Weekly Bulletin #4
Portfolio: PANR, YCA | Monitoring: BG | Developing: Wickes Plc (WIX)
Disclaimer
Value Situations is NOT investment advice and the author is not an investment advisor.
All content on this website and in the newsletter, and all other communication and correspondence from its author, is for informational and educational purposes only and should not in any circumstances, whether express or implied, be considered to be advice of an investment, legal or any other nature. Please carry out your own research and due diligence.
Model Portfolio Updates
There were two updates relating to Model Portfolio names last week, Pantheon Resources Plc (PANR) and Yellow Cake Plc (YCA).
PANR
PANR provided two updates last week, firstly an update on drilling progress at Theta West last Tuesday, followed by a Notice of Partial Conversion in respect of the $55 million unsecured convertible bond issued recently.
The key takeaways from the drilling update are as follows:
PANR confirmed that both the Upper Basin Floor Fan (UBFF) and Lower Basin Floor Fan (LBFF) horizons at Theta West have been drilled, with approx. 1,160 gross feet of hydrocarbon bearing reservoir found across both horizons combined.
Data collected indicates the reservoir quality is superior to Talitha #A (as expected), with high quality light oil encountered across the entire section. PANR are now preparing to set flow test both BFF horizons over the coming weeks.
Well bore and weather conditions prevented the company from conducting wireline operations, however PANR did conduct did conduct logging while drilling (LWD) work, which provided excellent quality data and indicated the presence of hydrocarbons in the targeted horizons.
Samples analysed to date by AHS/Baker Hughes confirmed the presence of light oil within the UBFF and the top portion of the LBFF, consistent with the LWD data.
The company cautioned that it’s too early to draw final conclusions as to the ultimate potential of the well, which can only be assessed after the completion of flow testing operations, which are expected to progress in the coming weeks.
These findings are very encouraging, and as expected confirm that the Theta West zone is of a superior quality to Talitha. In simple terms, we know that the oil is there at Theta West, and findings to date are in line with management’s expectations and models. The upcoming flow testing is the critical next step to confirming the potential and commercial viability of Theta West, but in Technical Director Bob Rosenthal’s words, for now this is “very much a case of so far, so good."
Regarding the partial conversion of the convertible bond, investor Heights Capital Ireland opted to convert $2m of the $55m convert bond into ordinary shares, resulting in the issuance of 1,937,608 new ords. The dilution from this conversion is negligible, at ~0.3% for existing shareholders. Accordingly, the principal outstanding on the bond reduces by $2m to $53m.
The conversion price is £0.78/share, which is exactly in line with the initial conversion price set at a 20% premium to the Issue Price of £0.65 at the time of the bond subscription back in December. With the converts clearly in the money with the share price at ~£1.35 prior to conversion, this move by Heights isn’t surprising given they’re effectively buying into the equity now at a ~40% discount to the share price. It’s not clear if they sold immediately into the market following conversion, but if they did they’ll have booked a ~26% ROIC on their $2m within ~2 months. Given the value story here however, I’d expect they’re holders of the equity to participate in the substantial upside ahead.
I see this conversion as a positive, in that it signals confidence from an institutional investor as PANR progresses a critical drilling programme, while reducing the convert debt outstanding with minimal dilution to existing equity holders.
YCA
The uranium thesis continues to gain momentum with the recent news that French President Emmanuel Macron has outlined plans to build at least six new nuclear reactors in France in the coming decades, as well as an intention to extend the 40-year life-cycle of existing French nuclear reactors to more than 50 years (France currently has 56 reactors in operation).
With this move Macron referred to the “rebirth of France’s nuclear industry” and given the ongoing energy crisis in Europe and climate change objectives, the outlook for increased nuclear power generation and therefore demand for uranium continues to strengthen.
This suggests that the value of YCA’s inventory of ~19m lbs of uranium U308 will appreciate substantially as increasing demand further widens the uranium market’s supply deficit.
Situations Monitor
The multiple factors driving food price inflation continue to play out, with a number of news stories last week providing further support for my thesis on Bunge Limited (BG).
The Wall Street Journal reported on surging soybean prices due to deteriorating forecasts for this Spring’s South American crop due to adverse dry weather conditions. As a result, prices for soybeans (which recall are the base ingredient in many food products, animal feed and renewable fuel, among other things) are rising again towards decade highs. Should the crop deteriorate further, soybean prices will likely rally higher. With BG being the largest oilseed processor in the world, strong demand for soybeans and soybean oil should support crush margins in its Agribusiness segment, which bodes well for FY22 earnings.
Separately, the WSJ also reported on the impact of inflation on farmers in the US, specifically for fertilisers, noting that even as crop prices remain high, supply costs are expected to outpace the price of agricultural goods in 2022. Furthermore, this could lead to reduced crops and therefore food shortages, further fueling inflation, as the WSJ reports:
The potential for higher farming costs to cut into production of corn and other crops could fuel continued food-price inflation, analysts said. Higher corn and soybean prices, for example, raise the cost of animal feed for meat companies.
Given BG’s entrenched position as a major commodity trader at the centre of the global food supply chain, this confluence of factors across weather, input costs and supply chain issues, not to mention the unfolding situation in Ukraine, looks set to sustain high food prices and perhaps food scarcity later this year. Historically, this is the type of market environment that traders such as BG tend to do very well in.
Developing Situations
A new name that has dropped onto my Idea Bench is UK-listed Wickes Plc (WIX).
WIX is a UK home improvement retailer, selling products in various categories including kitchens, bathrooms, gardens, and building supplies. It operates across three segments, DIY, Do-It-For-Me (DIFM) and Local Trade, and looks like a classic post-spin off sell-down story. WIX was spun out of UK-listed building materials group Travis Perkins Plc (TPK) last April and since then its share price has declined by ~25% to ~£1.88/share vs. its spin/IPO price of £2.50.
At the time of the spin WIX was valued at ~7x EBITDA but following the recent price decline, it currently trades at 4.9x, which includes IFRS 16 lease “debt” (which I don’t really see as debt, but rather an operating cost); excluding leases, WIX has a net cash balance sheet position of £204m with no financial bank debt outstanding.
The declining share price appears attributable to non-fundamental selling by holders of previous parent TPK given WIX’s small size (~£490m market cap), and perhaps retail exposure, which compares to TPK’s £6.5bn market cap and a B2B model serving the UK building and construction industry.
WIX is cheap compared with both comparable private market transaction multiples (in the 7x- 8x range), and listed comps such as Kingfisher Plc (KGF) at ~6x and Howden Joinery Plc (HWDN) at ~11x. The seemingly indiscriminate selling post the spin-off indicates little appreciation of fundamental value here and so feels like a genuinely mispriced situation. Given its small size, underlying net cash position and positive recent trading updates, WIX seems like a very plausible takeover target by either PE or a strategic acquirer if the market does not re-rate it once the forced sellers (for mandate reasons) have been shaken out.
As a result, WIX earns a spot on my Idea Bench, and is an idea I expect to return to again in a future issue of this newsletter.
Any Other Business
For this week’s AOB I thought I’d highlight a very insightful discussion that delves into the current oil market, between Harris Kupperman (aka Kuppy) of Praetorian Capital and Josh Young of Bison Interests.
For anyone interested in what’s happening in the oil and oil services markets today, I highly recommend listening to it here:
That’s all for this week, thanks for reading and please reply if you would like to provide any feedback.