2014 – The Great Irish Share Valuation Project (Part III)
Prior Post(s): 2012 & 2013
Price: USD 48.70
As anticipated, ICON’s recent (large) contract wins are now feeding through the P&L very nicely. The company enjoyed 15% Q4 net revenue growth in Q4, and even better 20% FY growth. This has been accompanied by the expected expansion in margins – at 11.2%, ICON’s Q4 operating margin’s finally back to normal. It also booked $446 million of net new business, for a 1.3 book-to-bill ratio in the latest quarter, and a backlog of 3.1 billion.
Considering the company’s very healthy cash flow & revenue growth rate, its current operating margin now deserves a 1.2 P/S multiple. ICON’s also got 321 M of net cash on hand, and huge scope to lever up its balance sheet (particularly with a 3.1 B backlog). I calculate 385 M of debt would put net interest expense around 15% of operating profit – let’s count just 50% of that debt, plus 100% of available net cash, and include it as a (positive) cash/debt adjustment to my P/S valuation.
We’ll also assign a P/E multiple: With its current rate of revenue growth & margin expansion, the company’s enjoyed massive earnings growth in the past year (+56% in the latest quarter, and +77% FY!). That obviously isn’t sustainable – but annualizing Q4 diluted EPS of $0.53 & applying a 20 P/E multiple (reflecting the FY revenue growth rate) may appear high, but seems quite appropriate in this instance:
(USD 2.13 EPS * 20.0 P/E + (USD 1,336 M Net Revenue * 1.2 P/S + 321 M Net Cash + 385 M Debt Adj * 50%) / 61.2 M Shares) / 2 = USD 38.61
Currently trading on 22.9x FY-2014 guidance (of $2.125), ICON looks fairly over-valued to me – but with US big pharma stocks generally back in favour, and the biotech sector on fire, it’s no great surprise to see a high valuation here also.
Price Target: USD 38.61
See the Wexboy investment blog for links, charts, full post, etc.
2014 – The Great Irish Share Valuation Project (Part II)
Company: Dalradian Resources
Prior Post(s): 2013
Price: CAD 0.80
Dalradian continues to burn cash at a merry pace, but hasn’t progressed too far from its 2012 resource report & Preliminary Economic Assessment (for Curraghinalt, in Northern Ireland). However, a new resource report is promised – any upgrade of the company’s inferred gold resource (2.23 M oz) could have a substantial valuation impact… Meanwhile, let’s focus on its 10 K oz measured resource & its 460 K oz indicated resource. I’d normally ignore resources in these categories (as I’m doing with the inferred resource), but based on the PEA I think it’s justified to incorporate them into my valuation – albeit on a fairly conservative basis. My (updated) valuation rule of thumb for gold is $150 per in-the-ground oz - but I’ll haircut this by 50% for measured & 75% for indicated.
DNA has CAD 9.4 M on hand, and is now in the middle of an underwritten offering. Let’s presume the (basic) offering gets completed (within the next week) – that brings in an additional 12.1 M of (gross) cash, against the issuance of another 17.3 M shares. We’ll also deduct for the company’s annual cash burn, which looks to be around 18.1 M right now. [NB: Dalradian's abandoned its Norwegian exploration programme, on which it spent (say) 3-4 M in 2013. Arguably, I could adjust down my cash burn estimate accordingly, but I suspect this spending will just end up being diverted into incremental Northern Irish spending]:
(CAD 9.4 M Cash + 11.5 M Offering Net Cash – 18.1 M Cash Burn + (10 * 50% + 460 * 25%) / 1,000 * $150 per oz * 1.1005 USD/CAD) / 106.8 M Shares = CAD 0.212
Dalradian looks wildly over-valued here. However, a potential upgrade of the company’s inferred resource (as already noted) would produce a substantial uplift in valuation. On the other hand, the estimated initial capex cost of the project is CAD 192 M – a huge undertaking in relation to Dalradian’s current resources, or market cap! And one that will surely result in significant dilution for existing shareholders. OK, right, that’s probably the best you can bloody well hope for with most junior resource stocks..!
Price Target: CAD 0.212
See the Wexboy Investment Blog for full post, links, etc.