2013 – The Great Irish Share Valuation Project (Part IX)
Company: Dalradian Resources
Prior Post: None
Price: CAD 1.10
Dalradian is a new arrival for TGISVP – a reader actually highlighted it to me (thanks!) some months back. Although they’re Canadian, they’re actually focused on European gold (& silver) exploration. They do have the mineral rights to 1.7 mio hectares in Norway, but for the moment, the company’s resource value & development efforts are focused on Northern Ireland (go on, pay a visit!).
Their NI gold resources have been somewhat proved up, with 10 K & 460 K oz of measured & indicated resources. They’ve also advanced their potential mine project planning, with a Preliminary Economic Assessment (PEA) completed which identifies an NPV of about CAD 300-500 mio! However, this comes at a daunting capex cost of CAD 192 mio, and places great reliance on the additional exploitation of a 2.23 mio oz inferred resource. I’m happy to place a $175 per oz in-the-ground valuation on measured/indicated resources (albeit with a 50% & 75% haircut for M & I status, respectively), but at this point the inferred resources may turn out to be completely uneconomic. Frankly, a focus on further proving up of resources would offer the most value-add at this point.
Dalradian currently has CAD 28.9 mio of cash on hand, and an annual cash burn of around CAD 17.1 mio. Put all this together, as things stand, Dalradian looks substantially over-valued. However, if we see an eventual proving up of their inferred resources, that would obviously be a game-changer in terms of DNA’s potential valuation.
Price Target: CAD 0.37
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hlowell42 - thanks - can't seem to get to your reply, but I saw it - yes, I agree, new cardiac prospects seem excellent for TRIB, it's just a case of how much you incorporate in the price in advance of further progress
Company: Trinity Biotech
Prior Post: Here
Price: USD 16.91
TRIB’s a long-standing holding of mine – here’s my v first write-up, and my most recent post. I’m not going to do a fresh write-up here – there’s no fundamental change in my investment thesis, but as the share price has risen I’ve obviously trimmed my stake to a current 4.5% portfolio holding. With steady progress on revenues & earnings, my price targets have also edged up accordingly. At this point, we’re long past my original (earnings & cash based) Intrinsic Fair Value target, so it’s only logical to opt for my Relative Fair Value target (3.5 Price/Sales & Cash, based on comparable M&A multiples – which, frankly, I’ve never really understood – again, see my original TRIB post). This pegs TRIB as fairly-valued, but I ain’t selling out yet…
You may/may not agree with that conclusion, depending on how much of a value purist you are… In my defence, I’ve been steadily reducing my stake, but I’m also cognizant value investors often sell far too early. TRIB’s story, sector, M&A potential & technicals all suggest more upside to come – in fact, it looks like many growth investors have only begun to join the band-wagon recently. As long as TRIB continues to deliver, I expect better exit-prices to come – if things change (abruptly), I’ll probably become a lot more value-conscious & exit in haste (missing out on a few dollars, I expect). Sure, I’m being a little greedy here, but hopefully it proves to be smart-greedy!
Price Target: USD 17.38
See Wexboy Blog for full writeup, links etc.
Thks, folks - just published a new blog post, including commentary & valuation on Permanent TSB Group Holdings (if you want a good B/I comparison).
2013 – The Great Irish Share Valuation Project (Part VI)
Company: Bank of Ireland
Prior Post: Here
Price: EUR 0.137
For me, Bank of Ireland’s still a reach too far… Sure, their most recent Core Tier 1 Ratio is at 13.9%, but really, that’s just a crock! B/I only has EUR 8.8 bio of equity, supporting EUR 158 bio in total assets – see the disconnect?!
Isn’t that just 5.6% of equity? Nope, not if you rely on the magic of Risk Weighted Assets. Now, before somebody corrects me, I do understand the concept (well, say about as well as a regulator ;-) ), and it has a certain charm & logic (like most dangerous ideas). I’d probably even find it handy if I was performing a comparative risk analysis on some potential bank stocks. But lift your eyes from the white paper & look around the real world – it won’t be long before you’re painfully reminded how God-awful quickly risk-free assets can turn risky! And tomorrow‘s risk isn’t necessarily a risk you’ve seen before…
If you really do want to invest in bank stocks, it seems obvious the v first requirement should be an equity ratio of at least 8%, even 10%. And that’s something you should calculate yourself – it isn’t difficult, just ignore everything management says. To mangle what Buffett said, a good investor only needs simple arithmetic: Just hit the balance sheet, and calculate equity/total assets – go on, you can simply eyeball it!
Even now, investors & home-owners aren’t quite sure if the decline in Irish property prices is actually over. Which explains the continued increase in B/I’s ‘impaired’ loans & their never-ending write-downs. Which may not be over yet: Their latest (total) impairment provision is only EUR 7.1 bio. Only..?! Well, I take a pretty simple top-down approach to loan losses: Picture the average loan B/I was making some years back – let’s say it was a house loan for a middle manager, up to his neck in debt & desperation. I’m probably being kind if I presume the LTV was only 80%. But for every 80 cts of debt, the bank’s original 100 cts of collateral has now melted away to say 40 cts, at best. Sure, they probably have impaired loans in better shape, but you can bet they’ve plenty in far worse shape too…
So, a 50% haircut on impaired loans looks about right to me, which would be about EUR 7.7 bio. Well, that doesn’t compare too badly with B/I’s current provision…except we can’t forget another EUR 5.7 bio in ‘past due but not impaired’ loans. If you’re pessimistic, you may want to assume these loans also end up impaired. If you’re optimistic, you might just be deluded..! But let’s take the middle road & assume a 25% haircut on these – that’s another EUR 1.4 bio of potential losses that could show up (and certainly haven’t been provisioned for). That all amounts to an incremental EUR 2.1 bio adjustment I’d make to B/I’s total provision & equity.
Basing a valuation even on this adjusted equity might prove too generous. Stripping out losses/provisions, underlying return on equity is in the low single digits. This can be directly traced back to the current 1.20% net interest margin - which has been horribly affected by B/I’s elevated cost of funding. Most banks need at least a 200 bps margin to start generating decent returns on equity. But it’s not at all clear when that might happen – granted, things have been feeling a little rosier recently, but we all know the European sovereign debt crisis could kick in again at any time.
But then again, B/I offers a great long-term play on the entire Irish economy. [Though I'll humbly suggest FBD Holdings (FBD:ID) offers similar exposure, but with far less risk]. And it’s clearly in the catbird seat when les bon temps rouler, with the other Irish banks on life-support (or gone terminal). Recognizing this, let’s apply a 1.0 P/B ratio to my adjusted equity figure – despite everything, B/I actually offers some pretty decent upside.
Price Target: EUR 0.224
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2013 – The Great Irish Share Valuation Project (Part V)
Prior Post: Here
Price: USD 28.43
ICON’s starting to fire on all cylinders again, as I correctly anticipated. Well, except for the share price…but I’m sure investors aren’t complaining! ;-) Last year, the company was squeezed between (virtually) zero growth in its existing contract revenues & the challenges/expenses of ramping up to meet some v large contract wins. Operating margins, even on a pre-exceptional basis, had fallen to near-zero - but valuing ICLR on that basis would clearly have been incorrect. It seemed reasonable to presume margins would return to 10%+ as new contract revenues/margins matured.
On the other hand, bidding on & winning these contracts was clearly vital, so the prudence of their contract pricing & assumptions remains unclear. [Big Pharma has huge negotiating leverage with ICON & its peers. The fact ICLR's margins max out far below 20% (perfectly achievable for this type of business), attests to the power of Pfizer, BMS, etc.] My approach was a valuation based on averaging current & historic margins, plus a significant debt adjustment to reflect its financial strength. ICLR ended up looking fairly over-valued to me, absent an actual bounce-back in margins.
Hmm… Shareholders clearly didn’t need this reassurance, they bought the shares regardless! The company recently provided $1.40-55 EPS guidance for 2013, a substantial step-up from 2012. This puts ICLR on a prospective 19.3 P/E - uh, that looks a little rich to me! However, considering the steady ramp in revenues, margins & earnings this year, I’m happy to gross up from their latest results. Quarterly revenues are running at $285.5 mio, for an operating margin of 7.3% & an EPS of $0.29. My valuation’s based on a similar Price/Sales methodology as last year, but now incorporates a 20 P/E (using a $1.16 EPS run-rate). To me, ICON appears about as over-valued as it was last year.
Price Target: USD 20.84
See the Wexboy blog for links/other stocks!