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

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

Links/Charts/Files/etc: https://wexboy.wordpress.com/2016/05/30/2016-the-great-irish-share-valuation-project-part-ii/

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):

(GBP 0.517 Adj Dil EPS * 20.0 P/E + (117 M Rev * 1.33 P/S + 15.1 M Cash + 23.1 M Debt Adjustment * 50%) / 24.2 M Shares) / 2 = GBP 893p

Again, First Derivatives looks massively over-valued. Which reflects the fact it’s one of those stocks where investors will inevitably have a totally binary positive/negative perspective, depending on which figures & accounting statement(s) they focus on – not unusual for a serial acquirer. As long as revenue (& earnings momentum) is maintained, growth investors will ignore anaemic cash flow, potentially fudged accounting, dilution, any potential increases in leverage, and keep buying at almost any price…the optimistic outcome is for FDP to eventually grow into its valuation. On the other hand, if something goes horribly wrong here, and/or investors’ expectations are dashed, my new fair value may end up looking pretty generous for what could become a pariah stock…

Price Target: GBP 893p

Upside/(Downside): (56)%

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Company: Tullow Oil (TLW:LN)

Last TGISVP Post: Here

Market Cap: GBP 2,173 M

Price: GBP 238.2p

Tullow’s probably one of my biggest & most ambitious TGISVP calls to date. Back in 2012, at 1,543p per share (close to its peak), I predicted a near-80% decline with a fair value of 339p. Just imagine the howls of outrage from TLW shareholders at the time…of course, the irony today is that I was being overly-generous! But this wasn’t some prescient bet on an oil price collapse – despite being one of the few resource stocks deserving of a P/S & P/E multiple at the time, I couldn’t ignore the mathematical logic of the long-term discounted value of its proved-up assets in-the-ground vs. its net debt burden (which was actually much lighter then). But as happens so often with over-valued stocks, price & valuation don’t necessarily converge – negative trigger(s) may be required. In the end, the oil price collapse was the obvious trigger here, but production issues with the Jubilee Field & a Ugandan tax battle were also reminders of the operating, financial & political risks facing an increasingly African-focused company.

TLW management’s done its best to respond to collapsing revenue & earnings – by re-focusing capex on W Africa, slashing costs & head-count, eliminating a major portion of the exploration budget, and getting rid of the dividend. And fortunately, debt service is technically not an issue – the company’s continued to generate a healthy $1.4 billion pa of operating cash (on average in the last two years) vs. an average $0.2 billion pa in finance costs paid. The real problem (& perhaps opportunity?!) is actually the TEN Field – perhaps fearing a worse alternative, Tullow & its lenders opted for an all or nothing bet on TEN’s development. Which means TLW’s actually averaged $(1.0) billion FCF pa & net debt’s doubled to $4.5 billion (as of end-April) in the last couple of years, with nothing tangible to show for it yet…production & reserves are down in the last five years, production costs are up, and everything’s now pinned on timely (so far, so good) & successful TEN production.

An asset-based valuation is the only one that makes sense here now. My standard in-the-ground valuation of a barrel of oil equivalent (based on market and M&A multiples) was $10 per proved boe, with a 50% discount for probable boe, and occasionally I’ll include contingent resources at a 75% discount. Obviously, such a valuation must necessarily discount long-term price, geological, operating, political, tax, etc. risks over a life of years & even decades. As a rule of thumb, it tends to approximate 10% of the average spot price. Post-oil price collapse, this 10% rule doesn’t make sense…I think it’s prudent to adopt an $8 per proved boe valuation & to discount in similar fashion. Tullow now has 322 million boe of proved & probable reserves (see p. 170), which we’ll value at $6 per boe (assuming a 50:50 split). It also makes sense to include its 975 million boe of contingent resources at $2 per boe. Of course, we must adjust for the company’s latest net debt figure, and it’s only fair to include net derivatives of $0.6 billion (representing profitable oil hedges):

(322 M boe Proved & Probable * $8 * 75% + 975 M boe Contingent * $8 * 25% – USD 4.5 B Net Debt + 0.6 B Net Derivatives) / 1.4623 GBP/USD / 912 M Shares = GBP 0.2p

Yeah…

You read it right: I reckon Tullow’s essentially worthless at this point. Now, let the foaming of the mouths re-commence… If it’s any consolation, this absurdly precise price target is purely academic. Because, as with most (potentially) distressed companies, there’s a completely binary outcome to handicap here. Clearly, the profit (& more importantly, the cash flow) on a TEN boe that’s actually produced & sold this year should be worth far more than my discounted in-the-ground/under-the-seabed valuation. So maybe TEN starts up on time without a hitch, maybe production hits 100 K bopd net next year, maybe the oil price doubles, maybe Tullow can slowly dig itself out of this hole… But who knows, the oil price may take another sub-$30 dive, TEN may suddenly hit a disastrous production (or political) issue, the lenders may finally lose patience and/or force a horrifically dilutive equity raise on Tullow, short-sellers become more aggressive, whatever… Time will tell, but my price target stands right now.

Price Target: GBP 0.2p

Upside/(Downside): (100)%

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Company: CRH (CRH:ID)

Last TGISVP Post: Here

Market Cap: EUR 22,579 M

Price: EUR 27.40

When Albert Manifold kicked off as CEO, it certainly looked like he was planning to right-size a rather stretched balance sheet (I even wondered whether he’d launch a rights issue). But it’s always hugely tempting for a new CEO (esp. the CEO of an Irish corporate icon like CRH), to make his mark as an empire-builder, so that resolve didn’t last long… Despite announcing a €1.5-2.0 billion multi-year disposal programme in late-2014, 2015 proved to be the year for mega-acquisitions – totaling almost €8 billion, primarily the Lafarge-Holcim & C.R. Laurence Co acquisitions. [OK, Manifold did a placing in the end, but only to fund about 25% of the LH deal].

While underlying organic growth’s now progressing at a very healthy clip (primarily driven by renewed US momentum), we haven’t reached a point where it’s easy to determine an appropriate P/E multiple – therefore, we’ll use a similar approach to my previous write-up. Noting CRH’s two big acquisitions closed in H2-2015, first we need to calculate a post-acquisition revenue run-rate: LH revenue’s €5.1 billion & the deal closed end-July, so that’s a €3.0 billion revenue bump for FY-2016. And CRL revenue’s $570 million & it closed end-Aug – an additional $380 million revenue bump.

CRH’s FY-2015 EBIT margin was 5.6%, which compares to a peak 9.9% margin (back in 2007) – so relying on the company’s actual Op FCF margin (of 8.3%) seems appropriate here for valuation purposes & deserves a 0.75 P/S multiple. [Which seems fair for the incremental acquisition revenue also – LH & CRL earn much higher EBITDA margins than CRH, but since CRH’s Op FCF margin’s about 50% higher than its EBIT margin, it seems unwise to specifically adjust margin higher for these acquisitions]. And looking at average FY-2015 debt levels vs. year-end debt of €9.2 billion vs. underlying net interest costs, I estimate FY-2016 net interest cost will be around €366 million (vs. a prior €295 million), which is just over 16% of Op FCF – so a debt adjustment no longer seems necessary, bearing in mind CRH also has €2.5 billion cash on hand (also provides cover for a €0.6 billion pension deficit). [OK, props to Manifold…he’s bloody well cashing his way out of a stretched balance sheet!]:

(EUR 23.6 B Rev + 3.0 B LH + $0.4 B CRL / 1.1115 EUR/USD) * 0.75 P/S / 824 M Shares = EUR 24.53

CRH looks marginally over-valued at this point. But noting the underlying momentum of its US business, and likely cost savings to come from its two major acquisitions, we should hopefully see it grow into its current market cap over the next year. But investors should also be mindful of potential integration and/or (renewed) economic risks here, which could prove challenging for a company that’s relatively leveraged at this point.

Price Target: EUR 24.53

Upside/(Downside): (10)%

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Company: Keywords Studios (KWS:LN)

Last TGISVP Post: Here

Market Cap: GBP 151 M

Price: GBP 280p

For a company that hasn’t put a foot wrong to date (what, no profit warning just months after its IPO?!), it’s amazing Keywords still appears to be almost entirely unknown to the average investor. In fact, it’s doubly surprising, as KWS is now enjoying a real sweet spot in the new XBox/Playstation console cycle – which has seen it deliver 20%+ pa underlying organic revenue growth over the last two years. The other kicker, of course, is its consolidation strategy in a fragmented outsourcing sector for the video game industry.

The acquisitions are piling up so quickly, the best way to approach valuation is to construct a current revenue run-rate. Let’s begin with FY-2015 results: Revenue was up 55% to €58 million, adjusted profit before tax was up 57% to €8.0 million, while adjusted basic EPS was up 49% to 12.71 cents (there’s been dilution in terms of placings & acquisition-related share issuance). We’ll ignore minor acquisitions, so first we’ll look at Liquid Development – cash outlay & share issuance are reflected in the FY results, but only a third of its $7.5 million annual revenue is captured, so that’s a $5.0 million revenue bump for FY-2016. Next, we have Mindwalk Studios – which was acquired in 2016, so that’s another $4.2 million in ongoing revenue. And the same for Synthesis – that’s another €16.9 million.

I calculate Keywords’ adjusted operating margin was 14.4% in FY-2015. Let’s assume the same for incremental acquisition revenues (which is conservative, their average adjusted PBT margin is actually around 17%) – I’ll continue to assign a generous 1.67 P/S multiple, noting the attractive growth trajectory here. Year-end cash was at €19.0 million – Mindwalk & Synthesis will reduce this balance by $3.4 million & €10.2 million respectively (at this point, we’ll ignore some minor future cash & shares consideration), and we’ll also include another €1.0 million being paid to acquire the remaining 50% of Kite Team. We can also add a debt adjustment (KWS just signed a new €15 million revolver) – I calculate another €29 million of debt would still limit interest expense to 15% of adjusted operating margin, but as usual we’ll haircut this figure by 50%:

((EUR 58 M Rev + 16.9 M Synthesis + (USD 9.2 M Liquid/Mindwalk / 1.1115 EUR/USD)) * 1.67 P/S + (19.0 M Cash – 11.2 M Synthesis/Kite Team – (USD 3.4 M Mindwalk / 1.1115 EUR/USD)) + 29 M Debt Adjustment * 50%) * 0.7601 EUR/GBP / 54 M Shares = GBP 223p

Keywords remains fairly-overvalued. Which doesn’t necessarily mean we’ll see a reversal – based on the underlying organic revenue growth we’ve seen here, KWS could well grow into its current market cap in the next year (or so) anyway. And one would obviously hope to see some cost savings & revenue synergies as the company consolidates its acquisitions to date. However, I also think my valuation’s a good reminder of the risk(s), for example, of a bad acquisition & the potential impact on what’s been a pretty high-flying stock…

Price Target: GBP 223p

Upside/(Downside): (20)%

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Company: Circle Oil (COP:LN)

Last TGISVP Post: Here

Market Cap: GBP 3.8 M

Price: GBP 0.68p

After initiating a strategic review in March, management came clean just over a week ago, admitting there’s little or no value attributable to shareholders. Regular readers will presume I cracked open a beer to celebrate another investor death-trap biting the dust. Alas, no… In my last write-up, I did tag COP as significantly over-valued, but I also highlighted it as one of the few junior resource stocks that could boast revenue, profits, and even free cash flow! So it’s a crying shame to see it go under…

Which prompts the question: Why am I trying to value it?! Simple…’cos there’s a bunch of sprockets out there who still believe the company may be worth well over 5 million bucks!? [Perhaps the same people who reckon Petroceltic (PCI:LN) shareholders are getting 31 cents per share? Er no, see p. 9/10). So it’s only right I burst their little bubble of hope… I should also defend Mitch Flegg, who was appointed CEO just a year ago & is almost entirely blameless here. Circle’s fate was actually sealed back in 2014, when it began drawing down on a $100 million IFC loan facility (which I specifically flagged as a huge risk) to fund an aggressive ramp-up in exploration & development. While funding such spending with debt is always a bad idea, it now looks like sheer lunacy in light of the oil price collapse. But unfortunately, that collapse only commenced in mid-2014, after two years of a stable $100+ oil price…and Circle’s spending orgy was obviously launched at that point. You know the rest – the drilling was touted as successful but we saw no meaningful increase in reserves, then reserves were decimated by a re-classification & the oil price collapse, which in turn breached the covenants of the IFC loan, all while the company was burning cash, and so on & so on…

A new reserve report shows 5.4 MMboe net proved (again, we’ll value at $8 per boe) & 2.3 MMboe net probable (at $4 per boe) – and since they’re producing fields, we’ll include 5.5 MMboe net possible/contingent (P50) (at $2 per boe). The other figures we need are here: As of year-end, COP had $10 million of cash, $7.5 million of net receivables, and $77.5 million of debt. Except we should also adjust for at least half year’s cash burn, to get us to end-June – the last interims indicate a $26 million semi-annual burn, so let’s use that to be conservative. [Sure, maybe the company’s on a starvation diet now…but if you run different numbers, you’ll see it makes no difference!]:

(5.4 M boe Proved * $8 + 2.3 M boe Prob * $4 + 5.5 M boe Poss/C’gent * $2 + USD 10.0 M Cash + 7.5 M Net Receivables – 77.5 M Debt – 26 M Semi-Ann Cash Burn) / 1.4623 GBP/USD / 566 M Shares = Zero

Yes. Circle Oil is, without a doubt, worthless…

And if you know anybody who’s still a shareholder – please oh please, pass along a right old slapping from me. I mean, really, how stupid can some people get…maybe they just deserve it!

Price Target: Zero

Upside/(Downside): (100)%

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Company: Escher Group Holdings (ESCH:LN)

Last TGISVP Post: Here

Market Cap: GBP 31 M

Price: GBP 167.5p

Oh dear, yet another offensive write-up of mine: With ESCH at 330p per share (having peaked at 395p per share a couple of months earlier), I set a price target of 119p per share! Yup, we have plenty of special snowflakes out there who thought they were the chosen ones to discover what was surely an incredible high margin recurring revenue machine… Maybe so – except I came along & reminded them if doesn’t quack like a duck & it doesn’t look like a duck, it may not be a duck….which they didna’ like at all. And two years later, I’m sure they don’t like the fact I was bloody correct! But eventually you wake up and recognise the timeline & figures just don’t match the story – hence, the relentless decline in the ESCH share price over the last two years.

There’s been a blizzard of contract signings reported, included some new areas of business (like e-government & mobile rewards/payments), but little visible sign of them since. The only obvious positive to report is the increasing level of contracted & recurring revenue, which should reach 50% of total revenue in 2016. That’s great, but unfortunately I predicted a side-effect: ‘One way or the other, the transition will likely present another revenue growth challenge’. And consequently…revenue today is still 11% below FY-2013 revenue. Cash flow looks better, but that’s due to a substantial swing in working capital – in reality, free cash flow in the last two years was zero. Which means we’re still a long long way from the historic 31% operating margins Escher clocked in the past. Again, we’ll split the difference between FCF & peak operating margins – which suggests a 1.5 P/S multiple is still appropriate, with no adjustments necessary for cash/debt (net debt’s actually $2.7 million):

USD 22.0 M Rev * 1.5 P/S / 1.4623 GBP/USD / 18.7 M shares = GBP 121p

Escher remains fairly over-valued. Unless we see a decisive inflection point in the numbers, the shares will keep grinding lower as disappointed shareholders bail. But last week’s announcement was interesting – Stephen McLeod will be appointed a Senior Independent Director. Regular readers here will recognise him as the former CEO of Universe Group (UNG:LN), which was previously a big favourite & winner for me. In fact, if the CEO Liam Church didn’t own 12% of Escher, I’d wager McLeod was being lined up for an executive post…but even his contribution as a director could prove valuable here.

Price Target: GBP 121p

Upside/(Downside): (28)%

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Company: Galantas Gold Corp (GAL:LN)

Last TGISVP Post: Here

Market Cap: GBP 7.2 M (assuming the latest Placing/Debt Exchange)

Price: GBP 5.25p

[NB: Most shareholders will be happy with the London listing, but I should highlight GAL:CN may actually offer better liquidity.]

Don’t let the prices from my last GAL write-up fool you – the company did a 5-for-1 consolidation shortly thereafter, so today’s share price is actually lower. But not by much, which is rather surprising, as nothing’s really changed here – granted, final planning approval was given last year for the underground gold mine…well, it was meant to be final, but an individual managed to spike it, so it’s dragged out ’til Sep-2016 when it’s before the court again. [Presumably, the same indefatigable individual who’s been a thorn in their side all along – surely they could have hired some unemployed ex-paramilitary for next to nothing, and sorted the problem once & for all?!]

However, they did manage a resource upgrade, so that helps… I’m still comfortable with my long-term $150 per proved oz in-the-ground gold valuation, so in this instance I’ll apply a 50% discount to their 32 K of measured oz & a 75% discount to their 148 K of identified oz (ignoring inferred resources, at this point). The company has CAD 0.6 million of cash on hand, CAD 0.8 million of net payables, CAD 3.8 million of related party debt (which, of course, presents a potentially serious risk for minority shareholders), CAD 2.4 million gross from the new placing/debt exchange (presuming it goes ahead), plus we also need to adjust for a CAD 1.7 million annual cash burn:

((32 K Measured * 50% + 148 K Indicated * 25%) * $150 per oz * 1.3026 USD/CAD + CAD 0.6 M Cash – 0.8 M Net Payables – 3.8 M Related Party Liab + 2.4 M Placing * 95% – 1.7 M Annual Cash Burn) / 1.9048 GBP/CAD / 138 M Shares = GBP 2.6p

Galantas remains substantially over-valued. God knows how many more years it takes here before an underground mine actually goes live, if ever…which means the resource component (i.e. the major component!) of my valuation could be academic at best!? Not to mention how the development of the mine would actually be funded…

Price Target: GBP 2.6p

Upside/(Downside): (50)%

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Company: iShares MSCI Ireland Capped ETF (EIRL:US)

Last TGISVP Post: Here

Market Cap: USD 160 M

Price: USD 40.95

In my last TGISVP post, I covered the other Irish ETF – the WisdomTree ISEQ 20 UCITS ETF (WTIE:ID) – but EIRL may have a natural advantage here, as it’s about five times larger. As I’ve highlighted before, TGISVP isn’t about predicting the ISEQ itself, so I’m assuming no potential upside/downside here (as the share price approximates NAV):

USD 40.95 NAV * 1.0 P/B = USD 40.95

I should also repeat, I remain bullish on the Irish market (which now seems to be breaking out from its recent stagnation), so an Irish ETF may well be a nice play for investors. And as a capped index ETF, EIRL’s also a little less concentrated – though its top 5 holdings still amount to 50% of NAV. But I should highlight a severely underweight Ryanair (RYA:ID) allocation (I’m sure there’s a good technical reason for this) is responsible for much of this differential – so that may be a plus/minus depending on your perspective.

Price Target: USD 40.95

Upside/(Downside): 0%

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Company: IMC Exploration Group (IMCP:PZ)

Last TGISVP Post: Here

Market Cap: GBP 1.9 M

Price: GBP 1.75p

B]NB:[/B] IMCP’s supposed to begin trading [URL="http://www.investegate.co.uk/imc-exploration-group-plc--imcp-/prn/publication-of-prospectus/20160518070000PB999/"][B]on the LSE[/B][/URL] on or about [B]May-31st?![/B

Hahahahahahahahahahahahahaahahahahahahahahahaha…

That’s just a quote from my last write-up…since US Oil & Gas is de-listed yet again, I’ll miss having another chance to mock its shareholders, so I needed to let off some steam there! IMC is, of course, another Liam McGrattan/Nial Ring vehicle – McGrattan’s the real puppet-master here, but Ring actually managed to sink even lower in my opinion the other day, as he also appears to be an apologist for the notorious Hutch family. After seeing them claim a 354g/t core interval (a huge multiple of what’s found in some of the highest grade gold mines globally), I washed my hands of ’em years ago. But now they’ve somehow managed to seal a 75% farm-in deal with Koza (a Turkish mining group) in return for €3.4 million of works funding…and if they pull off this LSE listing, you can expect to see a much larger & more concerted ramping effort here.

Of course, there’s nothing tangible backing any of this up. The company has a mere €63 K of cash on hand, it’s just raised a new £100 K placing, and its annual cash burn is €126 K. That pegs fair value, if you can call it that, at:

(EUR 63 K Cash + GBP 100 K Net Placing * 93% / 0.7601 EUR/GBP – EUR 126 K Annual Cash Burn) * 0.7601 EUR/GBP / 108 M Shares = GBP 0.04p

Astonishingly, IMC’s once again evaded the worthless tag – at this point, it’s merely ridiculously over-valued!? But for some wing-nuts, a seductive story & a 1.75p share price is too much/too cheap to resist…

Price Target: GBP 0.04p

Upside/(Downside): (98)%

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Company: Total Produce (TOT:ID)

Last TGISVP Post: Here (former holding, also see here & esp. here)

Market Cap: EUR 538 M

Price: EUR 1.69

For such a dull stock originally, Total Produce has had an incredible run…actually quadrupling in the last 3-4 years! All despite the fact its fundamentals haven’t really changed – management continues to make 1-2 acquisitions a year (generally buying a 35-65% stake), adjusted EBITA margins remain in the 1.8-1.9% range, and earnings continue to grow at an average 9% clip in the last few years. Fortunately, I managed to capture a major portion of this revaluation…and to enjoy seeing so many investors only become interested after the stock doubled/tripled!? [Tom Claugus of GMT Capital (one of Jack Schwager’s new Market Wizards) has been building a 9% stake since late-2014, while Daniel Gladis of Vltava Fund now lists it as a top 5 position after (presumably) building his stake since late-2013].

But TOT management really takes the cake here: They finally pulled the trigger on a €20 million share buyback towards the end of last year…yup, I kid you not, the buyback actually came AFTER the share price quadrupled!?! And no, it’s not like there was some kind of prior financial constraint – management actually wallowed in €100 million+ of surplus cash for the past few years. Granted, I always had a pretty dim view of TOT’s capital allocation strategy anyway…but this must surely be the stupidest management decision I’ve seen in a long time.

Anyway, FY-2015 results confirm a 1.9% adjusted EBITA margin – but if we allow for an average 19% minority interest in profits, this is equivalent to an underlying 1.5% margin, which deserves a 0.15 P/S multiple. And with a mere €18 million of net debt outstanding, we can adjust for cash (& investment property), plus an incremental debt adjustment – noting actual finance expense paid of €7.2 million, we could comfortably add another €49 million of debt, but let’s haircut that by our usual 50%. In terms of earnings, we can award a bit of a premium to TOT’s growth rate, recognising the underlying stability of the business (but not forgetting management’s poor capital allocation record) – a notch higher (for a 12.0 P/E ratio) now seems in order – and noting the Progressive Produce acquisition early this year & the recent trading update, using the top end of the €0.105-115 EPS range also seems appropriate:

(EUR 0.115 Pros Adj Dil EPS * 12.0 P/E + (3,454 M Revenue * 0.15 P/S + 142 M Cash/Inv Property + 49 M Debt Adjustment * 50%) / 318 M Shares) / 2 = EUR 1.77

Total Produce is now fairly-valued. But there’s an obvious value-enhancing event still lurking on the horizon…a potential re-merger with Fyffes (FFY:ID). I mean, how ludicrous is it seeing two Irish fruit & veg companies (with basically the same €0.5 billion market caps) compete with each other, with both dead-set now on buying their way (however quixotically) into the North American market – the cost savings & revenue synergies to be harvested from, say, a nil-premium merger are blindingly obvious. But expecting something so rational from the TOT management team may be asking too much…we may have a very reluctant bride & groom on our hands still.

Price Target: EUR 1.77

Upside/(Downside): 4%

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OK, that’s all for now, folks – TGISVP Part III will follow in due course. Of course, I’d be delighted to see any/all of your questions & feedback, via comments & email. And here’s an updated TGISVP file, for your reference – note previous valuations are automatically updated to reflect current FX rates (if applicable), and all stocks/valuations (both new & old) are ranked together according to their upside potential:

2016 – The Great Irish Share Valuation Project – Part II

slowjoe17

I'm new-ish to this forum and thinking about investing in shares. I'm very happy to see someone thinking about value investing.

Thank you for all the work you have put into this!