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End of Quarter Situation Review
End of quarter thoughts on various names
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Since the inception of this newsletter in June, I have analysed nine stocks in varying degrees of detail, usually in tandem with a discussion around a wider theme. With last Thursday marking the end of Q3, it prompted me to look back over the nine names I’ve written about and re-evaluate my thinking on them based on the latest facts where necessary.
To be clear, I’m not a believer in quarterly reporting and don’t read anything into quarterly return performance, as this reflects the type of short-term orientation or mindset that often creates the type of mispriced value situations that I seek to capitalise on.
However in the spirit of market convention and honest follow-up analysis, in this week’s newsletter I thought I’d outline my current end-of-quarter thoughts on each name and review the respective share price returns to quarter-end. If nothing else, this is just an interesting exercise to do with the passage of time.
To start off, the summary table below sets out each stock I’ve “covered” to date, with two names (Dole and Dalata) being the subject of full investment memos (“Conviction Ideas”), and the remaining seven being more high level ideas discussed as potentially interesting names to investigate further (“Quick Ideas”):
Source: Value Situations analysis; share prices are closing prices as at 30 Sep-21 quarter-end per Koyfin
*Note: Price on Publication for Dole shown above reflects the original €2.52/share price for Total Produce Plc shares converted to its equivalent Dole Plc share value after 7-for-1 share exchange and IPO transaction, converted to USD at FX rate as at 30 Sep-21 quarter-end.
Before discussing each name in more detail, two things stand out to me from the table above:
I’ve had more losers than winners so far - but its been less than ~3 months, so really there’s no real information value or conclusions to be drawn from such a short time-frame in my view.
Taking these names as an equal weighted portfolio or basket (as presented above), my picks have under-performed absolutely (-2.2%), and relative to large-cap US and European benchmarks (-3.6% vs. the S&P 500 and -1.3% vs. the European Stoxx 600 respectively) - of course, of the nine stocks I’d argue only the two conviction ideas Dole and Dalata Hotels are true picks; on an equal weighted basis, these two names are down ~2.7% in aggregate, attributable to Dole’s weak IPO and subsequent share price performance.
Again it’s my belief that quarterly returns are not meaningful as my investment term for underwriting ideas is typically 2-3 years, and so 3 months most likely reflects noise more than anything else. But I think this is still an interesting thought exercise, so taking each name in turn, my current thoughts are set out below.
Dole Plc (DOLE)
Following a disappointing IPO at the end of July, Dole’s stock has generally languished below its $16/share IPO price since then, that is until last Wednesday when it surprisingly became the latest hot stock on Reddit’s Wall Street Bets (WSB) forum. Since then, Dole’s stock is up ~13%, apparently off the back of WSB-fuelled options activity and interest in the name.
Prior to its WSB “debut,” Dole’s stock had actually been trading sub-$15/share, implying a valuation of 6.9x LTM EBITDA pre-synergies (~6.4x including synergies), while its US-listed peers Fresh Del Monte, Mission Produce and Calavo Growers continue to trade at significantly higher LTM multiples at ~10x / 17x / 24x respectively. Similarly, on a forward NTM basis, the valuation gap persists with Dole at sub-7x vs. average 14x multiple for these US peers. The valuation gap here is all the more anomalous when one considers Dole’s superior competitive positioning in nearly every respect - its 2x bigger than Fresh Del Monte and ~10x bigger than Mission and Calavo, and so has significant scale advantages, with a vertically integrated model and a diversified 300+ product range, compared with Mission and Calavo, which are basically single product avocado businesses.
Despite its poor showing in the public markets to date, and aside from the WSB interest, Dole has been setting up nicely along a re-rating trajectory, firstly with positive analyst initiation coverage commencing in August, followed by the commencement of options trading in the stock in September. The next step on this trajectory is the Q3 results and earnings call - remember that this “new Dole” business post the merger with Total Produce is only ~2 months old as a public company. I expect a positive set of result for Q3 (the company has yet to confirm a reporting date), and the recent read across from United Natural Foods is a positive for Dole.
I see a re-rating as inevitable after a couple of quarters’ reporting, which will get investors comfortable with management and the company, which in turn should lead to index and ETF inclusion in time as its market cap re-rates higher.
Dole remains extremely cheap relative to peers and is currently valued at 7.4x LTM EBITDA (pre-synergies) after last week’s WSB-inspired rally. My view is that Dole simply suffers from unfamiliarity and a resulting lack of interest so far, rather than any fundamental concerns, and this is evident when one looks at the valuations of its peers.
I see no change to my original underwrite or thesis and see substantial upside in Dole from here.
Hibernia REIT Plc (HBRN)
I wrote about Hibernia REIT Plc as a takeover target in the context of record amounts of PE dry powder needing to be deployed and given my knowledge of strong institutional interest in Irish real estate assets. Hibernia is particularly notable in that it trades at an anomalous discount to comparable UK office peers, despite having a very attractive prime office portfolio in Dublin with one of the strongest rent collection rates (~99%) in Europe among office REITs during COVID through the pandemic. I won’t rehash all the investment attributes here but the key point is that it possesses many of the characteristics that make it an ideal take-private candidate for private equity real estate (PERE) funds with a persistent discount to NAV, much wider than its peers.
HBRN had traded as high as €1.37 in mid-August in anticipation of the “return to the office” before the Delta variant took the wind of its sales, and has recently pulled back to €1.18/share, for a P/NAV of 0.67x. This is just too cheap for a portfolio of this quality with very little leverage (LTV ~19%) - the net rental yield implied by the current EV is ~6%+ vs. prime office yields in Dublin City Centre holding at ~4% - 4.25%. With prime rents holding firm and strong occupier interest in the Dublin market its difficult to see a reason for HBRN to trade so far below NAV.
I don’t really see much downside, if any, at the current share price given the ~30%+ discount to NAV. If the shares continue to remain this depressed as offices re-open (which has already started happening in Dublin), I can see a take-private happening at €1.50+ per share. So there’s an unusually (for a REIT) asymmetric risk/reward on offer here, with ~30% upside vs. little to no downside, all backed by prime real estate and a supportive outlook for Dublin office space.
Herman Miller, Inc (MLHR)
I wrote about Herman Miller Inc (soon to be renamed as MillerKnoll) as a beneficiary of what I see as the structural change happening across the office market post-COVID. Herman Miller, the #2 player in the US office furniture market completed its merger with Knoll (#5) during the past quarter, creating the #1 player in the industry. MLHR’s stock has declined over 20% since I wrote about it, and after a 6% sell-off on the final day of Q3 last Thursday, it now trades at ~7x PF EBITDA for the newly merged business, vs. ~11x for closest peer (and industry #2 player) Steelcase.
What I originally liked about the Miller/Knoll situation is that it capitalises on structural change at both the industry and company levels – MLHR should benefit from both a “great reconfiguration” of the office and from home/remote working shifts, from the strengthened position as market leader following the merger.
The company reported Q1 FY22 results last Wednesday, which were broadly positive notwithstanding some inflation and supply chain issues. Management stated they are seeing demand accelerating as customers prepare to return to the office - orders grew across every segment of the business, and were up ~35% YoY organically, with orders up ~43% within its Americas Corporate contract segment and up ~35% in its International Corporate contract segment, indicating corporate customers are starting to reconfigure office formats for post-COVID working practices.
Overall, my sense is that this remains a stock to watch, being the market leader with tailwinds from both a return to the office set to accelerate further by January, plus a strong home office offering. Yet MLHR is valued at just 7x PF EBITDA, vs. 10x - 12x NTM EBITDA for closest peers Steelcase and Kimball. I’d expect the stock to re-rate over the next 12 months as both corporate and retail/WFH customers continue to upgrade their working environments.
Daily Mail & General Trust Plc (DMGT)
Having sold RMS to Moody’s for £1.43bn / ~$2bn and completed the SPAC merger and listing of Cazoo on the NYSE, two key pre-conditions for the proposed take-private of DMGT by its controlling shareholder Rothermere Continuation Limited (RCL) have been satisfied. However, last Thursday, RCL obtained an extension to the “put-up or shut-up” (PUSU) deadline for the second time, to the 28 October, due to ongoing discussions with the trustees of DMGT's pension schemes to ensure they are not adversely affected by the take-private.
When I last wrote about it, my revised SOTP analysis put the underlying value of DMGT including its interests in RMS and Cazoo at ~£16/share, ~33% above RCL’s indicative offer of ~£12/share. Unfortunately, given that RCL holds all the voting shares, there is nothing to stop it pushing through with what in my view is a low ball bid, and the failure of an activist to emerge here to create some noise is somewhat disappointing.
My sense is that RCL will agree a position on the pension schemes and complete the buy-out of shareholders, effectively paying just 8x PF cash operating income for the residual business post the RMS and Cazoo deals, which substantially undervalues the underlying businesses in my view. Shareholders will receive a measly ~12% premium to the current price based on my analysis of RCL’s offer, but given the share class structure that’s the only real upside at this stage given that the deal is likely to occur.
If RCL completes the deal by the end of Q4, shareholders will have gotten a ~16% return based on the price at the time of my initial publication, which equates to an annualised IRR of ~37%. Not bad, but should be better given the underlying asset values.
Dalata Hotel Group (DHG)
My second high conviction target stock, DHG is up almost 13% since I published my investment memo on it, off the back of increased travel and economic activity as pandemic restrictions are lifted across Ireland the the UK. In addition to improving sentiment for hotels, DHG announced announced the creation of 600 new jobs last week as the business re-ramps in preparation for this increased activity.
After the recent increase in share price, DHG is valued at ~8.7x pre-COVID (FY19 EBITDA), which is a meaningful discount to peer Whitbread Plc currently trading at 12x pre-COVID EBITDA. I also think its important to emphasise that at the current EV of €1.18bn, buying into DHG at the current share implies you acquire an interest in its freehold hotel portfolio at a slight discount to its real estate value AND get its ~3,000 room leasehold portfolio AND its ~2,600 room development pipeline for free.
Again the combination of real asset backing, recovery prospects and its cheap valuation make DHG a strong takeover target in my view; if it share price remains depressed as travel and hospitality sectors recover post-COVID, a PE or RE acquirer will make a move for it.
No change to my original underwrite or thesis and I continue to see substantial upside in for DHG’s share price.
US Silica Holdings Inc (SLCA)
I highlighted SLCA as a quick idea commodity play in the context of constrained sand supply, against a backdrop of strong demand across key economic sectors, including construction/infrastructure, energy and glass, with this demand set to increase significantly with President Biden’s infrastructure plan.
In looking at SLCA initially, its Industrial & Specialty Products (ISP) segment seemed the most interesting part of the business, given its exposure to a range of essential industrial end-uses (building products, specialty glass, filtration) seeing rising demand. Furthermore, this segment has exhibited pricing power (having raised prices several times in last ~12 months) and so may be an inflation beneficiary also. However, given the growing energy market crisis and rising oil price, SLCA’s Proppants (frac sand) segment for which it is better known may actually see stronger growth than ISP in the near term, and benefit from an inflationary tailwind also.
It’s worth remembering that SLCA’s value is approximately the same as it was at the bottom of the US shale market bust of 2015/16 despite the bullish outlook for oil that we are now aware of.
The main risk with SLCA is its highly leveraged balance sheet, but with a mixed shelf offering filed, management may have a plan to deal with this, by placing shares to delever into a strengthening market for SLCA. If the oil price does take off spurring new production, SLCA could be a way to play this theme, which combined with the supportive outlook for US infrastructure continues to make SLCA very interesting.
Yellow Cake Plc (YCA)
When I highlighted YCA as part of a wider discussion on the uranium market opportunity, the spot price of uranium was at ~$35/lb and subsequently rose to a nine year high above $50/lb (an increase of ~70% YTD), before recently pulling back to ~$42/lb. While the looming uranium market supply deficit was well flagged by a number of investors over the past ~2 years, the main driver of the recent multiyear high was the emergence of the Sprott Physical Uranium Trust (U.U), which has been buying up supply in the spot market ahead of an expected increase in demand among utilities with a new contracting cycle and new reactors coming online.
Like the Sprott vehicle, YCA offers investors exposure to the underlying commodity and a way to play the projected increase in the price of uranium, which reached ~$136/lb at the peak of the previous cycle (when there was no deficit). For this cycle, many industry and market analysts are projecting uranium could hit $150 - $200/lb given the structural supply deficit, which is projected to reach ~50 million lbs by 2030, as the below chart forecasts:
In the past week, the long-term contracting price for utilities is reported to have reached a 5 year high of $45/lb but its worth noting that uranium would need to reach at least $60/lb to be commercial viable for most miners and producers, so a move to $60+ seems likely over the next 12 months or so.
In this context, YCA continues to look very interesting, trading at 1x NAV (backed by ~15.8m lbs of physical uranium, and based on the current spot price), which is a slight discount to the Sprott trust. Indeed, I’ve noticed that YCA tends to trade at a discount to Sprott’s U.U which makes little sense given they are similar vehicles with similar risk.
Should the spot price of uranium increase to the commercially viable level of $60/lb, YCA is trading at an indicative forward multiple of 0.84x NAV. I believe a move to $90 - $100/lb is very possible, which implies ~100% upside holding the 1x NAV multiple, while the risk of spot price falling below $40/lb seems unlikely given the supply-demand dynamics at play.
With the current energy market crisis likely to worsen, there is the added tailwind of a potential political u-turn on the use of nuclear power, which could drive further incremental demand for uranium to the benefit of YCA, U.U and uranium miners. I continue to believe that uranium is the most fundamentally compelling play within commodities and energy, and I see YCA as perhaps the best risk/reward stock within this theme.
British Land Plc (BLND)
I recently highlighted BLND as a name worth tracking as a potential take-private candidate by a PERE acquirer given its relatively cheap valuation (~0.8x NAV) and prime office assets, with the potential for unlocking value via a repositioning or divestment of its retail portfolio (which is largely responsibly for its discount to NAV). I also highlighted that Brookfield Asset Management own ~9% of BLND, and it was interesting to note in Brookfield’s investor day presentation last week that it intends to retain core properties including offices that are”irreplaceable” and “high quality” as part of its strategy for the next five years. I believe BLND’s three London office campuses might fit this profile and given Brookfield is continuing to raise enormous new funds for real estate, BLND might be an obvious and relatively easy way to deploy some dry powder.
The upside on BLND is probably no more than 25% or so, and therefore not hugely compelling from a return standpoint relative to other names I’ve written about, but the risk/reward is interesting given the largely prime asset backing with limited downside on a P/NAV of 0.8x. I continue to watch this name with interest as part of the wider PERE/Forced Purchaser theme.
Pantheon Resources Plc (PANR)
PANR is my most recent quick idea and given I only published my analysis on it last week I won’t re-hash the entire thesis here, but would summarise by saying PANR is a highly asymmetric asset play leveraged to the bullish outlook for oil prices amid a growing energy crisis.
It appears to be priced like an option yet is backed by an enormous real asset base in the form of ~20 billion barrels of oil. Based on the facts and confirmatory work done by management and its advisors to date, the downside seems more than priced in at the current share price. A crude downside sense-check implies reinforces my thinking here -
PANR has ~20 billion barrels OIP, with management estimating ~14% is recoverable (note other Alaskan North Slope oil fields have recovery rates well above this, with Prudhoe Bay estimated to have 16 billion barrels recoverable from its ~33 billion barrels OIP, for a 48% recovery rate)
Let’s assume pessimistically only 10% is recoverable, or ~2 billion barrels (a very poor outcome here).
Taking the precedent transaction price/barrel of $3.10 from the Oil Search comp for the Pikka/Horsehoe assets and applying a draconian 50% haircut to this implies an EV of $3.1bn for the ~2 billion recoverable barrels; furthermore applying only a 30% probability of commercial success to the $3.1bn EV implies a risked EV of $930m for PANR’s asset base. (Note the 30% probability here is very conservative).
Backing out net liabilities of ~$6m (and ignoring corporate cash on the assumption that it is required for opex/WC needs), this indicates a risked NAV of ~$923m for the company.
Next lets assume that the company raises the $50m required for the winter drilling and testing programme as outlined by CEO Jay Cheatham on the recent Proactive Investor interview update at the current share price of ~£0.71/share, which implies an increase in share count by ~52m shares to 793m shares fully diluted.
Finally, taking my pessimistic risked NAV of $923m, and dividing by the PF share count 793m shares and converting to GBP, I arrive at a share price of £0.86 or 19% above the current share price.
To my mind, the above scenario would represent a very bad day out for the company and its world class ANS assets, yet still yields a NAV comfortably above the current share market cap and share price. On this basis, the downside here is more than priced in and any reasonable forecast of commercial success suggests a multibagger return.
With Jay Cheatham confirming that the key catalyst of the farm-out/funding process being well underway and indeed “quite advanced” with a number of parties, it would seem PANR is on track to realise significant value in due course. For readers who are interested, my key takeaways from Cheatham’s recent interview can be found on Twitter here:
To conclude I believe the prospects for the nine names I’ve written about to date remain positive across the board, but if I had to pick my top five names as things currently stand, I believe DOLE, DHG, HBRN, YCA and PANR offer the best risk/reward and so are the most interesting. Hopefully this exercise has been interesting for readers, and please do get in touch with any thoughts or comments.