oil is v slightly under-valued now.

Price Target:   GBP 16.7p

Upside:   6%

_

Company:   United Drug

Prior Post:   Here

Ticker:   UDG:LN

Price:   GBP 275.8p

Long gone are the days when United Drug was a rock-solid earnings machine… For years now, the emphasis has been on acquisitions, with United Drug funding them with debt which was comfortably under-pinned by predictable revenues & steady earnings. The credit crisis put paid to much of that confidence, with everybody pulling in their horns & hunkering down. The company also had to face up to ever-increasing pressure on its domestic Irish/UK revenues as government budgets & prospects turned increasingly sour.

I’ve always suspected the CEO & his management team are more than enamoured with international expansion – take a look & count the number of ‘international‘s in their latest results!? Presumably this is propelled by the usual desire to empire-build & play with the big boys – I detect an absurd pride that over 25% of profits are now earned in the US (and over 70% outside Ireland). This means plenty of fun trips across the Atlantic for management, but shareholders should reflect more on United Drug’s status in the US market – an outsider & a minnow, perhaps? I’m reminded of Greencore Group’s (GNC:LN) poor shareholders – they’re now enduring an even more quixotic push into North America…

I really think sticking to a buy & build European strategy would have been the far more sensible option in both cases. Perhaps even more so for United Drug – US healthcare may turn out to be a truly unpleasant sector to be in, for years to come.

Anyway, after 4 long years in a funk, the share price took off in mid-2012 & is up 55% since last year (far out-pacing my 20% upside target). Which happens to coincide exactly with the re-ignition of United Drug’s acquisition machine – they managed five of them in the second half of last year! So much for my reservations, clearly this is what investors are looking for… Earnings growth remains relatively slow, however, at 11% last year & a projected 5-8% this year – so I suspect we’re looking at the same old story here, i.e. acquisitions are required simply to compensate for the relentless pressure on core revenues & earnings. I’ll stick with a 10 P/E ratio for the moment. Adjusted operating margin’s now 4.6%, which deserves a small bump-up to a 0.4 Price/Sales multiple, and a positive debt adjustment is also warranted to reflect additional debt capacity (for acquisitions). All this, plus the run-up in the share price, have left United Drug looking slightly over-valued at this point.

Price Target:   GBP 245p

Upside:   (11)%

_

Company:   Total Produce

Prior Post:   Here

Ticker:   TOT:ID

Price:   EUR 0.66

Regular readers of the blog will be familiar with Total Produce – it was my largest Irish holding ’til about 2 weeks ago, when I trimmed it down to a 4.8% holding. This reflects no change in my view – I’ve long had a key interim EUR 0.65-66 technical level in mind as a good opportunity to re-base the size of my holding (for risk-management purposes), and to free up cash for a new stake elsewhere…

Last year, I projected an ultimate 114% upside potential for TOT, and we’re well on our way, with almost half that upside now realized at the current share price. I won’t do a fresh write-up here – I think my previous posts still provide a nice road-map (here’s my first post, and my two most recent posts, here & here). Yes, I know those latest posts are a year old, but that’s a good sign! Seriously, in most instances, if your perspective & valuation of a company drastically changes within a year (or, God forbid, within a month!) – you may want to question your choice of companies, and/or your analysis…

Suffice it to explain my latest (improved) valuation:  Latest revenues were just over EUR 2.8 billion, with adjusted EBITA margin (after minorities) coming in around 1.5%. This might deserve a little upgrade, but for the moment I’ll stick to my previous 0.125 Price/Sales multiple. However, we’ll compensate by bumping up revenues to reflect Total Produce’s recent acquisition of a 35% stake in the Oppenheimer Group, which has CAD 525 mio in annual sales. The financial impact of this acquisition is negligible as it can be financed from cash on hand – in fact, TOT’s additional debt capacity warrants a positive debt adjustment. No change appears necessary to my 10 P/E ratio either, which we’ll apply to the latest adjusted diluted eps of EUR 8.11 cts. Total Produce continues to offer v attractive upside.

[Of course, it goes without saying this acquisition policy of buying partial stakes in other produce companies is bloody infuriating..! Let's not even discuss the superiority of acquiring complete control of a target company - it's blindingly obvious the only produce company TOT should focus on acquiring...is TOT itself! What is it with most Irish companies? Do they really need a primer on share buybacks?! Ugh, I'll say no more, I'm sure this topic will come up again..!]

Price Target:   EUR 0.99

Upside:   50%

_

Company:   Falcon Oil & Gas

Prior Post:   None

Ticker:   FOG:LN

Price:   GBP 13.625p

Falcon has actually been around for decades now, in one corporate form or another, and has been listed in Toronto since 1999. The genesis of the company’s current incarnation dates back to 2005, when it completed a reverse takeover of Mako Energy Corporation, an Hungarian exploration firm. Since then, the company’s added other unconventional oil & gas exploration assets in South Africa & Australia. Falcon takes a relatively low-risk approach to exploration, preferring to partner with companies like Hess (in Australia) & NIS (a Gazprom sub., in Hungary) who will fund the majority of any planned exploration spend in return for an increasing share of the assets. All assets are highly prospective, but offer significant upside potential.

Of course, this kind of upside potential & geographically diverse portfolio matches up perfectly with the profile of the average Irish junior resource company – and the average UK/Irish resource stock investor, it must be said..! Where demand exists, supply tends to rush in to supply it – so it was no great surprise when John Craven (ex-Cove Energy) & Philip O’Quigley (ex-Providence Resources (PVR:LN)) came on board as Chairman & CEO, respectively. Which was followed by a new AIM listing, just over a week ago, and a $25 mio placing at GBP 14p per share. Which puts Falcon on a GBP 111 mio market cap – not too shabby for a company that’s been around for decades, with little to show for it yet in terms of proved up reserves or resources!?

But it can still offer precious fodder for muppet dreams…

I wish them all the best in terms of exploration success, but new investors might also want to take a little time to breathe into a paper bag, calm down & ponder a little the implications of Falcon’s long-term chart:

Ouch..!

In the absence of any proved-up assets, we’re forced to fall back on our old reliables. Cash as of the last balance sheet date was $5.9 mio, and Falcon subsequently received $2.5 mio in payments from Chevron & NIS, but spent most of this relocating to Dublin. Also, the net proceeds of the new placing will essentially get eaten up by the current $12.9 mio annual cash-burn rate & the upcoming maturity of $10.8 mio in debentures. This all leaves Falcon looking ridiculously over-valued.

Price Target:   GBP 0.5p

Upside:   (96)%

_

Now, dear reader, if you’re still with me & a real TGISVP fan, I have a little task for you. Noting all the companies covered to date (see Excel file below), I now have 9 more Irish companies left to cover. They are:

If there’s any Irish companies I appear to have forgotten at this point, please alert me now (just comment, or email me at wexboymail@yahoo.com) & I’ll be happy to take a look/include them.

It recently occurred to me there was too much emphasis on performance last year (even though it was pretty enjoyable ) – quarterly updates were certainly a little OTT! Thankfully, this makes my original end-March deadline for TGISVP pretty irrelevant… [In my defence, I think my write-ups have actually been a little more comprehensive this year - and believe me, my recent schedule's shot to hell with a lot more demands on my time!] But I’ll obviously be finished pretty soon with this valuation phase of TGISVP anyway, and we can look forward to seeing if there’s some value-add here again this year.

Now, here’s my usual pair of Excel files, which includes all companies covered to date, plus updated share prices/FX rates/etc. (as of April 7th):

2013 The Great Irish Share Valuation Project X     (xlsx file)

2013 The Great Irish Share Valuation Project X     (xls file)