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2013 – The Great Irish Share Valuation Project (Final – Part XII)
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23-05-2013 6:50am#12013 – The Great Irish Share Valuation Project (Final – Part XII)
Continued from here. This is my final post in the valuation phase of TGISVP - see here for my first 2013 TGISVP post. I’ve only 5 companies left to cover, including a new one suggested by a reader (Kedco,thanks!). [I rejected another - One 51 - as it isn't listed on a regular exchange]. Let’s begin:
Company: Ovoca Gold
Prior Post: Here
Ticker: OVG:LN
Price: GBP 11p
What a difference a year makes, eh!? Last year, I was pretty bullish on Ovoca & its story (perhaps less so on its valuation, but I still saw a reasonable 39% upside). Wow, I even made a $2,000 call on gold (not that I was interested in participating)… However, a couple of months later, I rapidly lost interest in Ovoca as the Russians took over, dodgy loans started popping up on the balance sheet, and their American CEO abruptly resigned & sold his stake. It also made me realize Ovoca isn’t remotely an Irish company any more – in fact, I seriously considered kicking it out of TGISVP. But it’s still an Irish-listed company – so let’s hold our noses & take a closer look.
There’s still been no proving up of reserves in its Rassoshinskaya &
Stakhanovskiy licences. However, the Olcha deposit (from the former licence) was sold in December – to Polymetal Intl. (POLY:LN) (again!), for 0.8 mio POLY shares ($13.5 mio at the time), which adds to the 0.6 mio shares Ovoca already owns. [It's worth highlighting here - Olcha had inferred resources of 650 K gold oz & 3.59 mio silver oz. Get your calculator out - the price tag on the sale's a great reminder that the value of inferred resources is a mere fraction of proved & probable reserves. Let that sink in...] It also has another $0.8 mio in securities & an estimated $21.9 mio of cash. Against this we have an annual cash burn of about $7.5 mio. I’ll ignore $13.9 mio in deferred consideration, as I’d expect any settlement of this liability to be accompanied (in all likelihood) by an advancement/proving up of Ovoca’s remaining gold projects.
This all pegs Ovoca as substantially under-valued – I leave it to you to decide if this kind of value can actually be realized by regular shareholders in a Russian-controlled junior resource stock… [If you're interested, WShak's adventure with the company is worth a look - his analysis made sense, but I get the feeling he was quite relieved with his exit a few months later].
Price Target: GBP 21.9p
Upside: 99%
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Company: Donegal Creameries
Prior Post: Here
Ticker: DCP:ID
Price: EUR 4.55
See here…pretty damn under-valued, eh? ‘Nuff said..!My Donegal stake is now a 6.6% portfolio holding.
Price Target: EUR 16.51
Upside: 263%
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Company: Minco
Prior Post: Here (& here)
Ticker: MIO:LN
Price: GBP 2.875p
After a decade+ of investment in the Pallas Green zinc-lead exploration project, long-suffering shareholders thought they were finally rewarded with a $19.4 mio buyout of Minco’s stake by GlencoreXstrata (GLEN:LN). But I asked the rhetorical question: ‘C’mon…don’t shareholders know management have houses to buy, and cellars to fill?‘ Yup, management’s grip on the cash was tighter than a nun’s knicker elastic – shareholders never saw a penny… Instead, I predicted: ‘I’m also sure they’ll eventually find something else to bury shareholders’ money into for another decade or two…‘
And of course they have: A new adventure in Canada’s now culminated in the imminent takeover of Buchans Minerals Corporation (BMC:CN). Minco shareholders might be relieved it’s a paper, not cash, offer but it’s still a lousy deal in terms of dilution & the liability Minco’s acquiring. Yes, I said liability… Buchans’ only tangible asset to date is CAD 1.7 mio of cash, which doesn’t go far when you’re funding a 2.8 mio annual cash burn. Unfortunately, that’s nothing new – Minco’s burning about $4.8 mio annually itself (it’s also wandering off to explore the Pennines). I see nothing to suggest their respective cash burns will be reduced post-merger, so it looks like Minco’s already diminished cash pile of $14 mio might end up exhausted in another 2 years…
Perhaps I shouldn’t have said ‘exhausted‘ – won’t the cash be replaced by world-class reserves? Yeah, sure – which will take another decade to develop, only to be hastily sold off at a terrible price – and so, the game will begin again… At a valuation based on post-merger cash, less 1 yr of cash burn, plus their 30 mio share stake in Xtierra (XAG:CN), Minco now looks decidedly over-valued.
Price Target: GBP 1.3p
Upside: (55)%
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Company: C&C Group
Prior Post: Here (valuation, no commentary)
Ticker: GCC:ID
Price: EUR 4.75
I’ve never quite understood the general level of investor excitement over C&C. Sure, every couple of years, there’s a brief out-break of summer in the UK/Ireland & cider has a storming good sales year. But then things settle down, and C&C goes back to the slow business of selling cider & Tennent’s, and local distribution in Ireland, N. Ireland & Scotland (they recently acquired the Gleeson Group to bulk up). [And really, who'd go out of their way to drink a bloody Tennent's?! Well, the Scots, I guess - hats off actually, they really came up with a winner in Caledonia Best. Sales are rocketing, and Tennent's is the only UK/Irish division that made any positive progress in the year just ended].
The answer, of course, lies with acquisitions & the US: C&C’s been exporting Magners to the US for a decade now. [I'd drink it myself outside Ireland, but judging by its colour, it's positively radioactive!]. In 2011, they added Hornsby’s, and now they’ve just completed the acquisition of the Vermont Hard Cider Company (maker of Woodchuck) for $305 mio (at a hangover-inducing 20.3 times EBITDA!?). These acquisitions have added the necessary oomph in terms of organic & acquired growth, to offset sluggish UK/Irish markets. Some days I even get excited about the massive potential of cider in the US.
Perhaps, but probably not… In reality, (say) 60% of America still drinks pure suds. Another 10% are sophisticates who drink imported beer – you know, exotic stuff like Heineken. Then there’s another 20% who stick with spirits (and occasionally dabble in old-timey cocktails, served by v interesting people in waistcoats) – because the ads remind them how classy whiskey & vodka drinking really is (er, at 2am, I’d beg to differ…). Finally, the remaining 10% are crazy passionate about craft beer – they’re a nice but pretty hairy bunch. [btw Seriously, I salute the US as having the best craft beer industry in the world, by far!]
This all leaves v little room for poor old cider, and frankly it’s still got much the same reputation as it always did: A rather quaint Oirish/English drink (possibly meant for the ladies) to be tried maybe once or twice – if they could manage the bloody accent, they’d call it coider! This probably implies C&C is ultimately pursuing a cider consolidation strategy in the US – a big fish in what may be (ironically) a fairly small pond. This may not be what investors are currently discounting, but it could turn out to be a great strategy if executed correctly.
Meanwhile, C&C’s earning a 23.9% operating profit margin on net revenues of EUR 477 mio, which I think deserves a 2.25 Price/Sales multiple. There will be a significant EBITDA contribution from the Vermont & Gleeson acquisitions next year, but FY 2014 has been labelled a ‘transition period‘, which suggests further sluggishness in the rest of the business. Based on that, and flat earnings in 2013, a 10 P/E multiple (on EUR 27.7 cts adj dil EPS) seems more than adequate for the moment. The good news is that C&C will continue to maintain decent interest coverage, and has significant cash on hand – suggesting further (bolt-on) acquisitions are possible. Unfortunately, the share price has had a nice run in the past year, and looks fairly over-valued at this point.
Price Target: EUR 2.99
Upside: (37)%
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Company: Kedco
Prior Post: None
Ticker: KED:LN
Price: GBP 0.8p
What a share to finish on..!? My favourite – Kedco’s in the renewable energy business! And it’s very much in start-up phase still, in terms of revenues, etc. - yup, just the kind of share I’m so good at valuing, eh? But I’ve actually taken a stab at valuing renewable energy projects before – the likes of SeaEnergy (SEA:LN) & a couple of others – so I’ve got some idea of values from an asset perspective. Which seems a good way to value Kedco at this point, as they point out themselves in a recent presentation.
First, I’m going to completely ignore their trumpeted 125 MW+ pipeline. Most of these exist on paper for the moment, they can take an eternity to get planning approval (if ever…), and raising funds, construction & sales can take another couple of years in many instances. No point in counting chickens here, and you’ll find there’s been v little invested in these projects to date anyway. I’m also going to ignore their small/approved anaerobic digestion & solar projects as too uncertain and/or immaterial.
That leaves:
- Three planning-approved wind-power projects totaling 1.8 MW. Total cost for wind-power is generally EUR 1-2 mio per MW, so let’s split the difference. Of course, they still need to be built, so let’s just assume the current value’s 20% of final cost (basically representing costs to date & development profit). That’s about EUR 0.5 mio.
- Their 4 MW Newry biomass CHP plant. Kedco’s average cost for biomass is around GBP 3.75 mio per MW – about 3 times that of wind-power, which rings a bell from my previous research. In this instance, the second 2 MW of this capacity will come on line in 2013, so let’s presume we’re simply talking about 3 MW for the moment. Kedco owns 50% of Newry in a JV, but will get to ultimately enjoy 92% of the economic profit – again, let’s split the difference, and simply assume they’re currently entitled to 71% of the current valuation. That equates to GBP 7.8 mio.
- Finally, they have a 12 MW Enfield biomass CHP plant all approved, and ready to move into its development phase. As with wind-power, let’s assume it’s now worth 20% of the final GBP 46 mio cost estimate – that’s another GBP 9.2 mio.
Now we just need to throw the company’s net debt of EUR 3.4 mio, and current annual expenses (of EUR 1.8 mio), into the mix – somewhat surprisingly, Kedco actually turns out to be quite under-valued!Of course, one shouldn’t forget their lack of cash vs. the potential scale of their project pipeline. This is all too familiar in the industry – much like the junior resource sector, companies have to constantly scramble to sell & farm-out promising projects to raise much needed cash for their next set of projects.
Price Target: GBP 1.2p
Upside: 47%
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OK, here’s my usual pair of Excel files, which includes (for your reference) my exact valuation figures & calculation for each of the companies above. Also included are all other companies covered to date (with updated share prices, FX rates, etc. as of May 15th), and of course I’ve re-ranked all companies (a grand total of 73 companies!) according to their current Upside Potential.
2013 The Great Irish Share Valuation Project XII (xlsx file)
2013 The Great Irish Share Valuation Project XII (xls file)
[Note I've also retained a hard-coded file with all the original share prices & price targets, so I can properly measure TGISVP performance later in the year].
Now, just to give you a taste - according to my valuations, here’s the current Top 10 Most Over-Valued Irish Shares:
Oh Lord, what a sorry collection… I actually pegged 9 out of 10 of these cripples as worthless!? Now, I must point out: i) Independent News & Media is currently in the throes of a debt & pension restructuring – this could possibly improve things, but I’m not convinced it’s going to be sufficient, and/or dilution for existing shareholders might be so bad ultimately the shares might as well be worthless, and ii) I still say my zero valuation for Continental Farmers Group was about right (God, just look at cash, debt & cashflow in their latest results), but shareholders are v fortunately getting bailed out by the Saudis at GBP 36p per share. As for the other shares, please exercise your own judgement before you consider avoiding/selling them – oh, who am I kidding, most of these little no-hopers should be dumped asap!
OK, let’s sign off with a much more fun table – (again, according to my valuations) here’s the current Top 10 MostUnder-Valued Irish Shares:
Hard to believe, but the fact I own the two shares with the highest upside potential is (somewhat) by chance..!? In reality, upside’s simply one of many factors I evaluate before deciding to establish a position. Of course, please bear that in mind if you’re considering any of the shares above for your own portfolio. Actually, I might never dream of investing in a couple of these shares – in some instances, for example, upside potential cannot hope to capture (or compensate for) the risks involved…
OK, cheers folks, I’ll be returning to TGISVP later this year to evaluate performance…2
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