Company:   ICON

Prior Post:   Here

Ticker:   ICLR:US

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

Upside:   (27)%

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Company:   TVC Holdings

Prior Post:   Here

Ticker:   TVCH:ID

Price:   EUR 0.87

Want to hear a can’t lose proposition? We’re offering a once-in-a-lifetime chance – the chance to become an investment management client. We won’t accept anything less than quarter of a billion in assets. What? You’ve only got EUR 118 mio to spare? OK, go on – we’ll take it, just this once… For that kind of dough, to make it worth our while, just keep in mind it’s gonna cost you almost EUR 2.5 mio a year in fees. Sorry, what do you mean? It most certainly is a bloody can’t lose proposition! For us, you silly man, not for you..!?

Hell, we’ll even provide an occasional investment update. To begin with, we plan to buy an 18% stake in UTV Media (UTV:LN). We’ve an online account open with a discount broker, so no big deal – it’s simply a click of a mouse, and a 20 pound commission! Then we’ll need to check the price (and see if there’s any news released) every single day. But we just discovered our receptionist surfs the bloody web all day long, so we might as well make her the UTV point-person.

We’ll invest the majority of the portfolio into deposits & government bonds – that only takes a few phone calls every six months, or so. Yes, rates are pretty low, but safety comes first! Anyway, our fees are far greater than the interest earned, so does it really matter what rate we get? Finally, just to remind you where all our time, brainpower & (your) fees are going, we’ll invest a whole 7% of the portfolio into unquoted investments. Granted, that’s a little nerve-racking – don’t worry, we know our shit…

OK, I’ll keep my TVC valuation simple: Cash & bonds, plus current value of UTV stake, plus unquoted investments (haircut by 30%). This offers some fairly low risk upside for shareholders. However, some kind of value realization event is really needed here:

- The UTV stake is sold: Relations with UTV now appear frosty, so TVC may seek a predator for their stake, or even the company. But UTV’s considered old-media now (perhaps incorrectly?), so that may be a tough proposition.

- An actual unquoted portfolio is created: Hmm, we’ll all be dead by then… And judging by UK PE fund discounts, the share price (on a 24% discount) could fall in that scenario!

- Let’s be creative: How about a 3-way merger between UTV Media, STV Group (STVG:LN) & TVC? UTV & STV are small(er) regional TV & radio broadcasters – sister companies at heart. With a far larger market cap, UTV might have gone for this already, except for STV’s litigation & liabilities... TVC’s cash/bonds solves that problem. They could also lend a private equity perspective to running the newly merged company – if you accept they’re in a mature/old media business, that type of approach would likely capture the best long-term return for shareholders.

- Perhaps simplest & quickest: A takeover by another PE investor/manager. Even paying a premium (?), an acquirer gets TVC’s infrastructure, contacts & personnel for free – perhaps a cheap & convenient entree to Ireland? Unfortunately, most external investors are now focused on Irish distressed debt & property – not TVC’s usual area of expertise. I would have suggested Jon Moulton of Better Capital (BCAP:LN), as a suitable predator – but that chance may may now be gone.

OK, all good fun, but TVC will probably just stagger on as per usual for the foreseeable future… The share price will likely continue to trail NAV, though UTV will hopefully prove a positive influence. If you forced me to bet on a new unquoted investment being (finally) made, I’d guess hotels.

Price Target:   EUR 1.14

Upside:   31%

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Company:   CPL Resources

Prior Post:   Here

Ticker:   CPL:ID

Price:   EUR 4.449

I must say, I was bloody spot on with last year’s valuation – it suggested a 76% gain & shareholders actually enjoyed a whopping 82% gain! Of course, there is the small fact I didn’t own the bloody shares. Ouch! But in my defence, I was profitably occupied elsewhere on the ISE. Anyway, you have to wonder what kind of upside CPL now presents after that kind of performance? I was pleasantly surprised…

Revenues have continued to surge, and CPL also acquired European Human Resources AB (EHRAB), which opens up the Scandinavian markets for them. [Rather hilariously, CPL insisted on calling them ERHAB - check the bloody initials, people!] Cash continues to build again – it’s now at EUR 26.6 mio (vs. zero debt). This offers plenty of scope to expand in core market(s), and to diversify into new geographies. Overall, CPL’s a miraculous story of survival while the Celtic Tiger was being slaughtered… Of course, management owns a substantial stake – this really makes all the difference when things go wrong, as protecting & growing the ultimate value of the business is far more important to them than the value of their pay packages.The company did suffer two years of decline (2009-10), but revenues have come surging back ever since, and in 2012 they surpassed prior (2008) peak revenues.

I think CPL’s secret sauce is their temporary staffing business. In the economic climate of the last few years, in Ireland & elsewhere, companies have obviously avoided permanent hires. This doesn’t mean they don’t need staff – they just need more flexibility (and suffer from far more uncertainty). Ireland’s continued success as a higher value outsourcing alternative to emerging markets has provided an ongoing/large source of demand also. This was always an important business segment for CPL, but with the downturn they chose (v smartly) to avoid scaling back their cost base – instead they focused it more & more on winning share & scale in the temporary staffing market. Margins are lower in this segment, but that’s been more than made up for on the revenue front.

I’d expect the current 3.7% operating margin to exceed their long-term average of 6.1% in due course (aided by an increasing level of higher margin permanent placements). I continue to value CPL on that basis, plus a positive debt adjustment to reflect their capacity for further acquisitions (and/or another share tender offer) – it still offers some decent upside.

Price Target:   EUR 6.07

Upside:   36%

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Company:   Glanbia

Prior Post:   Here     (valuation, no commentary)

Ticker:   GLB:ID

Price:   EUR 8.25

I pegged Glanbia as mildly over-valued last year. The surge in the share price ever since has been pretty bloody mystifying to me. What the hell am I missing? That everybody else seems to get..?! Even my father’s into share tips now – he advised me to buy Glanbia. Jesus – now I definitely know GLB shares are waayyy over-valued (sorry, Dad!).

OK, let’s take a closer look & think about what’s changed in the last year. Earnings last year were up 20%+, but this year’s proving a lot tougher with a likely 10% EPS gain at best. This earnings volatility suggests a fair value 13 P/E still looks about right, particularly in light of longer-term earnings growth. The only big news all year is really the spin-out of Dairy Ingredients Ireland (DII, a unit of Glanbia’s  Dairy Ireland division) into a JV, to be owned 40% by Glanbia & 60% by Glanbia Co-operative Society Ltd. (their majority shareholder). The impact on earnings appears insignificant, at least initially, but it now focuses management exclusively on the higher margin cheese & nutritional businesses.

Perhaps all this explains the mad enthusiasm for GLB shares? If so, it might be a little too much excitement – after all, the strategic direction of Glanbia has long been obvious. And, in my opinion, the impetus for the deal is simply to avoid a negative, rather than generate a positive… With the looming abolition of milk quotas in 2015, the Irish dairy sector needs to aggressively scale up processing capacity. In DII’s case, this would require a proposed EUR 180 mio investment over the next 7 years. And the likely reward? Maybe just more bitching about prices from Irish dairy farmers. But if they plan to increase milk production dramatically, what on earth do they expect to happen with prices?! Then again, you should never assume a European (or US?) farmer will necessarily grasp simple market economics…

That kind of investment (in a low margin/volatile business) is the last thing Glanbia needs, when it can deploy the cash more profitably elsewhere. Far better to leave it to the Society – they can just go off & bloody argue with themselves, to their hearts’ content, about the milk price… Anyway, it’s debatable if Glanbia could afford it anyway – debt’s already far higher than is prudent, particularly when one notes operating free cashflow consistently falls 50% or more behind EBITA. [Operating FCF only provides a rather alarming 3 times interest coverage]. And considering the global competition Glanbia faces, that situation isn’t likely to change anytime soon. Total net proceeds from the spin-out will go towards reducing debt, but a further negative debt adjustment is clearly required. If we average the current 7.0% EBITA margin & the underlying 3.3% Op FCF margin, a 0.4 Price/Sales ratio is the best I can reach.

This implies Glanbia is now substantially over-valued – it’s trading on a 17.1 P/E, for God’s sake! Shareholders have gotten way ahead of themselves in pricing up their gradual disengagement from low margin Irish dairy processing.

Price Target:   EUR 4.80

Upside:   (42)%

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Company:   Abbey

Prior Post:   Here

Ticker:   ABBY:ID

Price:   EUR 7.50

Sometimes, watching Abbey is like watching paint dry… Hmm, that’s not necessarily a bad attribute in these still shaky post-crisis times – especially when we’re talking about a property company! The share price put on a nice spurt coming into 2013 & has now caught up with last year’s price target. It currently trades on a 0.9 Price/Book. An eventual 1.0 P/B fair value looks about right – while Return on Equity’s low (around 5%), credit should be awarded for a strong balance sheet: Assets appear reasonably valued, there’s zero debt outstanding, and Abbey’s got EUR 65.7 mio of cash & gilts on hand for land-bank purchases.

Obviously, the Gallaghers are firmly in the driving seat here, so we can expect Abbey to continue being run in a conservative fashion. More share buybacks are less likely now, as the share price approaches NAV. Anyway, past buybacks were probably more about increasing management’s control, rather than enhancing shareholder value. However, I don’t believe the Gallaghers necessarily want to buy out minority shareholders (unless they’re presented with a real bargain), or delist. But what about their offer for Abbey last year, you ask? Well, it’s important to note this was a mandatory offer, albeit one triggered by their purchase of shares, so I wouldn’t read too much into it. I think they were simply testing the waters…

With the majority of Abbey’s business now in the UK, the recent weakening of GBP (vs. the EUR) may hurt NAV. However, another year of (steady) earnings will likely offset that, so Abbey still presents a little further upside at this point.

Price Target:   EUR 8.30

Upside:   11%

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

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

Wow – mid-February, and I’ve definitely worked my way through about half the Irish stocks out there now. That’s right on schedule, so hopefully I’ll keep up the pace & have this review stage of the 2013 TGISVP finished by end-March (like last year). Cheers!

First, note there’s been 1 de-listing – we already had the heads-up on it last quarter: Cove Energy (COV:LN) was taken out for GBP 240p in cash per share by PTTEP (PTTEP:TB). A marvelous result for most shareholders, except for a few over-enthusiastic latecomers that bid the shares up to GBP 270p+ in the dying days of a Royal Dutch Shell (RDSB:LN) vs. PTTEP tussle. [I'll continue to include Cove - at its final GBP 240p value - for performance purposes for the rest of the year].

Note: Q3 2012 YTD performance for each stock is TGISVP specific – that is, performance is measured from the specific date (in Q1) I set a target price for each stock. [Apologies if you'd prefer to see actual YTD performance for all stocks - but I suspect there'd be a high degree of overlap in the winners & losers, anyway].

Two exceptions to note: I only added Fastnet Oil & Gas (FAST:LN) (only listed in June, as a result of a RTO/Placing) and US Oil & Gas (USOP) (suspended since 2011, only re-listed on GXG in April) to TGISVP v recently. Therefore, in a similar fashion, I’m only tracking their post-write-up performance – not surprisingly, FAST has barely moved since. USOP, on the other hand, has already demonstrated (again) just how amazing it is – it’s managed an impressive 36% (dead) swan dive (a whopping $146 mio loss in market cap) in the past 2 1/2 weeks, since my post… Wow!

OK, I’ll admit there’s a bit of a tease coming – but isn’t that exactly what the media does to you all the time these days? Sorry, I’m just going to show you the Top YTD TGISVP Winners & Losers in this post..! Something interesting to mull over – and then I promise the real meat in my next post:

[i.e. The performance of the TGISVP Alpha & Beta portfolios..!]

TGISVP Q3 2012 YTD Top 10 Winners:

Providence Resources (PVR:LN) is top of the charts! To prove I don’t actually despise all junior resource stocks, note I tagged PVR in my Feb valuation as having decent upside potential! However, I certainly under-estimated its actual upside YTD, but of course there’s been plenty of fresh news-flow (about the Barryroe Oil Field) since then. Datalex (DLE:ID) has had a v well deserved rally, recognizing its growth potential & a likely takeout multiple, but is starting to look pretty stretched right now. Siteserv‘s gain is just a f**king travesty…

Aer Lingus (AERL:ID) would be loathe to admit it might actually be ‘enjoying‘ Ryanair’s (RYA:ID) attentions, in the form of another attempted takeover bid - this should run & run (again)..! Intrinsic value still looks significantly higher for AERL – recent hints/steps to distribute surplus cash to shareholders should help with potential value realization. However, I’d be none too surprised if any eventual distribution strategy/announcement is accompanied by some huge pension deficit concession to the unions (despite AERL’s repeated denials of any legal liability).

Prime Active Capital (PACC:ID) is a bit of an outlier. Its YTD gain appears to be more down to a volatile price & a wide spread, than any fundamental share price gain. Its news-flow/results certainly haven’t been promising recently, but it remains (vaguely) intriguing as it potentially has a much higher intrinsic value in a sale situation. Then again, who on earth wants to buy shares in an Irish company invested in cell phone stores located in places like Alabama & Pittsburgh…?!

The rest of the Top 10 (with the exception of CPL (CPL:ID), which still has more room to run) appear to reflect a continued flight/re-allocation to safety – in the form of some of Ireland’s major agri-businesses, and FBD Holdings (FBD:ID) (which I hold) with its now fully de-risked balance sheet.

TGISVP Q3 2012 YTD Top 10 Losers:

Like I said in my last post, isn’t it soooo much easier to guess the losers ahead of time..?! Yeah, some of the usual rubbish – here we have eight junior resource stock losers/suspects, a ridiculously over-indebted company (the usual O’Reilly legacy… ), and an outright fraud/collapse…

Yeah, that sounds about right – case closed!

Switching to specific Irish corporate newsflow, full-year results from CPL Resources – the largest recruitment company in the country with a circa 40% market share – were released this morning. These revealed a resilient performance, with operating profits growing 39% to €10m, while earnings per share rose by a third (helped by a lower number of shares in issue following the recent tender offer). In terms of the outlook, while noting that the market remains “challenging”, management is confident of achieving “further profitable growth in the months ahead”. In all, this is a good set of numbers from CPL. My view on CPL Resources is positive, underpinned by a first-rate senior management team, dominant market share in its home market, a very strong balance sheet (net cash of €28.0m) and a diversified business model (both by geography and by sector).

(Disclaimer: I am a shareholder in Tesco plc) We saw some more distribution channel innovation at Tesco, with the roll-out of drive-through grocery pickups. It will be interesting to see if moves like this help to arrest the decline in Tesco’s UK market share.

In the energy sector, Providence Resources said its 80% owned Barryroe oil field offshore Cork may contain another 1.2bn barrels, bringing the total potential resource to 2.8bn (it should be noted that this is a P10 estimate).

(Disclaimer: I am a shareholder in Ryanair plc) In the transport space, easyJet said that it is to roll out allocated seating across its network from November. This is a significant move and it will be interesting to see if Ryanair, which has experimented with this, follows suit. Speaking of Ryanair, it reported its busiest ever month in August, carrying a record 8.9m passengers, up 9% year-on-year. There has been a lot of media attention given over to Ryanair’s falling load factors (-1ppt to 88%), but I am not especially concerned by that given the impact capacity redeployments (mainly from northern to southern Europe) have presumably had on traffic stats, so I prefer to focus on the positive momentum in total passengers carried. Elsewhere, Aer Lingus reported a fall in ‘mainline’ passengers carried for the second successive month, however, good capacity management kept loads in positive territory.

In the blogosphere Lewis looked at an interesting UK quoted manufacturing company, Renold.

(Disclaimer: I am a shareholder in Allied Irish Banks plc and Bank of Ireland plc) We saw a lot of news out of the Irish financials. Bank of Ireland issued a couple of updates. The first related to the Irish mortgage market, where the group revealed that its share of new lending has increased to 40%, while it did not indicate (emphasis) any change in the pace of arrears relative to its previously stated expectations. Its second update, released yesterday, brought confirmation that Bank of Ireland has completed its €10bn divestment programme within PCAR base case assumptions. This comes as no surprise (the group had previously disclosed that it was 97% of the way through this) but it is an incremental positive and reaffirms my previously expressed view that Bank of Ireland is doing an excellent job at managing the factors it has control over. Bank of Ireland’s main domestic competitor, AIB, released an AGM statement yesterday, the key points of which are: (i) Its non-core business is performing better than expected; (ii) The integration of EBS is going well; and (iii) AIB’s share of the mortgage market is now 35%. On the last point, adding in Bank of Ireland’s share noted above means that 75% of  Irish new mortgages are being issued by AIB and Bank of Ireland – so, essentially a duopoly market. Smallcap IFG’s AGM statement revealed a good start to the year for its core UK and Irish operations, while management said it is going to review its options post the sale of its international unit. Elsewhere, NAMA repaid another €2bn of bonds,  taking its total debt paydown in the past 2 years to circa €3.5bn. At the end of 2011 NAMA had €29.1bn of debt securities in issue, along with another €1.6bn of a subordinated equity instrument. Overnight we heard news of a ‘breakthrough‘ agreement on Ireland’s debt burden which may have significant effects on the banks here. However, I would echo the caution expressed by Constantin Gurdgiev here, namely “we cannot tell how positive it is yet”.

(Disclaimer: I am a shareholder in RBS plc) Switching to financials in other jurisdictions, the LIBOR investigation has had a significant impact on sector valuations in the UK. Also, the “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger” quote on page 19 of the FSA’s report should have a significant impact on what people put in work emails in future! From my perspective, my UK bank sector exposure is limited to a small position in RBS, which had already become smaller on the back of its IT problems. Yesterday’s 11.5% slump threatens to push the share price below £2 for the first time since the 1-for-10 reverse share consolidation. I’m still positive on the stock on a longer-term perspective, and am monitoring its current difficulties closely with a view to gauging if the risk/reward justifies topping up my position – although clearly this is not something I envisage happening in the immediate future.

(Disclaimer: I am a shareholder in PetroNeft plc) This morning’s 2011 results from PetroNeft give me few grounds for optimism. While management say that “production levels have been stabilised”, at 2,200bopd presently output is still below the 2,300bopd reported in early April and the 3,000bopd achieved at the end of 2011. I also note management’s comments that: “we have initiated discussions with a range of strategic investors about possible farm-outs, long term off-take agreements and potential equity or asset investments which in the long term would strengthen the Group’s financial position”. This ties in with the revelation that Macquarie wishes to reduce its $30m available loan facility to PetroNeft by $7.5m, “however they are giving the Group time to work this out “. Overall my sense is that a solution to the challenges PTR faces will likely prove to be unfriendly to existing shareholders, but assuming I’m right perhaps this is already reflected in the price as I note that the shares have opened higher this morning.

In the food sector, Greencore made what it described as a ‘platform acquisition’ in the US, buying Schau for £11m, or around 0.5x annual revenues. It also revealed a new $50m contract, which assuming a 6% margin should lead to around $3m in extra operating profits on a full-year basis. Overall, Greencore’s US business continues to make progress, but it is still a marginal player in a huge market – I wonder would the capital the group has tied up here be better deployed in strengthening its strong position in the UK instead of trying to build a sizeable operation in the States. In other Irish food company news, Origin Enterprises released a fascinating presentation about its agronomy operations. I’m very bullish on the long-term outlook for this business, which is underpinned by rising food consumption across the world, the lifting of EU quotas and food security issues.

In the support services sector, CPL Resources released an upbeat trading statement, featuring the word “strong” no less than three times, which bodes well for Ireland Inc.

(Disclaimer: I am a shareholder in Trinity Mirror plc) In the media sector,  News International raised the cover price of The Sun newspaper, which could (emphasis) pave the way for Trinity Mirror to follow suit with its Daily Mirror title.

In the blogosphere Lewis took a look at Plastics Capital, which is not a name I’m too familiar with and based on his blog not one I wish to become more acquainted with anytime soon! Speaking of blogs, FT Alphaville posted up UCD Professor Karl Whelan’s Target2 presentation. I was particularly struck by slide 20 – Eurozone countries’ net balances with the Eurosystem.

Finally, John Kingham looks at how his top tips for 2012 have performed in the year to date – I will outline how mine have done over the weekend.

(Disclaimer: I am a shareholder in France Telecom plc) There was quite a bit of news around France Telecom since my last update. First, the operator finalised the terms of its buyout of Egypt’s Mobinil. This was something I already had penciled into my forecasts for the company, so no surprise there. However, what did surprise me was another story I spotted involving France Telecom, which said that the European Commission is investigating whether France’s telecom regulator was too generous in setting the rates it allows new mobile operator Iliad to charge other companies for calls into its network. While we’ll wait and see what comes of that, anything that undermines Iliad’s Ryanair-style entry into the French mobile market would be good news for France Telecom (yes, I am speaking from a  hopelessly conflicted viewpoint!)

Seeing as I’ve mentioned Ryanair, I was also interested to read that Qantas has made the world’s first commercial biofuel flight. This is an interesting development which I’ll be keeping tabs on, especially given that the modest ‘carbon footprint’ involved would certainly help offset some of the EU’s carbon taxes if it was to be rolled out in an economical way in this part of the world.

In other energy sector related news, Dragon Oil issued an interim management statement this morning, in which it revealed average Q1 production of 70.6kbopd (the 2011 average was 61.5kbopd), and retained its 2012 gross output growth target of 15%. I didn’t see any ‘new news’ within the statement, but with the group having reached its 2012 output growth target of 15% in Q1, I am guessing that the risks on the production front lie to the upside for Dragon Oil.

(Disclaimer: I am a shareholder in Independent News & Media plc) In Friday’s Irish Times former INM director Leslie Buckley called for regime change at the publisher (see here and here). Expectations of a showdown at the AGM remain undiminished. But, of course, one would prefer if the dirty linen wasn’t aired in public, regardless of the grievances involved.

(Disclaimer: I am a shareholder in Abbey plc and PetroNeft plc) While reading Edinburgh based microcap fund Nettle Capital’s Q1 2012 factsheet I was interested to learn that they hold Irish listed Abbey, CPL Resources and PetroNeft in their European fund. Great minds and all that!

Speaking of Abbey, UK housebuilder Telford Homes issued a strong trading update earlier today in which it said profits would beat expectations due to strong demand. Encouragingly, it has acquired sites that add 1,200 properties to the development pipeline over the past year, which is a vote of confidence in the outlook for the industry. Given Telford’s focus on the south-east of England, which is Abbey’s main area of operations, the read-through for Abbey from this is positive.

Switching to macro news, the OECD said that Ireland may need a mini-budget to meet its fiscal targets. This comes as no surprise to me, given my bearish view on the state of the public finances. I despair at the lack of a proper national debate about the fiscal crisis – which has left the door wide open for populist politicians and other vested interests to pretend that this mess can be easily solved through levying punitive taxes on some imaginary army of fabulously wealthy individuals.

Cormac Lucey, whose views on both politics and economics I rate very highly, makes a powerful case for why Ireland should reject the forthcoming fiscal treaty.

On a lighter note, as a current MBA student at Smurfit, I’ve been thrilled to read of the Smurfit rugby team‘s exploits at the MBA Rugby World Cup in North Carolina – having taken a host of scalps along the way (Duke, Columbia, London Business School, Wharton) the icing on the cake came overnight with the Irish team defeating Harvard University to become world champions for a record tenth time. Congratulations in particular to my classmates Justin Thomas, John O’Loughlin, John MacMahon, Donnchadh Casey, Conor Price, David Pierce and Conor Beirne who were all part of the squad.

(Disclaimer: I am a shareholder in Trinity Mirror plc) In the media sector, Trinity Mirror issued FY2011 results. Going into them I had forecast revenues of £731.0m, EBIT of £99.6m and net debt of £195.8m. In the event, these came in at £746.6m, £92.4m (the main variance here was that exceptional items were c. £5m worse than expected) and £200.7m respectively. One thing that did catch me offside was the pension deficit – this widened to £230m from £161m in FY2010. This is a very material move – the deterioration is the equivalent of 27 pence per share, which compares with Trinity Mirror’s current share price (at the time of writing) of 36.5p. Updating my DCF based valuation model produces an equity value of just 13p per share, which represents 63% downside from current levels. However, this valuation is extremely sensitive to movements in the pension deficit – a 10% move in the pension deficit moves the price target by 9p. I would also note: (i) the strong asset backing (freehold property had a book value of 72p/share in 2010); (ii) the further self-help moves the group could implement on the cost side; and (iii) the reasonably strong cash flows (operating cashflow was £76m last year), which give me confidence that the group can nuke its net debt over the coming 3-4 years. Overall, for me Trinity Mirror is downgraded to a hold.

(Disclaimer: I am a shareholder in Total Produce plc) In the food sector, Aryzta posted its H1 results. There wasn’t a whole lot in it for me, with management saying: “our EPS guidance of 338 cent for FY12 and 400+ cent for FY13 remains unchanged”. Elsewhere, Total Produce announced this morning that it is to be included in the ISEQ 20 indices, which may prompt some modest index buying.

(Disclaimer: I am a shareholder in Playtech plc) In the technology sector, there were reports that Playtech and William Hill are to open talks on their WHO joint venture shortly. From my perspective, the best option for both parties is for William Hill to buy Playtech out (given the difficult working relationship, William Hill’s online needs, Playtech’s balance sheet being significantly strengthened at a time when it’s looking to do deals etc.), a theme explored by IC here. Playtech also issued FY2011 results, which revealed a strong performance (revenues +46%, gross income +41%), while net cash was a healthy €137.3m. Management also signaled that the group has made a strong start to 2012, and that the company has made progress towards achieving a full listing. Playtech’s share price has surged in the past week, tipping 350p and bringing it closer to my breakeven level (~380p). I remain an ‘unhappy holder’ of Playtech but will be ‘less unhappy’ if I can get out of the position flat or slightly up.

In the energy space, Tullow’s FY2011 results contained few surprises, save for a big ramp up in the dividend (from 6p to 12p). That said, the implied yield is only ~1%, so hardly anything to get excited about.

In the recruitment sector, CPL Resources acquired a Swedish firm, ERHAB. While no details of the consideration paid were released, I would expect it to have been very modest – high six figure / low seven figure territory – given CPL’s past form and its understanding that when you buy a recruitment firm you buy a business whose assets walk out the door at 5pm every evening. Hence, this is likely to be about buying a small number of individuals and then investing in building a strong team around them to increase ERHAB’s share of the market. It’s a model that has worked well for CPL both at home (CPL is the largest recruitment firm in Ireland, and has successfully evolved from being a niche IT recruitment specialist – e.g. CPL = ‘Computer Placement Limited’ – into a diversified operator) and abroad (CPL generated 33% of its permanent fees outside of Ireland in FY2011).

Finally, Siteserv has agreed to be sold to a vehicle owned by businessman Mr. Denis O’Brien. Under the terms of the proposed deal, shareholders will receive approximately 3.92c / share. I find this a little surprising given that the scale of Siteserv’s debts might have been expected to result in no consideration going to equity holders. However, IBRC (the former Anglo Irish Bank) seems happy with this arrangement. Overall, it seems the ISEQ is going to lose yet another company.

Dublin Street Scene: Ready for a Pub Crawl?

A good place to start is with Leopardstown-based ICON plc (Nasdaq: ICLR; http://www.iconplc.com),  a widely respected CRO (contract research organization) that provides clinical and development services to medical device companies, pharmaceutical companies, biotechnology companies across the British Isles, Europe and the USA, working in FDA Phases I-IV.  Leopardstown has always been known for its famous racetrack, but the horses there have nothing on the fast pace of ICLR activity.  ICLR shares trade at about $21.61, vs a year-high of $26.22 on average daily volume of just under 200,000 shares, and a market cap of about $1.3 billion.

Please do your own diligence.  We do not recommend stocks, nor are we financial advisors.  We do not own the shares in this article, and have no intention of buying them any time soon.

Staying with the healthcare theme for the moment, you might want to have a look at Bray, Ireland-based Trinity Biotech (Nasdaq: TRIB;  http://www.trinitybiotech.com ).  Although this diagnostics company is probably best known for its work in kits to diagnose HIV and sexually transmitted infections, it also works with diagnostics for autoimmune diseases/conditions, diabetes, liver disease and a variety of other diseases.  With strategic partners and distributors in 75 countries, TRIB reported revenue for 2011 of about $78 million, down from about $90 million the year before — but profits were up, which says a bundle about the determination of management to right the ship.  TRIB shares are trading at about $10.18 vs a 52-week high of $11.00, on somewhat anemic average daily volume of about 45,000; that says it could be underpriced vs what it might be if the audience were larger.  Market cap is about $215 million.

St Patrick's Day Parade, NYC (St Patrick's Cathedral)

Dublin-based CPL Resources plc (LSE: CPS or Pink Sheets: CPGLF; http://www.cpl.ie ) is a personnel-oriented company that supplies various kinds of skilled and highly trained temporary personnel, recruitment services, payroll services and a large suite of ancillary human resources services to companies across Europe, with an emphasis on eastern Europe (Poland, Hungary, Bulgaria, Czech Republic, Slovakia, et al), Ireland and Spain.  Revenues for 2011 of this company with women in the CEO and CFO positions were €235 million, substantially higher than 2010, with a profit of €7.2 million, and a rising treasury of cash-on-hand.  EPS were €o.19.  In US trading, CPGLF is changing hands at about $3.26 on negligible trading (not unusual for an unsponsored ADR), but volume in London is very low as well, indicating that either interest is low or the market has a very low float (or both).  Market cap is just under $100 million, which seems low based on blossoming results.

Dublin-based Datalex plc (Irish symbol: DLE; Pink Sheets: DLEXY; http://www.datalex.com ) is in the travel merchandising business, with advisory customers across the globe in the form of major airlines such as United Airlines and Air China (plus many more), and marketers such as Expedia.  The company’s very sexy website is helpful and fun, and lets you know just how much goes on behind the reservations systems you may be looking at online.  Revenues for 2010 were in the range of $27 million, with a loss of around $2.1 million, and 2011 results are due to be announced on March 30, 2012.  DLEXY shares are currently noted online at about $0.82 and in Ireland at about €o.40, but all the volume is on the Irish trading, with about 56,000 shares per day — however, since the ADR is sponsored you can buy the Irish shares, convert them in the wink of an eye to ADRs and put them in your brokerage account, which will store them at DTC, reversing the process if you want to sell (at no cost, btw).  We find that many cool small companies have neglected ADRs, which can present super opportunities for value-sniffing investors.

Finally, have a look at Dublin-based Fyffes plc (LSE: FFY or Pink Sheets: FYFFF; http://www.fyffes.com ), a purveyor of tropical fruits and produce: pineapples, melons, bananas: “Feel Good Fruit” according to the Fyffes colorful website.  2011 revenues were about €850 million with EPS of €0.06 per share, and a dividend of about €o.o2 per share.  Shares of the 1888-founded company are trading for about $0.60 on the Pink Sheets or about £o.36 on the London Stock Exchange, with London volume dominating at about 57,000 shares and a market cap of about $195 million.

Like I said, you don’t need green beer to look at these companies — although it couldn’t hurt, as they say.  Happy Saint Patrick’s Day!

(Disclaimer: I am a shareholder in Ryanair plc) The main scheduled corporate newsflow in Ireland this coming week is Ryanair’s Q3 results on Monday. Bloxham’s Joe Gill provides an excellent preview of them here. In addition to the results, one thing that could act as a catalyst for Ryanair’s share price is news that a key competitor, Spanair, has gone bust. Spanair carried more than 13m passengers in Spain in 2010, which is roughly half of what Ryanair carried in the same time period in that market. Given that Spain accounts for circa 35% of Ryanair’s annual passengers, this news is a clear positive for the stock in my view. Elsewhere, The Irish Times‘ Conor Pope has a very interesting piece on what life in Ryanair HQ is like here.

(Disclaimer: I am a shareholder in Allied Irish Banks plc, Bank of Ireland plc and Irish Life & Permanent plc) There was also a lot of chatter around Ireland’s financial sector. The NTMA said that domestic deposits have stabilised, which is consistent with the most recent updates from both AIB and Bank of Ireland. The recent deposit trends represent a good vote of confidence in the sector. Speaking of votes of confidence in Ireland’s financial sector, Investec announced that it has agreed to buy NCB. Elsewhere, Ireland’s richest man, Denis O’Brien, says that he would consider buying shares in Bank of Ireland.

In the support services space, Ireland’s biggest recruitment firm, CPL Resources, reported strong results despite what it rightly says are “very challenging trading conditions”.  I like CPL a lot, given its excellent management team, market dominance and proven track record. I don’t really have space for it in the portfolio at the moment though, and in any event I already have a leveraged play on Ireland Inc in the shape of Bank of Ireland (my other Irish financial holdings account for an embarrassingly small share of my portfolio), so it’s not one I’d be rushing to buy just yet.

(Disclaimer: I am a shareholder in Marston’s plc) In the pub sector we had strong Christmas trading updates from Marston’s, the most recent addition to my portfolio, and also Fuller, Smith & Turner. While the comparatives are obviously helped by the extreme weather conditions in winter 2010, the positive signals from the sector are nonetheless very encouraging.

Switching to macro matters, I have written before about the sorry state of America’s public finances. Two videos that I spotted in recent days really put the US’ problems in this regard in perspective. In the first clip, you can see where so much of the deficit has ended up being ‘invested’ in. The second video features a rant by Rick Santelli that fiscal conservatives will approve of.

In the blogosphere, John McElligott makes a good case for investing in Dart Group, while Mark Carter has a very interesting piece on how the higher risk stocks have been outperforming. I can particularly relate to Mark’s blog, as I’ve been finding so far this year that the stuff I would like to boot out of the portfolio are doing nothing, while the ones I want to buy more of are flying. If only it was the other way around!

The Great Irish Share Valuation Project II     (xlsx file)

The Great Irish Share Valuation Project II     (xls file)

A couple of housekeeping items, if you’ll take a look at the first (Wexboy) sheet:  I’ve added a Blog Link column to the right – if I’ve written about a stock already, you’ll find the link there. I’ll bold any stock (see FBD, for example) where I’ve disclosed an ownership stake. I’ve also added some averages at the bottom of the sheet. I’ll discuss these in more detail when there are valuations for a majority/all of the shares listed, but they’re pretty self-explanatory and already look interesting.

You’ll note I’ve refreshed the market price of ALL stocks. Most importantly, this will update each stock’s Upside, so best to always focus on my most recent file. I’m keeping a record, though, of the original market prices at the time I published each batch of share valuations/price targets, and I’ll do the same for all contributions. Might be handy for some fun performance analysis at a later date! Finally, I’ve sorted all stocks by their Upside potential. Now, what did I find this time ’round?:

Datalex (DLE:ID):   Datalex’s finally near the inflection point of being cashflow positive, and there appears to be a great pipeline of Revenue signed up. I’ve focused on the EBITDA Margin to come up with a P/S Ratio (plus Cash), as it corresponds well with Operating Margins for many (but more mature) tech companies, and in reality it’s the key M&A metric in the sector. This may be relevant, as it has some sharp/activist shareholders on the register, including IIU.

Elan (ELN:US):   Elan’s a tough company to get your hands around. My valuation may seem harsh, but then again it’s alarming to see how dependent it is on Tysabri, a drug with its own fair share of problems and competition. However, my valuation would probably have included an aggressive debt haircut only for the recent spin-out/merger of Elan’s EDT business into Alkermes (ALKS:US) (incidentally, they’re (or claim to be..!) HQed in Ireland, and obviously have lots of Irish-based manufacturing and R&D, so I’ve included them as a TGISVP candidate). In return, Elan received $0.5 billion of cash, and a 25% stake in ALKS.

Take a look at my valuation methodology: R&D has to be fully expensed, not capitalized. I like this as a ‘default‘ – and it’s v appropriate in many situations. But if you’re dealing with a company which has a diverse, successful, long-standing R&D programme, it makes perfect sense to addback the majority of a company’s annual R&D expense to arrive at underlying operating profitability. Think of it another way, if you bought out a Pharmco in the morning and terminated its R&D programme, you’d have an amazingly profitable business for many years to come.

FBD Holdings (FBD:ID):   I included a previous (short) write-up on FBD. I own it, and included it in my Baker’s Dozen for 2012. With risk now removed from the B/S, and an underlying RoE of 19.5%, a valuation of at least 2.0 NAV is very obvious. It should either grow into this valuation within a reasonable timescale, or note that foreign insurers have always been fascinated with the Irish market (despite its size)… With Liberty Mutual snapping up Quinn Insurance, others may soon stop trembling in their boots and think about how they can grab a slice of the pie too.

Great Western Mining (GWMO:LN):   Oh God, what do you want me to say about this little f**king cripple? Whoohoo, it has slightly more than a year’s cash on hand..?! Hmm, maybe it’s on AIM Soiree‘s Top 100, haha. Plse ignore this PoS! Shareholders are investing in nothing – even if they ever find anything tangible, existing shareholders would obviously be diluted to hell if they were ever to move forward…

Grafton Group (GN5:ID):   This is a high quality stock in a v cyclical sector, which unfortunately accounts for its hammering in the past few years. Recent saving grace has been the UK business, which has bottomed out/improved slightly even as the Irish market continues to tank – like DCC (DCC:ID), it’s become an increasingly UK focused company, with an over 70% share of its revenues in the UK now.

Not surprisingly, I’ve used the same valuation approach as with CPL (CPL:ID) and CRH (CRH:ID), but with one interesting twist: Operating Free Cash Flow (FCF) leads and lags operating profitability in a bust and boom, respectively. Duh, elementary, dear Watson (btw I’m really warming up to Sherlock now)! Yes, I know this is not so unusual, but it’s quite pronounced with Grafton particularly on the downside, I believe. This is an excellent defensive characteristic (perhaps not in terms of price – does the market ever pay attention to cashflow?! – but in terms of continuing financial stability). Also, if you evaluate based on FCF, current/historical margins are in a much tighter/more predictable range – another sign of quality.

I think Grafton will be slow to take off in the current environment, but when it does it can expect to enjoy a multi-year momentum cycle. This is no great/aggressive macro call. It’s more a reflection of the fact that in a more normal (even low growth) economy Grafton will re-acquire the confidence and capacity to renew its bolt-on/roll-up acquisition strategy (in a still v fragmented market). This has proved v successful in the past.

Donegal Creameries (DCP:ID):   The real daisy in the cowshit (though they need a name-change). This was (is) a bit of a hotch-potch – they own retail stores, a dairy business, an organic/yoghurt business, other assorted agri-businesses, a stake in a mushroom producer, farmland and investment properties! I was tempted to value based on RoE (and attracted by the large discount to NAV), but with the recent disposal of the dairy/co-op/retail business, a drill-down into the individual investments and businesses seemed worthwhile. This was also prompted by the fact that the dairy business was the most volatile and poorly performing (on occasion) business, perhaps freeing up its more stable/higher value businesses? And its sale will eliminate a significant portion of DCP’s debt.

Unfortunately, their agri-inputs business is not so hot either (with volatile/distribution type margins) – it would be worth a lot more sold, than retained. That would leave it with property (mostly farmland, which you can still actually shift in Ireland), and its Monaghan Mushrooms stake, both of which could be divested in due course. In fact, the Monaghan stake is ultimately responsible for my valuation premium to Book: A 15 P/E multiple for this stake may seem aggressive, but it’s on what looks like a temporary profit dip, and the implied valuation is undemanding considering their recent EUR 100 mio capex programme. An eventual IPO here wouldn’t surprise me. If this path was followed, Donegal would be pretty much left with cash and its produce (seed potato) business. The obvious end-game there would be an M&A transaction with Produce Investments (PIL:LN), which is also in the potato business, with a similar market cap.

Yes, I wanted to identify all the listed Irish companies out there, (re)acquaint myself with their business fundamentals and financials, come up with a rough and ready valuation for each stock, and thereby come up with a list of the most potentially under- and over-valued Irish stocks.

So, what’s my definition of an Irish company? I don’t see a need to be too rigid about this. I’m including companies listed on the Irish Stock Exchange, companies who’ve most/all of their business/operations based/HQed in Ireland (not simply registered there), and companies who are led by predominantly Irish directors and/or management. I first input all the ISE listed stocks and then, off the top of my head, I added all the other non-ISE listed Irish stocks I could think of. I will revisit this exercise, but I’m sure I’ll still end up missing a few stocks – so if you notice any missing, please don’t hesitate to comment or email me.

No need to be impressed with the data/formulas etc…it’s all just brute force! I’m not a huge fan of screeners/download tools – I’m wary of a lot of data out there, and even if it’s accurate it’s often unrevealing or misleading. Yeah, they produce an occasional worthwhile idea, but I tend to find plenty of interesting stocks anyway without them. Also, I have this quaint notion I owe each stock at least one perusal of its website and latest annual report. Doing this makes each company/stock seem that much more tangible and memorable. (And that’s also probably why I still mostly buy CDs…though I’m not a complete idiot, I almost never buy CDs in Ireland).

And boy, does this pay off! I reckon half my investing knowledge/experience comes from reading up on new stocks, trying to understand their business/sector and its quirks, and puzzling over how to value them. I’ve also become fairly good at retaining little mental snapshots of great/interesting/obscure companies that were a tad expensive (good company, bad stock) when I first came across them. It’s amazing how often the wheel comes full circle and you get to buy these stocks at a great price (good company, good stock) based on a little neglect or some temporary distress! I often consider patience to be the most important value investing skill…

OK, before I attach the first version of my file, please note I’m nowhere near finished! I’ve got about 70 stocks listed already! Rather than slave away for God knows how long, I thought it far better to start with the first dozen stocks, post them, hopefully get some dialogue/feedback going and then post regular file updates in the next few (?) weeks. Also, here’s my Disclaimer again! Please Do Your Own Research (DYOR) before buying, as they say. These are all rough and ready valuations (unless I utilize a valuation from a blog post) – some turn out to be truly a surprise, even to me! – and I’m not planning an in-depth write-up on most of these stocks. So, feel free to agree, or disagree (violently), with me on any aspect of my valuations..!?!

The Great Irish Share Valuation Project I   (xlsx file)

The Great Irish Share Valuation Project I   (xls file)

Please focus on the Wexboy sheet – I’ve also included a Disclaimer for reference and I’ll discuss the Template in another post. I think the spreadsheet’s pretty self-explanatory – I’ll run through the more notable stocks to illuminate my approach, and if you’ve any specific questions don’t hesitate to comment or email me. Btw I don’t consider this file a final buy or sell list, it’s more my (personalized and clunky) version of a stock screener to identify the highest priority over/under-valued stocks to research and monitor more closely. These next steps will often prompt me to revise my price target higher or lower, or even revise my valuation approach, on a stock.

If you’re a more occasional investor, perhaps consider this file a good cheat sheet for a hopefully rewarding discussion with your adviser/broker. Perhaps you might discuss whether buying/adding to any of the most under-valued stocks, and/or selling the most over-valued, might be a good idea? Your broker should understand the valuation approach and metrics in each instance, and if he/she disagrees just ask them to explain why, and to review their own valuation with you.

OK, let’s visit with a few of these initial stocks:

Abbey (ABBY:ID):  Based on current RoE, and the safety of the B/S, I’ve set the Target Price equal to the Net Asset Value. Abbey’s a great stock (Philip O’Sullivan just put up a good post here), but there are quite a few other property stocks out there (with Net Cash or low LTVs) on similar/lower valuations, so your stock preference will come down to what kind of exposure you’re looking for.

Aer Lingus (AERL:ID):  Wow, this valuation caught me by total surprise! I’m not a fan of most airlines, but this is intriguing – and, of course, Aer Lingus has got the almost unique distinction of having significant Net Cash on the B/S. But the numbers stack up:  Operating FCF (Operating Cashflow less Capex) (adding back aircraft lease finance charges) comes in at 8.6% of Revenues, so I think a 0.67 P/S Ratio is deserved. This depends on two big assumptions – that Mueller can keep up this performance, and that Capex will be severely limited in the next few years (based on average plane age, that seems reasonable). I’ve then haircut Cash to reduce Debt/Aircraft Leases to sustainable/lower risk levels, and to eliminate half the Pension Deficit (sure, Aer Lingus isn’t on the hook for this, but are you really going to bet that management, the unions & the government won’t shaft the shareholders with some kind of deal/settlement?!)

AIB (ALBK:ID) & B/I (BKIR:ID):  Well, no surprise with the AIB over-valuation, who the f*k is buying the shares on a EUR 31 billion valuation?! On the other hand, I was genuinely puzzled at the Fairfax/Ross consortium investment – but perhaps this valuation and Price Target explains it? As you see, I’ve used the latest Equity in both valuations and haircut by my estimated losses on Gross Impaired/Vulnerable/Past Due loans, adjusted to reflect their current B/S Provisions. Of course, this doesn’t provide much protection against new Bad Loans turning up..!?!

Aminex (AEX:LN):  With oil/natural resource stocks, I usually ignore earnings and value the business at Cash, less Borrowings if there are any, less 1 Year’s Cash Burn. If a company has Proved & Probable Reserves, I’ll include them at $10 per boe for Proved Reserves, and $5 per boe for Probable Reserves. Yes, it’s tempting to get excited about Indicated/Inferred Resources, but from painful experience it’s just not worth it! After all, have you ever seen a bank lend against Resources? But they can serve as an additional qualitative factor if you’re stuck choosing between a number of oilies. Conroy Gold (CGNR:LN), by the same logic (with no Reserves) is basically worthless.

Continental Farmers (CFGP:LN):  Investment banks/brokers, I salute you! How do you sell this stuff?! Nothing wrong with the company, but like pretty much all of its peer group (I wrote about this here) it doesn’t generate any Free Cash Flow, and isn’t likely to in the near-term, so I’m forced to value it based on its land holdings (btw the IPO Cash raised only matches the Debt they currently have outstanding).

CPL Resources (CPL:ID):  When I come across a decent (cyclical?) stock, and I’m reasonably confident it will revert to their peak/average Operating Profit Margins, I’ll actually price it at a P/S Ratio that reflects an average of current and peak (or LT average) Margins. I think this is fair, as it’s a Margin the company should be able to reach/exceed in the next couple of years (so think of it as a Target Valuation), and/or it more fairly represents what another company might be prepared to pay in a takeover situation. I’ve used a similar approach with CRH (CRH:ID).

Btw Some stocks are listed on more than one exchange – I’ve opted for the Irish listing unless trading volumes are significantly higher on another exchange.

(Disclaimer: I am a shareholder in Abbey plc) Housebuilder Abbey released H1 numbers earlier this week which came in behind market consensus and prompted a round of downward revisions to forecasts across the stockbroking community. Not that this miss particularly concerns me, as the difficult housing market conditions that caused the miss is hardly ‘new news’. In any event, for me, Abbey is a compelling story. Its balance sheet is in fantastic shape, with cash and cash equivalents at the end of November of €74m. That’s equal to €3.37 a share, or 66% of the current share price! The company has no debt and its pension scheme is in surplus (to the tune of €3m). Based on tonight’s closing price of €5.15, the company is trading at a discount of 30% to its NAV (€7.35). Its financial strength gives it considerable flexibility in terms of being able to grow its landbank (which the company has been doing, albeit to a modest extent, in recent times), while the company has also been returning money to shareholders through a share buyback (in the past 13 months it has bought back 11% of its shares) as well as paying dividends (8c a share, making a 1.6% yield). While housing market conditions remain challenging across its areas of operation (Southern England, Leinster, Prague), Abbey’s obvious financial strength means that it has the staying power, and more importantly, the firepower, to capitalise on any recovery. 

(Disclaimer: I am a shareholder in Ryanair plc) Aer Lingus released strong passenger statistics for November, which continues the positive narrative from the company that I’ve been tracking in recent times. It also mirrors Ryanair’s better-than-expected passenger stats for the same month, which along with the recent upgrade to earnings guidance from Europe’s largest LCC has helped give the shares a lift in recent times.

Value guru Richard Beddard asked if I was familiar with CPL Resources, Ireland’s leading staffer. It’s a stock I covered in my analyst days, and one I have great admiration for. Just by way of background, the company was founded by CEO Anne Heraty in 1989. Its name comes from Computer Placement Limited, which underlines its technology recruitment origins. It has, however, expanded into multiple other business areas over the years through a series of smart acquisitions. CPL has been very disciplined on the M&A front, preferring to spend six or low seven digit sums of money for businesses, as it understands that when you buy a staffer you’re buying a business whose assets walk out the door at 5pm every evening. So, the M&A strategy has been about buying a good group of people in a particular niche and then investing in growing that team so that if anyone leaves there is ample strength in depth to compensate for their departure.

The group has a dominant position in the recruitment market in Ireland (it’s particularly strong in the multinational space, so while the domestic economy’s troubles have hurt it, CPL has plenty of other domestic revenue streams), and it has a decent overseas business with offices in the UK, the Czech Republic, Slovakia, Poland, Hungary, Bulgaria and Spain. In its 2011 financial year the company generated 33% of its profits outside of Ireland.

CPL’s business is not just about placing candidates. It has also built up a decent operation providing outsourced functions to companies such as payroll, training, and HR services. This provides it with a lot of recurring revenue, while its strength in temporary placements delivers similar results (for staffers, permanent placements generate a once-off fee, while temporary placements generate recurring fees so long as the candidate is in situ).

Given the M&A discipline noted above, its limited capex requirements and its record of consistently generating profits the company has been an impressive cash generator over the years. At the end of FY11 (end-June) the company had €46m in net cash. Management elected to return €20m of this to shareholders through a tender offer at €3 a share.

In terms of the valuation, post the completion of the tender offer CPL has 30,545,159 shares in issue. Based on its closing price this evening of €2.70 this gives it a market cap of €82.5m. Taking net cash as €26m (i.e. the end-FY11 net cash less €20m for the tender offer), this gives an enterprise value of €56.5m. Which is just under 7x its FY11 EBITDA. In its most recent update management said that it expects “further profitable growth in the six  months to 31 December 2011“. This is an industry with limited visibility on future earnings, so even if you conservatively assume that the current dislocation means that FY12 profits will be flat, the question you must ask yourself is this: “Does a recruiter with diversified earnings streams (both by industry and geography), a very strong balance sheet, an excellent and experienced management team and a proven track record going back over 20 years merit an EV/EBITDA rating above 7x at this stage of the cycle?” The answer for me is a yes.

So, what has been grabbing my attention since Friday?

From a corporate perspective, this week is all about builders and consumer facing stocks in the UK, with results due from Next, Kingfisher, Dunelm, Barratt Developments and Galliford Try. For a more complete overview of the week ahead, click here. In Ireland, watch out for results from CPL Resources on Wednesday. CPL is Ireland’s biggest recruitment company, hence its comments on the state of the labour market here will be particularly instructive.

There was a woeful article in the weekend press which speculated that Easyjet “may” bid for Aer Lingus. There are a number of glaring errors with this argument. For starters, Easyjet’s biggest shareholder, Stelios Haji-Ioannou, has repeatedly called for the carrier to curb expansion and focus on growing cash generation to fuel dividends. With himself and connected parties controlling at least 37% of Easyjet, it would be hard (if not impossible, as a takeover would presumably require a 75% “special resolution” majority) to get sufficient support for a takeover of Aer Lingus. Leaving that aside, from a strategic perspective, what would Easyjet want with a transatlantic business, Ryanair’s home turf (it has no presence in Ireland) and a big Heathrow (it has no presence at LHR) operation?

We’re nearing the endgame for Greece. This will have negative short-term implications for Ireland, but as I’ve argued before, if the Irish government were to cut spending deeper, and faster, this would remove a lot of the challenges we face.

In a sign of the growing panic around peripheral Europe, Italy announced last night that it was considering curbing short selling following Friday’s fire-sale in Milan. Ireland banned the shorting of bank shares in September 2008, and we all know how well that turned out. Today has been a day where people have been rushing to safety, and I can’t help but wonder when Spain will become the next target of the market’s fury. This all provides a toxic near-term outlook for Eurozone equities. The European Union and ECB’s handling of the peripheral crisis has been a failure and there are few signs of positivity elsewhere, with the US soon to hit its debt limit, the UK finding out that its consumers have no money left and China about to discover that its pro-cyclical economic policies have fueled one of the biggest bubbles of all time. Some of my readers have teased me for always being bearish since I started this blog, but the reality is that the troubled macro backdrop that we have now has been an ever-present since I began writing this blog. Believe me, I would love to have something positive to talk about!

(Disclaimer: I’m a shareholder in Bank of Ireland plc) The Bank of Ireland rights issue circus really gets going this week. I was amused by this story in the Irish Independent, in which Harris Associates appears to have forgotten that major banks such as HSBC, RBS, Danske & KBC have operations here. There is a terminology for this sort of thing – “talking up your own book” (another term I like for this sort of thing is “getting high on your own supply”). Now don’t get me wrong, perhaps BKIR will be a big winner once the dust settles. I hope it is, mainly because this will allow the State (i.e. we the taxpayers) to recoup some or all of its “investment” into it. At the time of writing Bank of Ireland’s shares are trading just 0.7c above the 10c rights price. Last year’s rights issue (at 55c) represented a 64% discount, so in the absence of a generous discount it will be tricky to ensure a substantial private sector participation. If it doesn’t happen, then the €150m in expenses paid to advisers by BKIR for its capital raising will look even more ridiculous (given BKIR’s market cap is only €562m) than it currently does.

Bloxham has an Irish equity strategy note (“Tin Hats”) out today. Its key picks are DCC, ICG, Kerry & Paddy Power, which are selected due to their strong balance sheets, the potential for share buybacks/special dividends and limited dilution risk for shareholders. It also selects four microcap stocks, Abbey, CPL, Datalex and Total Produce, due to their attractive rating and long-term upside potential. I recently identified four Irish companies as my preferred stocks on the ISEQ and I note that 3 of the 4 make the Bloxham list for much the same reasons why I included them. And for the sake of full disclosure, of Bloxham’s 8 picks, I currently hold ICG, Abbey, Datalex and Total Produce.

The banking sector in Ireland has caught my attention in recent times. While reading the new edition of Business & Finance magazine (in which I have articles on global markets and what Irish shares are worth buying these days) I was struck by how much advertising there was in it from overseas banks lending into the Irish market. Specifically, HSBC, KBC and Rabobank have all been stepping up their marketing in this country, which hopefully signals a genuine increased willingness to lend here from them. Given that most domestic “financial institutions” now resemble zombies from a Hammer horror film, the market opportunity for the foreign players is obvious. (Disclaimer: I’m a shareholder in Bank of Ireland plc) We also got the details on the Bank of Ireland rights issue, which aims to raise €1.9bn for the group. I was surprised that the rights price is 10c, which is only a 17% discount to Friday’s closing price. It will be interesting to see how many shareholders (by one estimate circa 60% of BKIR’s register is made up of retail investors) follow their money. The NPRF’s decision not to take up its option to buy a 15% stake in BKIR did not come as a surprise to me as it allows BKIR to dangle the “carrot” to investors that if they all take up their rights then the State shareholding will be capped at 29.2%. If none of them take up their rights then the State will be left with 69.7%.

Builders’ merchanting group Grafton issued a trading statement on Friday, which saw the shares get hockeyed, dropping 8.7% on the day. While I like the company and its business model, I think that Friday’s market reaction was warranted – it reported a big contrast between its performance in the UK (lfl sterling sales +4.7% in H1) versus Ireland (H1 sales -6%) – and the outlook for companies facing the UK consumer is deteriorating as we move into H2. And we all know about the outlook for consumer spending in Ireland!

We also got a trading update from CPL, which is Ireland’s biggest recruitment company. It says that profits for its financial year just ended will be “broadly in line with market expectations”, while the outlook statement was particularly encouraging given management’s long track record of caution when it comes to providing forecasts: “We are experiencing some signs of improvement across our various businesses, and our operations overseas are performing well.  We expect a further gradual improvement in market conditions in the coming months”. Good news for Irish job-seekers!

(Disclaimer: I’m a shareholder in Trinity Mirror plc) In my last blog I wrote about the mixed emotions I was feeling over my Trinity Mirror investment. Its share price has soared 18.3% this week on the back of the demise (of sorts – given that The Sun will likely now be printed on Sundays) of The News of the World. While the gains come on the back of low-life behaviour by certain individuals, I see plenty of happier reasons to believe that this stock has significant upside potential. For starters, its share price (50p) is about 30% below the 72p/share value of the group’s freehold property. It is also trading on a forward PE of circa 2x. Sure, the newspaper industry is in long-term structural decline, so a single-digit multiple is warranted, but with a decent enough balance sheet (the mean net debt/EBITDA forecast for the current financial year is only 1.6x) and chunky enough profits (both of which provide Trinity Mirror with staying power while many of its competitors go bust, which helps to at least partly offset the impact of the newspaper advertising market’s long-term structural contraction) coupled with advertising that looks to be near a cyclical low I think  that the group deserves to be trading at a price that is 2-3x higher than where it currently is.

I have previously written a lot about why I am bearish on China. Despite having held this conviction for some months, I am still amazed by some of the things I see about the construction bubble there. The excellent Tim du Toit at Eurosharelab posted some interesting charts from SocGen about the magnitude of infrastructure  spending in China, while this article from the New York Times that Derek Madden kindly brought to my attention featured this eye-popping passage:

“As municipal projects play out across China, spending on so-called fixed-asset investment — a crucial measure of building that is heavily weighted toward government and real estate projects — is now equal to nearly 70 percent of the nation’s gross domestic product. It is a ratio that no other large nation has approached in modern times.

Even Japan, at the peak of its building boom in the 1980s, reached only about 35 percent, and the figure has hovered around 20 percent for decades in the United States”